The Governor of Bank Negara Malaysia, Dr Zeti Akhtar Aziz, stressing that the bond market is key to meeting these funding needs for both the public and private sectors, said the challenge is to put in place an intermediation system that will channel the surplus savings in both these regions into productive investments.

In his keynote speech at the Sukuk Summit 2007  in London, themed "Demystifying Islamic Market Products," Dr Zeti said in the current environment, the demand for sukuks significantly exceeded the supply. "Today, the global sukuk market, denominated in international currencies, is estimated to be $18 billion.  If domestic sukuk issuance is included, it has now exceeded $50 billion."

Elaborating on the topic, "The challenges for a global Islamic market," he said although the size of the market may seem modest by global standards, the sukuk market has been registering an average growth of 40 per cent per annum. "The phenomenal demand has been spurred by the high levels of surplus savings and reserves in Asia and Gulf region. Asia has a savings rate which is higher than any other region in the world and is expected to remain between 30 and 40 per cent of GDP for many years to come."

Dr Zeti said the global experience has shown that the lack of well developed bond markets brings with it vulnerabilities arising from over-reliance on financing from the banking sector. "This has often resulted in funding mismatches with adverse implications on financial stability. The development of the bond market allows for access to funding with the appropriate maturities, thus avoiding the funding mismatches. It also allows for the diversification of risks by issuers and investors."

On the challenges and initiatives taken to address them, he said a vital ingredient for the development of capital markets, including the Islamic capital market, is the creation of a secondary trading platform for the capital market instruments. "This will provide investors with the flexibility in managing their liquidity requirements. In this respect, more needs to be done in terms of the creation of a continuous supply of Islamic papers and instruments that would promote the secondary trading of instruments and add greater depth to the market."

He said there need to be greater diversity in the type and maturity of the sukuks in the market for Islamic financial institutions and portfolio managers to manage their funds effectively. "Another challenge to the growth of the market concerns pricing issues. For the Islamic security to be efficiently priced and credible, further initiatives need to be undertaken to develop its own indicator.  For example, if a sukuk is issued based on the Ijarah principle, and uses the property as its underlying asset, the actual rate of rental may be explored to be used to determine the rate of return on the instrument. It would then fluctuate depending on the demand and supply for that property. It will then give a true reflection of the price of the underlying asset." 

Maintaining that shariah experts, who have a full understanding of the mechanics of Sukuk, are key to ensuring its proper governance, he said shariah decisions, when made, should be transparent and disclosed. This will allow others to appreciate the juristic reasoning, which in turn should lead to wider acceptance of Shariah decisions, particularly if they have implications on cross-border transactions. In relation to this, a guide for issuers and investors to refer with regards to Shariah decisions would facilitate the development of the market. Of further importance is the attainment of the convergence of Shariah principles and interpretation to ensure market confidence among investors from different parts of the world. To achieve this, there needs to be continuous investments in intellectual capital and greater engagement among Shariah scholars. The regular engagement that is now taking place among the scholars is already producing this convergence."

For the global acceptance of Islamic finance, the harmonisation of standards and practices is important, he added.