Sukuk : Islamic Finance As A Form of Financial Intermediation and Financial Stability in Malaysia 1. 0 INTRODUCTION Beginning in late 2006, the collapse of U. S sub prime mortgage market and the reversal of the housing boom have had a ripple effect around the world. The experience of Mexico around the Tequila crisis and Thailand around the Asian crisis are prototypical examples of the boom-bust cycle (Aaron Turnell and Frank Westermann, 2006, P. 48). In fact, more than half of the major world economies, in particular the U.
S, the Euro area and Japan, are in recession and experiencing the worst economic contraction since the Great Depression of the 1930s. To cushion the impact of the economic crisis, the Malaysian government had tabled the First Stimulus Package with an allocation of RM7 billion to sustain growth, ensuring resilient financial sector credit flows, promoting investment and new sources of growth, reprioritizing 9th Plan projects and enhancing social safety net programme (Tan Sri Sulaiman Mahbob, EPU, 2009).
While the project under First Stimulus Package is still on, government continued to tabled the larger, comprehensive, encompassing various economic sector and target group of stimulus package also known as Mini Budget. The target group under second core in the second stimulus package is to increase income of ‘rakyat’ makes government to issue syariah-compliant Savings Bonds (Islamic Bond) understanding that the Islamic bond or Sukuk is one of the Islamic financial instrument that government use to cure the economic crisis. 2. 0FIELD OF RESEARCH 2. 1 Islamic Financial System 2. 2 The International Bond Market 2. 3 The Global Sukuk Market 2. Sukuk In Malaysia 3. 0TOPIC OF RESEARCH PROPOSAL 3. 1 General Islamic Financial System 3. 2 Specific Sukuk : Islamic Finance As A Form of Financial Intermediation and Financial Stability in Malaysia 4. 0LITERATURE REVIEW 4. 1 Islamic Financial System The Islamic financial system in Malaysia runs parallel with its mainstream counterpart and claims syariah legitimacy by virtue of contracts (aqd’) employed in financial transactions. To some extent, the system is well received with untapped markets and potential product niche, Islamic financial markets in Malaysia can do better under strong government support (Saiful Azhar Rosly, 2005, p. 9). Over more than 30 years, Malaysia has placed strong emphasis on the four core sectors in Islamic finance – Islamic banking, takaful, the Islamic capital market and the Islamic money market. The capital market in an Islamic capital market are syariah-compliant stocks, Islamic funds and sukuk/Islamic investment certificates/bonds. As at 2007, Malaysia’s Islamic banking assets reached USD65. 6 billion with an average growth rate of 18-20% annually. While total assets of Malaysia’s takaful industry amounted to USD2. 8 billion, with market penetration of 7. % (Bank Negara Malaysia : Annual Banking and Takaful Statistics 2007). The stability and strength together with the rapid liberalization of Malaysia’s Islamic finance system has encouraged foreign financial institutions’ to make Malaysia their destination of choice. 4. 2 The Different Between The International Bond and Islamic Bond (Sukuk) 4. 3. 1 The international Bond The international bond market consist of the Eurobond market, the foreign-bond markets and those domestic-bond market (such as the U. S, Japanese and French markets) in which global bond investors participate actively.
The most ‘international’ of these markets is the Eurobond market, which from small beginning in the control-riddles world of the mid-1960’s had grown to the point where (by the early 1990s) it raises over $200 billion per annum in new capital for corporations, financial institution and government (Ian H. Giddy (1994), p. 322). Bond issue facilities have been developed as a natural extension of the market. These are offerings to the primary investor (beyond the inter-bank market, made on the basis of a prospectus, with the issue getting listed at an appropriate centre (London, Luxembourg, etc).
The issue could be on fixed or floating rate basis, the latter being referred to as floating rate notes. Bond issues imply a position for medium to long-term and hence these markets have acquired a truly sophisticated character ( PR Joshi, (1996), p. 32). 4. 2. 3Sukuk Sukuk are trusts certificates or participation securities that grant investors a share of the asset along with the cash flow and risks that commensurate from such ownership. Leveraging on various Islamic principles, sukuk can be structured in a number of ways to offer the issuing entity greater financial flexibility and options to meet its funding requirements.
Sukuk can be structure based on the principles of : (i) Contract of exchange such as bai’bithaman ajil (BBA), murabahah, istisna’ and ijarah; or (ii) Contract of participation such as musyarakah and mudharabah. Globally, the sukuk market has experienced tremendous growth, averaging an annual growth of 40%. Sukuk issued in 2007 amounted to USD82 million (Source : Islamic Finance Information Service, 2007). Sukuk are gaining popularity as an alternative source of funding, particularly for sovereigns and corporate bodies. Their growth has been fuelled by strong demand in global capital market for Shariah. 4. 2. 4 Sukuk In Malaysia
Malaysia track record in sukuk origination and issuances has been notable for its pioneering efforts since 1990 when the first sukuk in Malaysia was issued. This served as a catalyst for more sukuk issuances, especially in recent years where Malaysia has achieved several industry ‘ first’ As of 2007, the Malaysia sukuk market is the largest sukuk market in world, achieving more than 68. 9% or USD62 billion of the global outstanding sukuk (Source : Financial Stability and payment Systems Report 2007, Bank Negara Malaysia). On 14 May 2009, Ministry of Finance announce the issuance of Sukuk Simpanan Rakyat 01/2009 amounting to RM2. billion. This is the first issue of the two series of 3-year RM2. 5 billion sukuk each in 2009. Bank Negara Malaysia has been appointed to issue the sukuk on behalf of the government. Before, government announce in Second Stimulus Package amounting to RM5 billion this year. Apart from providing an additional savings instrument to the rakyat, the bonds will provide holders with additional income. Bondholder will receive additional income of RM250 million a year 5. 0 THEORETICAL FRAMEWORK 6. 1 Islamic Financial System (see Figure 1. 1) Islamic Financial System Figure 1. 1 Islamic Financial System Deficit Sector
Surplus Sector Islamic Financial Market Direct Financial Market Takaful Indirect Financial Market Islamic Money Market Unit trust Merchant Banks Commercial Banks Islamic Capital Market Corporate Finance Bond market Equity market Source : Saiful Azhar Rosly (2005), p. 21) 6. 2 The concept of Sukuk : Differentiate with the concept of International Bond -Categories of sukuk -Structure of sukuk 6. 3 The sukuk global market -Tradibility of sukuk -Including various parties involved in Sukuk transactions. – Risk, Contract and Cash Flow Analysis -Shari’ah standard for investment sukuk 6. 4 Sukuk market in Malaysia Potential of sukuk in fund management -Sukuk is one of the Islamic financial instrument to stabilize the financial sector and to cushion the impact of the financial crisis. 6. 5 Findings and Recommendations 6. 6 Conclusion 6. 0 OBJECTIVE OF STUDY 7. 7 To explore the potential of the Islamic financial system 7. 8 To differentiate between International bond and Islamic bond (Sukuk) 7. 9 Assessing the global sukuk market and Malaysia sukuk market 7. 10 To analyze whether using sukuk as one of the way to cure the financial crisis is the best solution besides conventional bonds. . 11 To proposed the ideal structure of sukuk in Malaysia 7. 0 METHODOLOGY OF STUDY Defining and analyzing the Islamic finance, international bond and sukuk can be complex as it has many dimensions. For this reason of complexity and by extension cost, this study will target on Sukuk : Islamic Finance As A Form of Financial Intermediation and Financial Stability in Malaysia. For the purpose of this research a mix of quantitative and qualitative approach will be carried out. A brief graphical idea of the methodology to be used in this study is show in Figure 1. 2 RESEARCH METHODOLOGY
Idea Formulation Reading Observations Experiences Research Objectives Scope Location Theoretical Limitations Methodology Formation Time Sample Cost Pilot Survey Sample testing Parameter formulation Data Analysis Quantitative Qualitative Research Findings Findings Recommendations Documentation Full Scale Survey Questionnaires Interviews Observations Secondary data Level 1 Level 2 Level 3 Level 4 Improvement Improve Research Instruments BIBLIOGRAPHY Aaron Tarnell ad Frank Westermann (2006), Boom-Bust Cycles and Financial Liberalization, The MIT Press Cambridge, Massachusetts, London, England.
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