Risk Management in
Islamic Financial Instruments
8
1.3.2.2 Geographic Dispersion of Islamic Funds
The majority of Islamic funds’ assets are concentrated in Saudi Arabia and Malaysia, followed
by Ireland, the US and Kuwait, as of the end of October 2012. Malaysia remains the largest
equity market for Islamic funds, followed by Saudi Arabia, the United States (US), Ireland and
Kuwait being the other major markets. An overwhelming majority of funds raised in Saudi
Arabia and Malaysia are channeled locally.
Among the countries in the Asian region, Malaysia is the largest producer of Islamic Funds,
accounting for 80.7% of the total assets under management worth USD13.1 billion in 188
funds. Besides Malaysia, Indonesia is the second largest market with 54 Islamic funds worth
USD1.4 billion. The growth of Islamic funds in Malaysia is fostered by the government-led
implementation of voluntary private retirement schemes (PRS). The private pension funds are
seen as a supplementary option to the mandatory Employees Provident Fund (EPF) retirement
scheme and are expected to boost the growth of Shariah-compliant funds.
Among the MENA countries, Saudi Arabia remains the key market for Islamic investors, worth
33.2% of the global industry in 2011 with assets under management of USD19.9 billion.
Kuwait is the second largest market with a 7.1%market share, followed by Bahrain (2.6%) and
the UAE (2.2%). Other countries in region such as Egypt, Qatar, Tunisia and Morocco are
developing their Islamic fund industries. More recently, South Africa has witnessed a number
of Islamic funds launched over the years. Additionally, Mauritania and Nigeria have launched
Islamic funds.
1.3.3 Current Status of Sukuk Market
Sukuk is the Islamic alternative for conventional government and corporate bonds. Over the
last decade, Sukuk has evolved as an important and vibrant part of the Islamic financial
system. Its stable growth is largely driven by the need for securitization among industry
players to create market liquidity and also the need for fixed-term investments and credit
facilities. In the mid-2000s, government institutions and central banks started short-term
Sukuk programs to enhance market liquidity management. After the 2007 global financial
crisis, business corporations remained shy to issue sukuk, given conventional spreads are
rising to record highs. However, government entities have actively participated and entered
the market in numbers that enhanced the debt capacity of the sukuk market. (IFSB 2013)
Following the sovereign debt crisis in Europe, the slower global economic growth has left
investors with fewer investment options, which has led to capital flows to emerging markets,
commodities and alternative investments such as Sukuk. As much larger pools of outstanding
sovereign Sukūk, acting as key benchmarks, were located in various jurisdictions and bond
yields and Sukūk yields outside of Europe declined, the cost of borrowing has also become
lower for corporations in recent years. These factors have fostered the growth of corporate
Sukūk issuances and the number of sukuk outstanding has surged beyond the pre-crisis levels,
pushing total global issuances to record highs.