193
Issues Affected countries Recommendations
Not cost competitive for
corporate issuers
 Indonesia  To amend the relevant tax laws to
encourage corporate sukuk issuance.
Unavailability/limited
retail sukuk
 Malaysia
 UAE
 Turkey
 Hong Kong
 Nigeria
 To make retail sukuk returns more
attractive and competitive than fixed
deposit rates.
Sources: RAM, ISRA
6.3 SUKUK INVESTMENTS (DEMAND – BUY SIDE)
The financial sector in Arab countries, particularly the GCC, is generally led by the banking
sector. NBFIs have a limited presence in the GCC. Investment funds have been expanding
rapidly in several countries, but focused largely on domestic equities and real estate. The
insurance sector, meanwhile, remains small and targets property/casualty risks. Contractual
savings are underdeveloped and dominated by public pension systems, which are mainly
defined as benefit, “pay as you go” schemes. Since most investment funds are owned by banks,
domestic investors of GCC sukuk are largely local financial institutions. A review of the
investor profile for the GCC’s recent bond issues (including sukuk) shows a high reliance on
foreign investors. Amid negative or near-zero bond yields in the UK, the euro zone and Japan,
these investors have been attracted to the bond yields offered by the Gulf region.
In Asia, Hong Kong and Malaysia have undergone healthy developments in their respective
financial markets, with strong intermediation from NBFIs. Indonesia, on the other hand, is still
working towards augmenting the ratio of its outstanding bond market against GDP. Based on
McKinsey Asian Capital Markets Development, Malaysia takes pole position among its Asian
peers, with a score of 3.25 (out of 5) in terms of funding scale, investment opportunities and
pricing efficiency; Indonesia recorded a score of 2.20.
Elsewhere, African countries liberalized their financial sectors in the late 1980s and 1990s, as
part of the structural adjustment programmes promoted by the IMF and the World Bank. The
reforms included the removal of credit ceilings, the liberalization of interest rates, the
restructuring and privatization of state-owned banks, and the introduction of a variety of
measures to promote the development of private banking systems as well as financial markets.
South Africa’s financial market appears to be the most advanced, as evinced by the increase in
its outstanding bonds and market capitalization as a percentage of GDP. Nonetheless, Africa’s
financial system remains relatively underdeveloped compared to other emerging markets.
Based on its investor profile, Africa’s debt securities are mainly held by foreigners. Although
African governments have implemented measures to hasten the development of NBFIs, they
are still hampered by challenges such as financial inclusion and low savings rates.
The main issues and challenges facing the sukuk market in terms of demand are briefly
presented in Table 6.4.