Better outlook seen for green sukuk

KUALA LUMPUR: Green sukuk in Malaysia is expected to have a better outlook in the near term with the support from Bank Negara and Securities Commission, says Cagamas Bhd chief executive officer Datuk Chung Chee Leong.

Chung said that as banks in the country have started to focus on projects related to green environment, global warming and environmental sustainability, this could help drive the green sukuk trend.

“For example, more developers are building houses that could conserve the energy by using solar energy.

“Therefore, I think, there will be a greater traction for green sukuk in the near future,” he told Bernama on the sidelines of the 14th Kuala Lumpur Islamic Finance Forum 2017 in Kuala Lumpur on Wednesday.

Green sukuk are syariah-compliant investments in renewable energy and other environmental assets, the proceeds fro which are used to finance construction, refinance construction debt, or finance the payment of a government-granted green subsidy.

In July this year, Malaysia issued the world's first green sukuk -? RM250 million Sustainable Responsible Investment Sukuk -? to finance the construction of a solar project in Kudat, Sabah.

Chung said Malaysia has an ideal ecosystem to facilitate the growth of green sukuk as the sukuk investor base was larger than the conventional investor base.

“As conventional investors could buy sukuk but sukuk investors could not do the otherwise, this has made issuers believed that sukuk is a better option for them,” he said.

On challenges faced by the sukuk issuers, Chung said the tightening of monetary policy by the US Fed remained one of the biggest challenges because it could create volatility in yields and price.

“For our perspective, we issue on the margin, meaning we issue at X per cent, use the fund to give to somebody else at Y per cent and it smooths out the tightening.

“But for general issuers, they will be subjected to the increase, and that is why many issuers have issued the bond or sukuk before the actual (interest) rate is announced,” he said.

For investors, Chung said, they would quit from the emerging markets and move to the US market because they expected US dollar yield to raise.

Early in the session, Bank Muamalat Malaysia Bhd executive vice-president, Syed Alwi Mohd Sultan, said green bond could be the largest threat to the sukuk industry.

“The green bond industry is going to overtake the green sukuk by itself, as between 2007-2012, the green bond industry only raised about US$20-US$30 billion annually while sukuk raised about US$100 billion annually.

“But in 2013 onwards, the green bond industry took off and issued US$80 billion in 2016, versus sukuk which only issued about US$78 billion last year,” he said, adding that for first half of this year, sukuk outstanding issuance was US$56 billion while green bond had achieved US$60 billion.

“When corporates want to raise funds for sustainability reasons, they will go for green bond instead of sukuk?” he asked.

Commenting on that concern, Chung said the bond market has always raised a bigger fund against sukuk as the latter was just a certain fraction of the total bond market, and bond has a longer history than sukuk.  

“But for Malaysia, one of our biggest advantages is that we have the investors from Singapore, Hong Kong and the UK who are interested in green sukuk,” he said.

Overall, he said, education and knowledge sharing remained the key to drive not only the green sukuk, but sukuk as a whole. - Bernama