## _pdp03 - 1. Global Issuance of Islamic Bonds (sukuk), 2004–07 (in US$ billions)

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---

### Overview
- Rapid expansion of Islamic finance has driven a surge in issuance of Islamic capital market securities (sukuk) by corporates and public sector entities.
- Structured finance instruments and enabling capital market regulations are fostering financial innovation and greater inclusiveness of shari’ah compliance.
- The paper reviews the state of the sukuk market, legal and economic implications of shari’ah compliance on sukuk configuration, and prospects for sovereign sukuk issuance in Muslim and non-Muslim countries.

### Definition of Islamic Finance
- Islamic finance extends shari’ah tenets to financial agreements; shari’ah bans the sale and purchase of debt contracts, profit taking without real economic activity, and activities not considered halal.
- Permissible financing is interest-free and tied to investments that avoid pork, alcohol, firearms, adult entertainment, and gambling.
- Shari’ah emphasizes contractual certainty, fixed payment obligations ex ante, shared business risk, direct participation in asset performance, and state-contingent returns; profits accrue only if the investment yields income.

### The Current State of Islamic Capital Market Securities (sukuk)
- The Islamic finance industry has grown by about 15 percent on average over the last three years.
- Currently, more than US$800 billion are lodged in Islamic banks, mutual funds, insurance schemes (takaful), and Islamic branches of conventional banks.
- Sukuk are wholesale, asset-based capital market securities that do not pay interest but generate returns through actual transactions (e.g., profit-sharing, leasing).
- Sukuk structures commonly refinance assets arising from three basic forms of Islamic finance: synthetic loans (murabaha), sale-leasebacks (ijara), or profit-sharing arrangements (musharaka or mudharabah).
- Key market-scale statistics:
  - Outstanding sukuk globally exceeded US$90 billion at end-2007.
  - Gross issuance of Islamic structured securities rose from US$7.2 billion in 2004 to close to US$39 billion by end-2007.
  - Number of sukuk transactions rose to 119 (up from 109 in 2006).
  - Average transaction size increased to about US$270 million from US$175 million.
  - Based on current trends, total amount of issued sukuk is likely to exceed US$200 billion by 2010.
  - Total issuance in 2007 was equivalent to roughly a quarter of conventional securitization in emerging markets but only two percent of conventional (local and foreign) bond issuance during the period.
  - Issuance slowed to US$2.3 billion in the first quarter of 2008 (down by almost half from the first quarter in 2007).
- Currency and regional patterns:
  - Global issuance historically concentrated in US dollars and in parts of Asia and the GCC.
  - The share of US dollar-denominated sukuk dropped from 85 percent in 2002 to slightly more than 50 percent in 2007.
  - Other major currencies of issuance in 2007 included the Malaysian ringgit, the UAE dirham, and the Saudi-Arabian riyal.
  - About half of issues by value originate in Asia (Malaysia and Brunei) and the other half in the GCC and Pakistan.
  - Individual Asian issues are mostly local currency and tend to be much larger (i.e., US$750 million and above) than in the GCC (below US$100 million).
- Structure and market composition:
  - Musharaka contracts were the largest sukuk issued in 2007, accounting for more than US$12 billion (about one third of issuance), though lease-based transactions (ijara) were the most common.
  - Ijara issuance amounted to about US$10 billion across 54 deals (compared to 22 musharaka structures).
  - Trustee-type mudarabah structures amounted to close to US$8 billion.
  - Corporate issuers dominated the primary sukuk market, accounting for over 86 percent of total historic issuance through end-2007.
  - Corporate issuance: US$5,731.2 million (2004); US$11,327.3 million (2005); US$24,832.5 million (2006); US$31,916.7 million (2007).
  - Sovereign issuance grew to about US$4.8 billion in 2007.
  - Top five lead managers accounted for almost 40 percent of global sukuk issuance in 2007.
- Market uses:
  - Sukuk help resolve maturity mismatches in Islamic banks by providing longer-tenor funding for loan origination.
  - They address short-term liquidity constraints and fund infrastructure and real estate lending demands in the GCC and emerging Asian economies.
  - Takaful insurance market growth creates investor demand for longer-maturity sukuk.
- Geographic and non-Muslim jurisdiction interest:
  - Sukuk issuance has begun outside Asia and the GCC (e.g., German State of Saxony-Anhalt sovereign ijara sukuk; World Bank local currency sukuk totaling 760 million Malaysian ringgit (US$200 million) in 2005).
  - The U.K. Treasury established an Islamic Finance Expert Group in April 2007 to study feasibility of sovereign sukuk issuance.
- Secondary market and money market development:
  - Development of a liquid secondary sukuk market depends on shari’ah-compliant interbank instruments and short-term liquidity facilities.
  - Central Bank of Bahrain (CBB) has issued short-term sukuk (cumulative value US$287 million) of three- or six-month maturities since 2001.
  - Malaysia’s Government Investment Issues (GII) and Bank Negara Malaysia Negotiable Notes (BNNN) serve similar roles.
  - Example of asset securitization: Cagamas Berhad issued mudharabah bonds in July 2005 with maturities ranging from three to 20 years.

### Table: Global Issuance of Islamic Bonds (sukuk) (in US$ million), 2004–07 — Key figures
- Total: 2004 — 7,210.5; 2005 — 12,033.8; 2006 — 27,392.5; 2007 — 38,596.6
- Sovereign: 2004 — 1,479.4; 2005 — 706.5; 2006 — 2,560.0; 2007 — 6,679.9
  - of which local currency: 2004 — 356.4; 2005 — 106.5; 2006 — 1,210.0; 2007 — 2,507.4
  - of which FX: 2004 — 1,123.0; 2005 — 600.0; 2006 — 1,350.0; 2007 — 4,172.5
- Corporate: 2004 — 5,731.2; 2005 — 11,327.3; 2006 — 24,832.5; 2007 — 31,916.7
  - of which local currency: 2004 — 4,692.8; 2005 — 8,745.4; 2006 — 14,743.8; 2007 — 18,411.6
  - of which FX: 2004 — 1,038.4; 2005 — 2,294.9; 2006 — 9,923.0; 2007 — 13,405.1
- Asia and Pacific Total: 2004 — 5,050.5; 2005 — 8,806.0; 2006 — 15,901.8; 2007 — 20,016.1
  - Sovereign (Asia and Pacific): 2004 — 0.0; 2005 — 0.0; 2006 — 1,628.0; 2007 — 1,961.0
    - local currency: 2004 — 0.0; 2005 — 0.0; 2006 — 758.0; 2007 — 1,961.0
    - FX: 2004 — 0.0; 2005 — 0.0; 2006 — 870.0; 2007 — 0.0
  - Corporate (Asia and Pacific): 2004 — 5,050.5; 2005 — 8,806.0; 2006 — 14,273.8; 2007 — 18,055.1
    - local currency: 2004 — 4,666.7; 2005 — 8,745.4; 2006 — 13,943.8; 2007 — 13,401.5
    - FX: 2004 — 383.8; 2005 — 60.6; 2006 — 330.0; 2007 — 4,653.6
- Middle East and Central Asia Total: 2004 — 2,037.1; 2005 — 2,940.8; 2006 — 11,325.0; 2007 — 18,480.6
  - Sovereign (Middle East and Central Asia): 2004 — 1,356.4; 2005 — 706.5; 2006 — 932.0; 2007 — 4,718.9
    - local currency: 2004 — 356.4; 2005 — 106.5; 2006 — 452.0; 2007 — 546.4
    - FX: 2004 — 1,000.0; 2005 — 600.0; 2006 — 480.0; 2007 — 4,172.5
  - Corporate (Middle East and Central Asia): 2004 — 680.7; 2005 — 2,234.3; 2006 — 10,393.0; 2007 — 13,761.7
    - local currency: 2004 — 26.1; 2005 — 0.0; 2006 — 800.0; 2007 — 5,010.2
    - FX: 2004 — 654.6; 2005 — 2,234.3; 2006 — 9,593.0; 2007 — 8,751.5
- Other: 2004 — 123.0; 2005 — 287.0; 2006 — 165.7; 2007 — 100.0
  - Germany Sovereign (EUR): 2004 — 123.0; 2005 — 0.0; 2006 — 0.0; 2007 — 0.0
  - US Corporate (USD): 2004 — 0.0; 2005 — 0.0; 2006 — 165.7; 2007 — 0.0
  - UK Corporate (GBP): 2004 — 0.0; 2005 — 287.0; 2006 — 0.0; 2007 — 0.0
  - Other: 2004 — 0.0; 2005 — 0.0; 2006 — 0.0; 2007 — 100.0

### Current Issues in the Sukuk Market

Economic and financial challenges
- Identification of underlying reference assets and security designs that satisfy shari’ah while offering attractive returns.
- Absence of conventional structural features not normally permissible in an Islamic context, e.g., repayment guarantees, credit enhancements, liquidity support mechanisms, trading of debt securities, discounted issues, and pay-through mechanisms.
- Many commonly-used risk management instruments for currency, interest rate, or credit risk are not acceptable to most shari’ah scholars; shari’ah-compliant substitutes have been slow to develop.
- Limited historical performance data on shari’ah-compliant assets and untested stress scenarios limit confidence in estimating recovery rates for pricing and rating.
- Typical “buy-and-hold” investment strategies and limited diversity of sukuk investors produce illiquid secondary markets and inhibit efficient price discovery.
- Tax disincentives: asset-backed Islamic finance transactions often incur double taxation (of dividends in equity-based contracts) without tax deductions on interest expenses (“tax shield”) available with conventional debt.

Legal and regulatory challenges
- Need for sukuk structures to satisfy both commercial and shari’ah law can generate inconsistencies concerning asset control and bankruptcy resolution for investors in non-Islamic countries.
  - Insolvency procedures subject to shari’ah law could displace investor protection such as bankruptcy remoteness and repayment guarantees, potentially reclassifying collateral assets as part of the originator’s bankruptcy estate.
  - Enforceability of asset claims and creditor rights can be unclear in some jurisdictions.
- Islamic jurisprudence is not uniform or precedent-bound; shari’ah rulings in one jurisdiction may not be enforced in others, creating heterogeneous assessments of shari’ah compliance and legal uncertainty.
- Regulatory standards for shari’ah compliance vary considerably across jurisdictions.
  - International organizations (IIFM, IFSB, AAOIFI) are working towards consolidation and harmonization.
  - AAOIFI has identified at least 14 possible sukuk structures.
  - A Task Force of the IFSB was due to publish recommendations for more standardized sukuk structures in 2008.
  - In March 2008, AAOIFI introduced new rules on the sale of sukuk.
- Greater standardization would enhance valuation, pricing efficiency, and secondary market liquidity while preserving universal standards of market supervision and financial surveillance.

### Malaysia as a Front-runner of Islamic Capital Markets

Market size and composition
- Malaysia accounts for about two-thirds of the global Islamic securities outstanding.
- Malaysia represents the largest sukuk market in terms of outstanding size and number of issues, estimated at US$47 billion at end-2006.
- Sukuk account for 14 percent of Malaysian public sector bonds outstanding.
- Sukuk represent about half of the total stock of Malaysian corporate bonds (US$32 billion).
- Corporate sukuk are issued mainly by the infrastructure/utilities and property/real estate sectors (70 percent).

Key milestones and landmark issuances
- First sukuk issue: 2002.
- October 2004: Cagamas Berhad issued a RM1.6 billion (US$432 million) conventional mortgage-backed security (MBS) to create a (liquid) yield curve for securitized debt with longer maturities; although conventional, it established a pricing benchmark for subsequent (predominantly sukuk) offerings in Malaysia.
- July 2005: Cagamas raised funding with its first Islamic mortgage-backed issue of mudharabah bonds amounting to RM2.05 billion (US$532 million), adding a new asset class to the local debt market.
- 2005: Malaysia’s central bank launched the first regular issue of ijara leasing securities.
- 2006: Khazanah Nasional Berhad successfully placed US$750 million worth of local currency-denominated Islamic bonds (as exchangeable trust certificates).
- March 2008: Khazanah Nasional Berhad placed its first U.S. dollar-denominated Islamic security issue of US$647 million.

Institutional, regulatory, and market-infrastructure developments
- 2000: Government’s ten-year Capital Market Master Plan provided strategic direction for Malaysia’s Islamic capital market.
- Over the two years preceding the source text, Malaysia announced measures to deepen its domestic capital market and broaden its investor base, including revised guidelines for Islamic securities to foster greater asset diversity in the sukuk market.
- Authorities aim to increase the role of Islamic finance in domestic intermediation and intend to ease rules to allow banks to conduct Islamic banking business in foreign currencies.
- Ninth Malaysia Plan (9MP) for the 2006-2010 period aims to position Malaysia as a center for origination, distribution, trading, funds and wealth management of Islamic finance products.
- Malaysia International Islamic Financial Centre (MIFC) established in 2006 as a one-stop contact point to facilitate sukuk issuance amid growing competition.
- November 2006: Bank Islam Berhad and Bank Muamalat Malaysia Berhad agreed to execute a derivative master agreement for documentation of Islamic derivatives; sponsored by the Malaysian Financial Market Association (Persatuan Kewangan Malaysia) with participation from Islamic and conventional banks to create more liquidity and enhance transparency (Jobst, 2006).

Observations on shari’ah approval and international positioning
- Malaysian sukuk structures are regarded as relatively liberal by most other Islamic jurists.
- Degree of religious approval of sukuk by shari’ah boards varies throughout the Islamic world; for instance, trading of sukuk is prohibited in Saudi Arabia.
- Malaysia has been a beneficiary of most innovation in sukuk and is actively engaged in standard setting and international harmonization of Islamic capital markets.

Cagamas Berhad (contextual note from source)
- Cagamas Berhad is a government-controlled secondary mortgage facility providing short- and medium-term finance and capital market access to mortgage lenders.
- Indirect government sponsorship of mortgage credit implies direct participation of Cagamas in the performance of the acquired mortgage pool.
- Cagamas refinances itself through issuance of unsecured conventional debt securities (fixed or floating rate bonds or short-term notes) or, more recently, through Islamic bonds without a pre-specified investment return.

Implications and policy relevance
- Malaysia’s combination of market scale, product innovation, regulatory initiatives, and institutional support positions it as a frontrunner and potential international hub for Islamic finance.
- Policy measures aimed at deepening market infrastructure, broadening investor bases, standardization of documentation, and easing operational constraints (e.g., foreign-currency Islamic banking) are central to leveraging Malaysia’s comparative advantages.
- International harmonization and standard setting remain important given variation in shari’ah interpretations and growing institutional competition among potential Islamic finance centers.

*Source: _pdp03 - 1. Global Issuance of Islamic Bonds (sukuk), 2004–07 (in US$ billions).*

### 1. Global Issuance of Islamic Bonds (sukuk), 2004–07 (in US$ billions). .................5

### _pdp03 - 1. Global Issuance of Islamic Bonds (sukuk), 2004–07 (in US$ billions)

### Overview
- Rapid expansion of Islamic finance has driven a surge in issuance of Islamic capital market securities (sukuk) by corporates and public sector entities.
- Structured finance instruments and enabling capital market regulations are fostering financial innovation and greater inclusiveness of shari’ah compliance.
- The paper reviews the state of the sukuk market, legal and economic implications of shari’ah compliance on sukuk configuration, and prospects for sovereign sukuk issuance in Muslim and non-Muslim countries.

### Definition of Islamic Finance
- Islamic finance extends shari’ah tenets to financial agreements; shari’ah bans the sale and purchase of debt contracts, profit taking without real economic activity, and activities not considered halal.
- Permissible financing is interest-free and tied to investments that avoid pork, alcohol, firearms, adult entertainment, and gambling.
- Shari’ah emphasizes contractual certainty, fixed payment obligations ex ante, shared business risk, direct participation in asset performance, and state-contingent returns; profits accrue only if the investment yields income.

### The Current State of Islamic Capital Market Securities (sukuk)
- The Islamic finance industry has grown by about 15 percent on average over the last three years.
- Currently, more than US$800 billion are lodged in Islamic banks, mutual funds, insurance schemes (takaful), and Islamic branches of conventional banks.
- Sukuk are wholesale, asset-based capital market securities that do not pay interest but generate returns through actual transactions (e.g., profit-sharing, leasing).
- Sukuk structures commonly refinance assets arising from three basic forms of Islamic finance: synthetic loans (murabaha), sale-leasebacks (ijara), or profit-sharing arrangements (musharaka or mudharabah).
- Key market-scale statistics:
  - Outstanding sukuk globally exceeded US$90 billion at end-2007.
  - Gross issuance of Islamic structured securities rose from US$7.2 billion in 2004 to close to US$39 billion by end-2007.
  - Number of sukuk transactions rose to 119 (up from 109 in 2006).
  - Average transaction size increased to about US$270 million from US$175 million.
  - Based on current trends, total amount of issued sukuk is likely to exceed US$200 billion by 2010.
  - Total issuance in 2007 was equivalent to roughly a quarter of conventional securitization in emerging markets but only two percent of conventional (local and foreign) bond issuance during the period.
  - Issuance slowed to US$2.3 billion in the first quarter of 2008 (down by almost half from the first quarter in 2007).
- Currency and regional patterns:
  - Global issuance historically concentrated in US dollars and in parts of Asia and the GCC.
  - The share of US dollar-denominated sukuk dropped from 85 percent in 2002 to slightly more than 50 percent in 2007.
  - Other major currencies of issuance in 2007 included the Malaysian ringgit, the UAE dirham, and the Saudi-Arabian riyal.
  - About half of issues by value originate in Asia (Malaysia and Brunei) and the other half in the GCC and Pakistan.
  - Individual Asian issues are mostly local currency and tend to be much larger (i.e., US$750 million and above) than in the GCC (below US$100 million).
- Structure and market composition:
  - Musharaka contracts were the largest sukuk issued in 2007, accounting for more than US$12 billion (about one third of issuance), though lease-based transactions (ijara) were the most common.
  - Ijara issuance amounted to about US$10 billion across 54 deals (compared to 22 musharaka structures).
  - Trustee-type mudarabah structures amounted to close to US$8 billion.
  - Corporate issuers dominated the primary sukuk market, accounting for over 86 percent of total historic issuance through end-2007.
  - Corporate issuance: US$5,731.2 million (2004); US$11,327.3 million (2005); US$24,832.5 million (2006); US$31,916.7 million (2007).
  - Sovereign issuance grew to about US$4.8 billion in 2007.
  - Top five lead managers accounted for almost 40 percent of global sukuk issuance in 2007.
- Market uses:
  - Sukuk help resolve maturity mismatches in Islamic banks by providing longer-tenor funding for loan origination.
  - They address short-term liquidity constraints and fund infrastructure and real estate lending demands in the GCC and emerging Asian economies.
  - Takaful insurance market growth creates investor demand for longer-maturity sukuk.
- Geographic and non-Muslim jurisdiction interest:
  - Sukuk issuance has begun outside Asia and the GCC (e.g., German State of Saxony-Anhalt sovereign ijara sukuk; World Bank local currency sukuk totaling 760 million Malaysian ringgit (US$200 million) in 2005).
  - The U.K. Treasury established an Islamic Finance Expert Group in April 2007 to study feasibility of sovereign sukuk issuance.
- Secondary market and money market development:
  - Development of a liquid secondary sukuk market depends on shari’ah-compliant interbank instruments and short-term liquidity facilities.
  - Central Bank of Bahrain (CBB) has issued short-term sukuk (cumulative value US$287 million) of three- or six-month maturities since 2001.
  - Malaysia’s Government Investment Issues (GII) and Bank Negara Malaysia Negotiable Notes (BNNN) serve similar roles.
  - Example of asset securitization: Cagamas Berhad issued mudharabah bonds in July 2005 with maturities ranging from three to 20 years.

### Table: Global Issuance of Islamic Bonds (sukuk) (in US$ million), 2004–07
- Total: 2004 — 7,210.5; 2005 — 12,033.8; 2006 — 27,392.5; 2007 — 38,596.6
- Sovereign: 2004 — 1,479.4; 2005 — 706.5; 2006 — 2,560.0; 2007 — 6,679.9
  - of which local currency: 2004 — 356.4; 2005 — 106.5; 2006 — 1,210.0; 2007 — 2,507.4
  - of which FX: 2004 — 1,123.0; 2005 — 600.0; 2006 — 1,350.0; 2007 — 4,172.5
- Corporate: 2004 — 5,731.2; 2005 — 11,327.3; 2006 — 24,832.5; 2007 — 31,916.7
  - of which local currency: 2004 — 4,692.8; 2005 — 8,745.4; 2006 — 14,743.8; 2007 — 18,411.6
  - of which FX: 2004 — 1,038.4; 2005 — 2,294.9; 2006 — 9,923.0; 2007 — 13,405.1
- Asia and Pacific Total: 2004 — 5,050.5; 2005 — 8,806.0; 2006 — 15,901.8; 2007 — 20,016.1
  - Sovereign (Asia and Pacific): 2004 — 0.0; 2005 — 0.0; 2006 — 1,628.0; 2007 — 1,961.0
    - local currency: 2004 — 0.0; 2005 — 0.0; 2006 — 758.0; 2007 — 1,961.0
    - FX: 2004 — 0.0; 2005 — 0.0; 2006 — 870.0; 2007 — 0.0
  - Corporate (Asia and Pacific): 2004 — 5,050.5; 2005 — 8,806.0; 2006 — 14,273.8; 2007 — 18,055.1
    - local currency: 2004 — 4,666.7; 2005 — 8,745.4; 2006 — 13,943.8; 2007 — 13,401.5
    - FX: 2004 — 383.8; 2005 — 60.6; 2006 — 330.0; 2007 — 4,653.6
- Middle East and Central Asia Total: 2004 — 2,037.1; 2005 — 2,940.8; 2006 — 11,325.0; 2007 — 18,480.6
  - Sovereign (Middle East and Central Asia): 2004 — 1,356.4; 2005 — 706.5; 2006 — 932.0; 2007 — 4,718.9
    - local currency: 2004 — 356.4; 2005 — 106.5; 2006 — 452.0; 2007 — 546.4
    - FX: 2004 — 1,000.0; 2005 — 600.0; 2006 — 480.0; 2007 — 4,172.5
  - Corporate (Middle East and Central Asia): 2004 — 680.7; 2005 — 2,234.3; 2006 — 10,393.0; 2007 — 13,761.7
    - local currency: 2004 — 26.1; 2005 — 0.0; 2006 — 800.0; 2007 — 5,010.2
    - FX: 2004 — 654.6; 2005 — 2,234.3; 2006 — 9,593.0; 2007 — 8,751.5
- Other: 2004 — 123.0; 2005 — 287.0; 2006 — 165.7; 2007 — 100.0
  - Germany Sovereign (EUR): 2004 — 123.0; 2005 — 0.0; 2006 — 0.0; 2007 — 0.0
  - US Corporate (USD): 2004 — 0.0; 2005 — 0.0; 2006 — 165.7; 2007 — 0.0
  - UK Corporate (GBP): 2004 — 0.0; 2005 — 287.0; 2006 — 0.0; 2007 — 0.0
  - Other: 2004 — 0.0; 2005 — 0.0; 2006 — 0.0; 2007 — 100.0

### Current Issues in the Sukuk Market

#### Economic and Financial Challenges
- Identification of underlying reference assets and security designs that satisfy shari’ah while offering attractive returns.
- Absence of conventional structural features not normally permissible in an Islamic context, e.g., repayment guarantees, credit enhancements, liquidity support mechanisms, trading of debt securities, discounted issues, and pay-through mechanisms.
- Many commonly-used risk management instruments for currency, interest rate, or credit risk are not acceptable to most shari’ah scholars; shari’ah-compliant substitutes have been slow to develop.
- Limited historical performance data on shari’ah-compliant assets and untested stress scenarios limit confidence in estimating recovery rates for pricing and rating.
- Typical “buy-and-hold” investment strategies and limited diversity of sukuk investors produce illiquid secondary markets and inhibit efficient price discovery.
- Tax disincentives: asset-backed Islamic finance transactions often incur double taxation (of dividends in equity-based contracts) without tax deductions on interest expenses (“tax shield”) available with conventional debt.

#### Legal and Regulatory Challenges
- Need for sukuk structures to satisfy both commercial and shari’ah law can generate inconsistencies concerning asset control and bankruptcy resolution for investors in non-Islamic countries.
  - Insolvency procedures subject to shari’ah law could displace investor protection such as bankruptcy remoteness and repayment guarantees, potentially reclassifying collateral assets as part of the originator’s bankruptcy estate.
  - Enforceability of asset claims and creditor rights can be unclear in some jurisdictions.
- Islamic jurisprudence is not uniform or precedent-bound; shari’ah rulings in one jurisdiction may not be enforced in others, creating heterogeneous assessments of shari’ah compliance and legal uncertainty.
- Regulatory standards for shari’ah compliance vary considerably across jurisdictions.
  - International organizations (IIFM, IFSB, AAOIFI) are working towards consolidation and harmonization.
  - AAOIFI has identified at least 14 possible sukuk structures.
  - A Task Force of the IFSB was due to publish recommendations for more standardized sukuk structures in 2008.
  - In March 2008, AAOIFI introduced new rules on the sale of sukuk.
- Greater standardization would enhance valuation, pricing efficiency, and secondary market liquidity while preserving universal standards of market supervision and financial surveillance.

*Source: _pdp03 - 1. Global Issuance of Islamic Bonds (sukuk), 2004–07 (in US$ billions).*

### Box 1. Malaysia as a Front-runner of Islamic Capital Markets

### Box 1. Malaysia as a Front-runner of Islamic Capital Markets

### Market size and composition
- Malaysia accounts for about two-thirds of the global Islamic securities outstanding.
- Malaysia represents the largest sukuk market in terms of outstanding size and number of issues, estimated at US$47 billion at end-2006.
- Sukuk account for 14 percent of Malaysian public sector bonds outstanding.
- Sukuk represent about half of the total stock of Malaysian corporate bonds (US$32 billion).
- Corporate sukuk are issued mainly by the infrastructure/utilities and property/real estate sectors (70 percent).

### Key milestones and landmark issuances
- First sukuk issue: 2002.
- October 2004: Cagamas Berhad issued a RM1.6 billion (US$432 million) conventional mortgage-backed security (MBS) to create a (liquid) yield curve for securitized debt with longer maturities; although conventional, it established a pricing benchmark for subsequent (predominantly sukuk) offerings in Malaysia.
- July 2005: Cagamas raised funding with its first Islamic mortgage-backed issue of mudharabah bonds amounting to RM2.05 billion (US$532 million), adding a new asset class to the local debt market.
- 2005: Malaysia’s central bank launched the first regular issue of ijara leasing securities.
- 2006: Khazanah Nasional Berhad successfully placed US$750 million worth of local currency-denominated Islamic bonds (as exchangeable trust certificates).
- March 2008: Khazanah Nasional Berhad placed its first U.S. dollar-denominated Islamic security issue of US$647 million.

### Institutional, regulatory, and market-infrastructure developments
- 2000: Government’s ten-year Capital Market Master Plan provided strategic direction for Malaysia’s Islamic capital market.
- Over the two years preceding the source text, Malaysia announced measures to deepen its domestic capital market and broaden its investor base, including revised guidelines for Islamic securities to foster greater asset diversity in the sukuk market.
- Authorities aim to increase the role of Islamic finance in domestic intermediation and intend to ease rules to allow banks to conduct Islamic banking business in foreign currencies.
- Ninth Malaysia Plan (9MP) for the 2006-2010 period aims to position Malaysia as a center for origination, distribution, trading, funds and wealth management of Islamic finance products.
- Malaysia International Islamic Financial Centre (MIFC) established in 2006 as a one-stop contact point to facilitate sukuk issuance amid growing competition.
- November 2006: Bank Islam Berhad and Bank Muamalat Malaysia Berhad agreed to execute a derivative master agreement for documentation of Islamic derivatives; sponsored by the Malaysian Financial Market Association (Persatuan Kewangan Malaysia) with participation from Islamic and conventional banks to create more liquidity and enhance transparency (Jobst, 2006).

### Observations on shari’ah approval and international positioning
- Malaysian sukuk structures are regarded as relatively liberal by most other Islamic jurists.
- Degree of religious approval of sukuk by shari’ah boards varies throughout the Islamic world; for instance, trading of sukuk is prohibited in Saudi Arabia.
- Malaysia has been a beneficiary of most innovation in sukuk and is actively engaged in standard setting and international harmonization of Islamic capital markets.

### Cagamas Berhad (contextual note from source)
- Cagamas Berhad is a government-controlled secondary mortgage facility providing short- and medium-term finance and capital market access to mortgage lenders.
- Indirect government sponsorship of mortgage credit implies direct participation of Cagamas in the performance of the acquired mortgage pool.
- Cagamas refinances itself through issuance of unsecured conventional debt securities (fixed or floating rate bonds or short-term notes) or, more recently, through Islamic bonds without a pre-specified investment return.

### Implications and policy relevance
- Malaysia’s combination of market scale, product innovation, regulatory initiatives, and institutional support positions it as a frontrunner and potential international hub for Islamic finance.
- Policy measures aimed at deepening market infrastructure, broadening investor bases, standardization of documentation, and easing operational constraints (e.g., foreign-currency Islamic banking) are central to leveraging Malaysia’s comparative advantages.
- International harmonization and standard setting remain important given variation in shari’ah interpretations and growing institutional competition among potential Islamic finance centers.

*IMF policy discussion box: "Malaysia as a Front-runner of Islamic Capital Markets."*

### REFERENCES

### _pdp03 - REFERENCES

### References list
- Ainley, Michael, Mashayekhi Ali, Hicks Robert, Rahman Arshadur, and Ali Ravalia, 2007, “Islamic Finance in the U.K.: Regulation and Challenges,” The Financial Services Authority (FSA), London.
- Ali, Salman Syed, 2005, “Islamic Capital Market Products—Developments & Challenges,” Islamic Research and Training Institute (IRTI), Islamic Development Bank, Riyadh.
- Batchvarov, Alexander, Martin James, and Furquan Kidwai, 2008, “Sukuk Growth to Continue ...,” Merrill Lynch, Islamic Structured Finance—ABS,” (February 1), London.
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*Source: _pdp03 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2008/_pdp03.pdf_