Dheerasak Suwannayos, President of the Islamic Bank of Thailand, speaks to Finance IQs Bryan Camoens on the attraction of sukuk and Indonesia’s potential as an Islamic finance hub.IQPC: Could you please tell us what lies behind the attraction of Sukuk?
Dheerasak Suwannayos:
There are many reasons that Sukuk is becoming increasingly attractive. One is that this tool provides an investment opportunity for the highly liquid investors in the Middle East markets.
The liquidity in the Gulf has been high, partly as a result of oil prices, also billions of dollars were repatriated from the West by worried owners after 9/11, and because the Islamic revival has left many Muslims doubting the wisdom of conventional investment. From the perspective of other non Islamic countries is that Sukuk provides an opportunity to benefit from the liquid petrodollars in the Islamic world.
Moreover, its ethical attributes attracted investors because of the difference in its risk profile from conventional bonds, i.e. the value of Sukuk is based on the underlying assets, rather than simply being backed by a purely credibility like a bond.
IQPC: What are some of the lessons learnt from sukuk defaults and what can be done to
minimize or prevent future occurrences of these defaults?
Dheerasak Suwannayos:
Defaults pertaining to Sukuk are a recent phenomenon. Sukuk is a nascent instrument of capital market that complies with Shariah principle, which also represents an alternative instrument to conventional bonds. The primary difference between Sukuk and conventional bonds is that Sukuk represents ownership of real assets whereas conventional bondholder owns debts.
After the case of Nakheel Sukuk in 2009, we must learn how the investors would claim their rights of the assets because the rights of the Sukuk holders and issuer’s responsibilities are governed by Common or Civil law, that is dependant on which country’s sukuk was issued, not the Shariah law.
Furthermore, the authorities have to play preventing roles by giving strict rules on issuances of Sukuk like conventional bonds where ratings are mandatory. However the ratings may need to cover not only credit but the jurisprudential dispute should take into account during the rating process too.
IQPC: Indonesia is a potential huge market for Islamic finance. In your view, what do you
think are the factors affecting the slow growth?
Dheerasak Suwannayos:
It is very unfortunate that a country with largest Muslim population in the world like Indonesia is still slow to tap into the Islamic finance market. The underperformance goes back two centuries when Indonesia had been colonized by Dutch where the Civil law was imposed. In fact, Thailand is also a country of civil law and faces the same situation.
Indonesian law neither acknowledges usufruct (Sukuk al Ijarah) nor recognizes a company set up purely as financing vehicle (SPV). After six years of struggling, the regulators under the government of Susilo Bambang Yodhoyono had enacted a ‘Sovereign Sukuk Law’ in April 2008 while other Muslim countries like Malaysia,
Pakistan, Qatar, Bahrain, the UAE and Brunei already have sovereign Sukuks. But the tedious process will then have to go thro for corporate Sukuks.
The current tax framework has a dis-intensifying effect on the growth momentum of the Islamic finance sector. Indonesia have yet to resolve the double taxation issue on Murabahah products. Whilst the policy makers in UK who manifested their ‘Islamic finance friendly’ approach by the introduction of tax reforms through Finance Acts 2005 & 2006 demonstrated their commitment for the elimination of tax bars for this alternative
mode of financing.
Aside from that, another factor affecting the growth is the lake of public awareness of Islamic finance and product. The research shows that more than 70% of the population still has little knowledge of the concept and its products.
IQPC: How can the Islamic finance market grow without over-relying on the repackaging
of conventional products?
Dheerasak Suwannayos:
Islamic financial system is still at its infancy which needs to be ahead of developments in order to remain a viable and competitive approach of financial intermediation. Toward the end, the development of an Islamic financial system should comprise the sets of the key components including the Islamic bank industry, the Islamic money and capital markets, and the takaful market, given the strong synergies among these components in the system. In addition, the developments of the non-bank financial intermediaries, such
as leasing companies or saving cooperatives, need to be developed to meet customer demands.
We are still in an initial stage where the development of Islamic financial industry has adopted the application approach in the formulation of Islamic financial products. In most instances, the Islamic financial products are repackaged along the features of the conventional financial products, only eliminating the elements that are not incompliance with the Shariah. The effort should be intensified to develop new financial products that embodied the virtues of Islamic financial system. There are several requirements to be met, firstly is a strong support by the authorities to provide a viable regulatory and supervisory framework. This is to ensure that the operations of the Islamic financial institutions are smooth and sound.
It also requires having a high calibre workforce and management teams with the expertise, leveraging on the technology, strengthening research and development, and instituting risk management systems. A structured education program needs to be in place to enhance the awareness of the Islamic financial system and the advances it offers. There is a need for Islamic financial players to intensify efforts in the training and development of expertise in the various specialised areas of Islamic finance. These programs should be carried out in a comprehensive approach, encompassing both conventional banking and Islamic banking, complemented with Shariah knowledge. The dynamism of the Islamic financial products can only be emerged through a pool of talent that possesses both convictions and expertise in Islamic finance.
IQPC: Where are some of the trends that you are seeing in the sukuk market in Asia?
Dheerasak Suwannayos:
Today Malaysia has become the dominate player in the global Sukuk market as a pioneer in the structuring of Sukuks. Whilst Asia’s largest Muslim countries like Pakistan and Indonesia have small, although growing Sukuk markets. Both Singapore and Hong Kong, which consider themselves the leading financial centers in the region, are stepping up their efforts to capture a slice of this growing market. Sri Lanka too entered the fray and competed for the attraction of foreign funds into their economies by eliminating the regulatory and tax impediments for the flourishing of Sukuk in their capital market. Japan is the most recent major developed economy to tap into the Sukuk market.
Thailand is although late in coming to the game, but it is just a matter of the legal system being put in
place to accommodate the Sukuk issuance. We have 9 million Muslims in Thailand out of a population of 67 million as comparable to Malaysia, a country with 12 million Muslims out of a population of 22 million. There are a number of top international banks with offices in Thailand, which very experience in Islamic finance such as Citibank, HSBC and Standard Chartered. I believe that we have strong potential to become an Islamic
financing hub as well.
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