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Sustainable and responsible Sukuk in Malaysia.

Summary: SUSTAINABLE AND RESPONSIBLE INVESTMENT (SRI) IS AN INCREASING FOCUS FOR INVESTORS, AND MALAYSIA'S FRAMEWORK FOR SUCH IS A PATH FORWARD FOR SUKUK IN THE NATION, WRITES SABA' RADWAN JAMAL ELATRASH, RESEARCH OFFICER AT THE INTERNATIONAL SHARIAH RESEARCH ACADEMY FOR ISLAMIC FINANCE AND NUR SHAIRA MOHD YUSOFF, EXECUTIVE AT ISRA CONSULTANCY SDN. BHD.

Sustainable and responsible investment (SRI) is an investment that advances environmental, ethical, and social justice while employing any investment strategy that achieves both financial return and beneficial impact on the society. The idea of protecting and enhancing the community through investing for a social cause and generating a financial return is very appealing to today's investors. In fact, SRI assets under management in the US alone is said to be worth more than $6.57 trillion according to a 2014 report by the US SIF Foundation.

Islamic finance prescribes the principles and elements of social responsibility, profit and risk sharing, as well as ethical

practises in all that is financed and transacted. There is a great emphasis on ensuring Islamic finance transactions do not contain any elements of injustice, oppression, and exploitation.

There is no denying that the objectives of Islamic finance and SRI can easily go hand in hand. Developing Shari'ah-compliant structures and products for SRI is likely to become an important contributing factor to the expansion of Islamic finance in the global market.

The rapid growth of Islamic finance and SRI over the past two decades reflects the soaring appetite of investors who are demanding products that not only provide financial return but also bring about social change.

However, without an adequate Government structure and proper regulatory frameworks to regulate Shari'ah-compliant investments, Islamic finance instruments with SRI elements such as SRI Sukuk might not develop to its full potential.

The challenge is to ensure that its investors have the assurance that while the investment is Shari'ah compliant, it also complies with the SRI's environmental, social and governance (ESG) set of standards and best practises.

SECURITIES COMMISSION MALAYSIA (SC)'S SRI SUKUK FRAMEWORK

To further develop the Islamic capital market and enhance Malaysia's leading position in the global Sukuk market, the Securities Commission Malaysia (SC) introduced the SRI Sukuk Framework in August 2014 to facilitate the rising trend of SRIs.

The SC 2014 Guidelines on Sukuk, in turn, included a specific chapter on the requirements for an issuance, offering or invitation to subscribe or purchase SRI Sukuk.

In March 2015, the SC released the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framwork, which superseded the 2014 guidelines on Sukuk concerning making available unlisted capital market products to sophisticated investors in Malaysia or persons outside Malaysia.

Following that in June 2015, the SC then released the Guidelines on the Issuance of Private Debt Securities and Sukuk to Retail which also superseded the 2014 Guidelines on Sukuk concerning retail investors. Table 1 below illustrates the SRI Sukuk framework issued in Malaysia since 2014.

The LOLA Framework laid down the additional requirements imposed on SRI Sukuk in Chapter seven. It is important to note that the rest of the requirements of the LOLA Framework shall apply to an SRI Sukuk regardless of the fact that it has its own chapter in the LOLA Framework.

In the Retail Investors Sukuk Framework, issuances of SRI Sukuk must also comply with the requirements under Part E; Chapter 20 which specifies the additional requirements imposed on retail Sukuk in addition to the requirements in Part D, which specifies the other Shari'ah requirements for SRI Sukuk.

Of the many important clauses in both the LOLA Framework and Retail Investors Sukuk Framework concerning SRI Sukuk, of note is the requirement that the issuer must ensure that the issuance of the SRI Sukuk will only be utilized for projects deemed to be eligible SRI Projects as shown in Figure 1. These eligible projects aim to: (i) preserve and protect the environment and natural resources; (ii) conserve the use of energy; (iii) promote the use of renewable energy; (iv) reduce greenhouse gas emission; or (v) improve the quality of life for the society. Projects that adhere to these objectives will be deemed to be an eligible SRI project. The discussion on eligible projects also mentions that an eligible SRI Sukuk can undertake to develop Waqf properties and assets.

The clarification on what is considered an eligible SRI Sukuk is significant when comparing Malaysia to other countries. Malaysia has successfully created a framework for SRI Sukuk that provides legal and regulatory clarifications on what can be considered as SRI Sukuk.

This move is seen as encouraging the issuers and providing them with guidelines to come up with eligible SRI Sukuk projects. Concurrently, such legal backing from these guidelines or framework provides credibility to foreign and local investors.

The SC has taken this a step further by imposing disclosure requirements on the issuer whereby the issuance of a disclosure document in relation to the SRI Sukuk must include: (i) details and impact objectives of the eligible SRI project; and (ii) a statement that the issuer has complied with relevant environmental, social, governance (ESG) standards or recognised best practises relating to the eligible SRI project.

* This is also seen to enhance the credibility of SRI Sukuk since the global investors are assured that issues from Malaysia will have adhered to:

* The general requirements mentioned in the LOLA Framework and the Retail Investors Sukuk Framework (whichever applicable);

* The additional requirements specified in the designated chapters of SRI Sukuk; and

* The ESG standards on the said SRI Sukuk project.

KHAZANAH NASIONAL BERHAD'S SRI SUKUK

The primary aim of the SRI Sukuk Framework is to foster innovation and dynamism in the Islamic finance market. The introduction of the SRI Sukuk Framework has benefited the Malaysian Islamic Capital Market industry through the issuance of the world's first ringgit-denominated SRI Sukuk by Khazanah Nasional Berhad.

Khazanah's vision is to be the leading regional strategic investment house that creates sustainable value for a globally competitive Malaysia. True to its vision, it issued the world's first ringgit-denominated SRI Sukuk in 2015.

Led by a special purpose vehicle (SPV) called Ihsan Sukuk Bhd (Ihsan), the Sukuk programme issued a nominal value worth MYR 1 billion. The tenure of the programme was for 25 years from its first issuance with a remarkable preliminary rating of AAA(s) by RAM Rating Services Berhad. The Sukuk programme was deemed hugely successful with an over- subscription for the first issuance worth MYR 100 million and has a 4.3 per cent return per annum over a seven-year tenure. The structure of the Sukuk can be seen in figure two below.

The structure of the SRI Sukuk is in accordance with the Islamic principle of Wakalah bi al Istithmar, which further acknowledges Khazanah's efforts in intensifying the innovation and evolution of Islamic finance.

The issuance proceeds will be channelled to Yayasan AMIR, a not- for-profit foundation initiated by Khazanah to manage its cashflow for the deployment of the Trust Schools Programme identified in 2015. Yayasan AMIR will, in turn, focus on improving the accessibility to quality education in Malaysia's government schools.

The step taken by Khazanah gives a reason for the stakeholders in the Islamic Finance industry to dream big and anticipate a brighter future. The first issuance of SRI Sukuk in Malaysia has amplified the expectations and hopes of the society to access quality education. This SRI Sukuk could fulfil the needs of both investors and society towards ensuring growth in the community's economy.

MEETING DEMANDS

Ultimately, SRI Sukuk has the significant advantage of providing a package that is very appealing to investors. The ever increasing need for developing and improving transport services, housing, schools, and hospitals, in addition to the necessity of developing alternative energy resources as well as green energy for the future generation, is an outcome desired by socially responsible, ethical, and green investors.

Though the SRI Sukuk is seen as cutting edge and progressive in the Sukuk industry, it has a long way to go. To encourage better participation and break new ground in the global market, countries across the world can facilitate the development of SRI Sukuk with a robust legal, regulatory and governance framework such as the SRI Sukuk Framework issued by the Securities Commission Malaysia. It is a leading example of what has to be provided to meet the demands of both retail and sophisticated investors in the Sukuk market.

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Publication:Islamic Business & Finance
Geographic Code:9MALA
Date:Oct 31, 2016
Words:1413
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