The Role of Sukuk in Islamic Capital Markets
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2.2.2 THE ROLE OF SUKUK IN DEVELOPING THE ISLAMIC FINANCE INDUSTRY
Sukuk plays an important role in further developing and expanding the Islamic finance
industry. It is the second fastest-growing asset class, with a CAGR of 5% since 2012, according
to data from RAM. It provides issuers with an alternative to syndicated loan financing and
bonds, to finance their capital expenditure and acquisitions. They can tap the ICM to raise
alternative funding that is backed by strong investor demand. Similarly, it allows investors,
who may have previously over-relied on bank deposits and equity, to access the ICM and non-
equity-like instruments.
The following are some ways in which sukuk can further expand the Islamic finance market:
 The issuance of sukuk adds to the diversity of ICM products, providing further
dynamism to the Islamic financial system. Most international financial centres aim to
include sukuk as one of their products to attract international issuers and investors.
One such example is Hong Kong. To further consolidate its position as a global
financial centre, Hong Kong has been actively pursuing the development of a sukuk
market, with 3 issuances from the government to date, i.e. in 2014, 2015 and 2017.
 Sukuk represents an alternative public and corporate debt instrument for funding
purposes. For instance, Saudi Arabia’s reform plan, Vision 2030, which aims to reduce
the country’s dependence on oil revenue, includes initiatives to develop the Saudi
capital markets as a source of long-term funding for the financing of proposed projects.
This provides opportunities for the further growth of sukuk.
 For governments, sukuk represents an important tool to fund budget deficits,
infrastructure and mega projects, and other economic development programmes. For
instance, amid the GCC member countries’ dwindling oil revenues, they can capitalize
on the strong global appetite for sukuk to finance widening budget deficits.
 Sukuk with shorter tenures can also be used as a tool in the Islamic money market,
providing retail banks and other Islamic financial institutions with liquidity
management facilities. Such short-term sukuk for these purposes have been issued by
Bangladesh, Malaysia, Bahrain, The Gambia, Indonesia and Brunei Darussalam.
Looking ahead, more of such shorter-tenured sukuk is expected to be issued in
jurisdictions that seek to promote their domestic Islamic finance industries.
 The availability of short-term sukuk can support the launch of Islamic retail
banking/financing services in jurisdictions where such services are not available. A
government issuance of short-term sukuk, for instance, will provide a Shariah-
compliant asset that banks could use to back the supply of Shariah-compliant retail
products.
 Similarly, the issuance of debut government sukuk can help create pricing benchmarks
against which all other debt instruments in the same market can be priced. This is an
essential starting point to encourage the development of corporate sukuk and other
government issues in markets where sukuk has yet to evolve.