Malaysia introduces new structure for government Sukuk

Malaysia’s new government Sukuk, structured using the Wakalah bi alKhadamat (agency for service) concept, represents a significant milestone in the country’s commitment to advancing its Islamic finance ecosystem. Announced in May 2024, the new structure introduces a fresh dimension to Sukuk issuance, combining the principles of Wakalah (agency) and Khadamat (services). The innovative structure allows Malaysia to remain competitive in the global Islamic finance market. In particular, it provides an alternative solution to international investors adhering to AAOIFI standards, who may find Malaysia’s existing Government Investment Issues (GII) (which rely on 100% debt through the Murabahah structure) less appealing due to trading restrictions (prohibition of debt sale, Bay’ al-dayn). Based on official statistics, less than 10% of GII investors currently are held by international investors. This innovative approach aligns with Malaysia's ongoing efforts to strengthen its investment landscape and signals its commitment to innovation and investor-friendly policies. The issuance of AAOIFI Shariah Standard No 59 on Sale of Debt, which came into effect on the 1st January 2021, further restricts the tradability of Sukuk structures which have debt elements such as

combination Sukuk using Wakalah, Ijarah and Murabahah (via Tawarruq) contracts. According to the standard, tradability of such structure needs to comply with the following parameters: Non-monetary assets (i.e., tangible assets such as shares, leased assets, Istisna assets, Mudarabah assets) must be more than 50% upon issuance; After issuance, the ratio is allowed to fall below 50% only in unexpected situations and with the approval of the Shariah committee; and If the ratio drops further (i.e., below 33%), the Sukuk holders must be informed that the Sukuk is no longer tradable. If the Sukuk is listed, it must be delisted. In Malaysia, the most commonly adopted Wakalah structure is Wakalah bi alIsthithmar. While this Sukuk Wakalah structure is widely used, the new GII Wakalah bi al-Khadamat structure addresses the new AAOIFI requirements on debt trading (comparison summarized below). The Sukuk issuance, which is targeted by 2025, aims to support climate and energy transition objectives. By incorporating sustainability considerations, Malaysia’s endorsement of the new structure further aligns its financial instruments with global sustainability objectives, supporting investors’ increasing preference for socially responsible investments.  Siew Suet Ming is deputy CEO and chief rating officer at RAM Ratings. She can be contacted at [email protected].

 
This article was first published in IFN Volume 21 Issue 31 dated the 29th July 2024.

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