Unlocking Economic Growth: The Importance of Sukuk in Modern Finance

In the dynamic world of finance, Sukuk has emerged as a critical instrument that is reshaping the global investment landscape. Sukuk, also known as Islamic bonds, have gained prominence in recent years due to their unique features and adherence to Islamic principles. This article explores the significance of Sukuk in modern finance and highlights the role it plays in promoting economic growth, enhancing financial stability, and attracting diverse investment opportunities.

As we know, Sukuk refers to financial instruments structured to comply with Shariah principles, which prohibit the payment or receipt of interest. Instead, Sukuk represent proportionate ownership of underlying assets or business activities. This unique structure allows investors to participate in profit sharing and risk-bearing arrangements, aligning financial transactions with ethical and moral considerations. The popularity of Sukuk has grown rapidly, with the global Sukuk market exceeding $500 billion in recent years.

Why is it so important you may ask? Well, sukuk also plays a vital role in promoting economic growth by mobilizing financial resources for infrastructure development, government projects, and corporate expansion. Unlike conventional bonds, Sukuk provide an avenue for Islamic institutions and investors to participate in these activities while adhering to their religious beliefs. This inclusion of a previously
untapped pool of capital enhances the overall economic development and promotes financial inclusion.

In Malaysia, the introduction of the Sustainable and Responsible Investment (SRI) Sukuk Framework by the Securities Commission Malaysia (SC) has led to the widespread popularity of Sukuk as a funding instrument. The implementation of the SRI Sukuk Framework is in line with the initiatives outlined in the SC’s Capital Market Masterplan 2, which aims to promote socially responsible financing and investment. It represents a part of the SC’s efforts to establish an enabling environment for SRI investors and issuers. Additionally, this initiative aligns with the increasing global trend of green bonds and social impact bonds, which aim to encourage sustainable and responsible investment practices. The proceeds generated from SRI will be exclusively utilized for funding activities or transactions related to eligible SRI projects.

Some of the biggest contributions and achievements made by SRI would be the issuance of the world’s first green Sukuk which was made in 2017, and the Global Sustainability Sukuk in 2021.

These innovations and developments changed the perception and game of the Sukuk arena.
Significantly, Malaysia witnessed the issuance of RM10.58 billion in SRI sukuk in 2022 alone. This brings the total amount of SRI sukuk issued under the SRI Sukuk Framework to RM18.92 billion since its inception in 2014. Out of this total, approximately RM16.58 billion was acknowledged under both the SRI Sukuk Framework and the ASEAN Standards. Malaysia’s sukuk issuances accounted for about 24% of the total issued under the ASEAN Standards.

Furthermore, Sukuk can facilitate cross-border investments and attract foreign direct investment (FDI). The global nature of Sukuk issuance allows issuers to tap into a wider investor base, including both Islamic and non-Islamic investors, leading to diversification of funding sources. This diversification reduces reliance on traditional financing methods, strengthens financial systems, and fosters economic resilience.

Not to mention, Sukuk contributes to financial stability by providing an alternative to interest-based transactions. The prohibition of interest shields investors from excessive risk-taking and speculative behaviour, reducing the likelihood of financial crises. The asset-backed nature of Sukuk enhances transparency and reduces information asymmetry, creating a more robust and stable financial system.

Generally, Sukuk offers a wide range of investment opportunities, attracting both domestic and international investors seeking ethical investment avenues. The Sukuk market provides diverse options, including infrastructure Sukuk, corporate Sukuk, sovereign Sukuk, and green Sukuk. These opportunities appeal to investors with varying risk appetites and preferences, leading to a more inclusive and diversified investment landscape.

enhances financial stability, and provides diverse investment opportunities. Its adherence to Islamic principles attracts a vast pool of investors seeking ethical and responsible investment avenues. By mobilizing funds for infrastructure development, attracting FDI, and diversifying funding sources, Sukuk plays a crucial role in unlocking economic potential. Furthermore, its asset-backed nature and prohibition of interest contribute to financial stability by reducing speculative behavior and mitigating systemic risks. As the global economy evolves, the importance of Sukuk as a sustainable and inclusive financing instrument will continue to grow, paving the way for a more resilient and prosperous future.

By Nur Madihah Mohammad Adib, Bachelor Degree Student, Faculty of Shariah And Laws, Universiti Sains Islam Malaysia (USIM)

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