Malaysia Sukuk Market In A Glance


Malaysia is at the forefront in the development of Islamic banking, an Islamic capital market, and takaful insurance. It has a strong and comprehensive Islamic financial system with a robust business-driven regulatory regime and legal framework. Malaysia has emerged as the largest sukuk market in the world. The sukuk market has become an integral part of the Malaysian capital market

The increasing popularity of Islamic bonds is attributable to several factors. First, sukuk provide an avenue for Islamic investors who need to invest in Shariah-compliant instruments. Second, sukuk also appeal to conventional investors who are constantly looking for liquid, attractively priced instruments to obtain capital gains and income. The strong demand by investors also provides the opportunity for issuers to raise funds at a lower cost. Third, the Government of Malaysia has been actively involved in creating an efficient price-discovery process for Islamic securities through its issuance of Malaysia Islamic Treasury Bills (MITB) and Malaysian Govt Investment Issues (MGII), which has led to the establishment of an Islamic benchmark yield curve.
This has been complemented by sukuk indexes published by BPAM. Over the years, Islamic capital market products have garnered universal acceptance as viable alternatives to conventional products. There has been clear evidence of the acceptability of the products to non-Muslim issuers and investors alike. As an indication of the success of Malaysia’s Islamic capital market, 58.8% of total bonds outstanding funds as at 2017 are in sukuk amounting to Rm759.6 billion.
The total ringgit bond market outstanding in Malaysia is Rm1.29 trillion in 2017. The success of mainstreaming sukuk can be replicated internationally, considering the estimated size of the global Islamic financial system and the latent demand for Shariah-compliant financial instruments.
Sukuk Issuance in Malaysia
Conventional government bonds have counterpart Islamic bonds in Malaysia. These includes the followings:
  1. Bank Negara Monetary Notes-i (BNMN-i), which replaced Bank Negara Negotiable Notes, are Islamic securities issued by BNM to manage liquidity in the Islamic financial market.
  1. Malaysian Islamic Treasury bills (MITB) are short-term securities based on Islamic principles issued by BNM on behalf of the government. The structure of MITB is based on the bai al-inah (sell-and-buy back) principle and are actively traded based on the bai al-dayn (debt trading) principle in the secondary market.
  1. MGII are non-interest-bearing government securities based on Islamic principles issued by the government and placed on a competitive tender with maturities of 3–20 years. Like MGS, MGII are issued by BNM on behalf of the government and the funds are used for development expenditures.
  1. Sukuk Bank Negara Malaysia Issues (SBNMI) are zero-coupon bonds with maturities of 1–2 years. SBNMI are based on al-ijarah (sale and lease back) principle.
  1. Merdeka Savings Bond is a bond structure based on Shariah principles with the purpose of assisting retirees who depend primarily on interest income from deposits placed with banking institutions.
  1. Sukuk 1Malaysia 2010, which is based on Shariah principles, is an additional investment instrument for Malaysian citizens who are at least 21 years old. Sukuk 1Malaysia 2010 has a resalable feature that provides flexibility for investors to sell and purchase the sukuk before maturity date. Corporates also issue sukuk. In fact, the corporate sukuk market has grown significantly in recent years, with average annual growth of corporate sukuk outstanding of 25% between 2010 and 2014. At the end of 2017, corporate sukuk accounted for 74.6% of total outstanding corporate debt securities issued in Malaysia.

Regulations for Sukuk in Malaysia

The Securities Commission (SC) supervises the Islamic capital market, which operates parallel to the conventional capital market. The SC originally issued the Guidelines on Sukuk, which contained provisions specific to the nature and types of sukuk, and their inherent practices. These provisions have by now been folded into the SC Guidelines for retail bonds and issuances under the Lodge and Launch Framework. The SC Guidelines, and related Practice Notes and Technical Notes, contain detailed documentation requirements, approval and issuance processes, and other relevant provisions for sukuk, alongside those for conventional debt securities.
Additional provisions for sukuk include the need for a particular type of sukuk, or iMTN, to conform to Islamic principles. For that purpose, the SC established the Shariah Advisory Council (SAC) in 1996 to ensure all Islamic domestic capital market products are in compliance with Shariah principles. The SAC comprises prominent Shariah scholars and jurists, as well as market practitioners, who advise the SC on matters relating to the Islamic capital market and provide Shariah guidance on Islamic capital market transactions and activities. BNM also features a SAC for the governance of debt and money market instruments under its purview.
On the basis that a sukuk type is principally acceptable in the market, a Shariah Adviser then must certify whether the structure of a particular sukuk is Shariah-compliant. The Shariah Adviser must be registered with the SC under the Registration of Shariah Adviser Guidelines. In addition, a legal advisor must certify that a Trust Deed for the trust underlying the sukuk is enforceable under Malaysian law.

Infrastructure for Sukuk in Malaysia

 In Malaysia, the market infrastructure is the same for sukuk and conventional bonds and notes. Sukuk are traded over-the-counter (OTC) on the same registered electronic facilities as conventional debt securities, or as exchange-traded bonds and sukuk (ETBS) on Bursa Malaysia Securities (BMS). Trades are captured in the electronic trading platform (ETP) and cleared and settled via RENTAS.
Bank Negara Malaysia (BNM) maintains an information portal dedicated to Malaysia, the International Islamic Financial Centre, and provides online access to information on the Islamic interbank money market. BPAM calculates and publishes the BPAM Sukuk Index in conjunction with Thomson Reuters.
Malaysia is also host to the Islamic Financial Services Board, an international standard-setting organization that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, which is broadly defined to include banking and insurance sectors, and the capital market.
The International Islamic Liquidity Management Corporation (the IILM) is an international institution established by central banks, monetary authorities, and multilateral organizations to create and issue short-term, Shariah-compliant financial instruments to facilitate effective cross-border Islamic liquidity management. The corporation is hosted by Malaysia and headquartered in Kuala Lumpur. As an international institution, it enjoys a range of privileges and immunities conferred by the International Islamic Liquidity Management Corporation Act, 2011.
In order to further spur the development of Islamic finance, in February 2016 Malaysia developed the marketplaceIF, which provides access to the global community seeking financial solutions and services by linking them with Malaysia’s Islamic financial institutions and professional ancillary services.
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