Sukuk & Capital Market - Islamic Finance News

November 2012 

Sukuk & 

Capital Market 

Features 

Islamic PE 

& VC: Still 

Misunderstood? 

Secondary 

Markets 

Stalemate? 

Chapters 

Eastspring 

Al-Wara’ 

Investments 

The KLRCA: 

Dispute 

Resolution 

PP17808/06/2013(032740)

editor’s note 

Market resurgence 

Supplements 

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The last year has seen unprecedented growth in the Gulf Sukuk market, with 

major issuances spurring its primary Sukuk market, and new entrants such as 

Turkey creating diversity in the issuance space. Although Malaysia currently 

dominates the global issuance table, making up 60% of global Islamic issuances, 

the challenge to attract cross-border investments and Middle East issuers still 

remains a hurdle in the country’s bid to create a dynamic and internationally 

attractive capital market. 

For any capital market to be successful, clear laws and precedence are important 

elements in attracting foreign issuers and creating a sustainable market. Past 

defaults and the current global economic environment has further pushed the 

need for transparency, proper regulations and clear-cut tax laws in order to attract 

major issuers and to create investor confidence in the market. Diversity amongst 

investors is also fundamental in avoiding too much concentration in one single 

geographical area to mitigate risk from an issuer’s perspective. 

Analysts have projected a continued rise in demand for Sukuk particularly in the 

infrastructure and project finance space; in the GCC, Arab Spring countries and 

Asia moving forward. Tapping the Sukuk market could help improve the capital 

structure and liquidity profiles of GCC and Asian companies, particularly those 

operating in capital-intensive industries such as infrastructure. It could also 

provide such companies the longer-term funding they need via a different funding 

source. This is expected to create more depth and substance in the Sukuk and 

capital market space, and also ties in with the need to tether Islamic finance to 

the real economy. 

In this issue of Islamic Finance news Supplements, we take a comprehensive 

look at the current Islamic capital market landscape; its issues and challenges, 

as well as the meteoric rise in capital market issuances. We also examine the 

secondary markets, which has seen development over the years, but still requires 

much more attention in order to create more depth and sustainability. The private 

equity and venture capital sector also take center stage in this issue; in which we 

question the habits and intentions of Islamic investors who are eager to reap the 

rewards but still shy away from risk. 

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November 2012 1

contents feature 

COVER STORY 

4 Sukuk and the Islamic Capital Markets: 

Moving Forward 

As the Islamic capital market space sees new 

entrants and Sukuk issuances gain momentum in 

the Middle East and in emerging markets such as 

Turkey and Hong Kong, Islamic finance players 

look forward and seek to create a sustainable and 

credible Islamic capital market to capitalize on the 

influx of business. 

interview 

8 Addressing Relevance 

Afaq Khan, CEO of Standard Chartered Saadiq 

shares his views with Islamic Finance news on the 

global Islamic capital market, and prioritizing for the 

future. 

featureS 

11 Islamic Private Equity and Venture 

Capital: Still Misunderstood? 

Until issuers and investors alike accept risk sharing as 

a fundamental aspect of Islamic finance, the Islamic 

private equity and venture capital space will continue 

to struggle. 

15 Secondary Markets Stalemate? 

Liquidity and the secondary market, or the lack 

thereof, in the world of Islamic finance, has been an 

issue of much debate for many years among industry 

professionals. 

25 The Islamic Fund Management Industry 

– Back to Basics 

The Islamic fund management sector is still 

grappling with fundamental challenges that could 

prove to be crippling to this nascent industry. 

chapters 

13 A Bright Path Ahead 

The outlook is favorable for Sukuk issuance in 

Malaysia this year and in the future, as issuance is 

expected to continue to grow exponentially. 

18 Sukuk Investing: Diversification for 

Resilient Performance 

The 2009 Dubai debt crisis erroneously gave the 

global investment community a poor impression of 

Sukuk (Shariah-compliant fixed income) investing. 

22 Dispute Resolution: The Final Piece of 

the Puzzle 

With an eye on the growing complexity and 

internationalization of the Islamic finance market, The 

Kuala Lumpur Regional Arbitration Center (KLRCA) 

has become the first organization in the world to 

launch its i-Arbitration Rules; a dispute resolution 

mechanism specifically formulated for Shariah 

compliant transactions. 

27 Diverging Models Shape The Growth 

Prospects for Takaful 

The growing need for insurance that complies with 

Shariah law means that the global Takaful sector is 

becoming an increasingly significant niche within the 

wider insurance industry. 

2 November 2012

Cover story 

Sukuk and the Islamic Capital 

Markets: Moving Forward 

As the Islamic capital market space sees new entrants and Sukuk 

issuances gain momentum in the Middle East and in emerging markets 

such as Turkey and Hong Kong, Islamic finance players seek to create 

a sustainable and credible Islamic capital market to capitalize on the 

influx of business. NAZNEEN HALIM explores the current issues in the 

market and challenges moving forward. 

Although Sukuk remains the buzzword particularly in Asia and 

the GCC, industry players have begun to place more emphasis 

on products and structures beyond the traditional debt capital 

market instruments, looking to incorporate Islamic finance 

into the real economy via project and infrastructure financing 

structures, increasing trade finance and syndication activity, 

and most importantly realizing the need to underpin Islamic 

finance transactions to real and tangible assets. 

For the last ten years, Sukuk has been one of the main drivers 

in the industry. However, industry players have been urged to 

take a macro perspective on the Islamic finance industry and 

help it find place in the global economy. As a result, the Arab 

Spring countries have taken center stage in the bid to venture 

into new, untapped markets with an opportunity to directly link 

infrastructure building and development to Islamic finance. 

Usman Ahmed, the head of corporate and investment banking 

at Citibank in the Philippines, believes that an important 

driver of sustainability in the market is the integration of 

Islamic finance within existing markets and the development 

of new products. The global financial crisis has also served 

as a wake-up call at the very least to the Islamic finance 

industry as a whole, creating further need for regulatory 

supervision, transparency in documentation and structures, 

as well as sound capitalization in the banking and financial 

system. 

As an instrument that allows medium-term capital raising, the 

popularity of Sukuk amongst capital market players—both 

Islamic and conventional— has become more prevalent. The 

growing desire for jurisdictions to issue sovereign Sukuk to 

diversify their investor pool and attract liquidity from the Islamic 

world is constantly reflected by the entry of new markets; with 

the most recent being Turkey, which had issued its debut 

US$500 million Sukuk, attracting over five times its initial 

issuance target. 

Malaysia leads the way 

Malaysia is currently touted as the most favored destination 

for issuers in the Sukuk market dominating 60% of the global 

share worth US$100 billion. This is primarily due to its deep 

and broad market with comprehensive regulations that ease 

Sukuk issuances, a favorable tax regime, a sophisticated 

investor base as well as support from all issuers, regulators 

and investors. However, the lack of an available platform in the 

Islamic capital markets outside of Malaysia and Saudi Arabia, 

as well as cross-border transactions involving swapping the 

ringgit to the currency of the issuer still remain a concern in the 

market. 

4 November 2012

Cover story 

From a foreign issuer’s perspective, Sabri Ulus, the head of 

treasury at Bank Islam Brunei Darussalam, is full of praise for 

the Malaysian Sukuk market, particularly due to its government 

and regulatory support, as well as its “very sophisticated” 

investor base. He added: “There are also many Islamic financial 

institutions, regulatory organizations and standard-setting 

bodies. GCC entities come to Malaysia and issue ringgit Sukuk 

mostly due to the premium on cross-currency swaps, thus 

reducing their costs if they issue in Malaysia. The tax regime 

and regulatory environment is also very encouraging to foreign 

companies to issue in the ringgit market.” 

Afaq Khan (caricature below), CEO of Standard Chartered 

Saadiq believes that clear laws and precedence are key to 

the success of any capital market in attracting cross-border 

issuances; a feat Malaysia has achieved over a decade of 

fine-tuning its Islamic capital market laws. “It is always a big 

concern for issuers when they want to come to a new market 

to issue paper. Malaysia’s regulations make it easy for the 

Middle East issuers to come to a new legal jurisdiction, and the 

ringgit market remains the most liquid in the Sukuk industry, 

so Middle East issuers are confident they can meet their issue 

size requirements by coming to the ringgit market as opposed 

to going to any other regional currency.” 

However, he adds that the main drawback of the ringgit market 

is its failure to meet the requirements of most international 

issuers in terms of currency. “The need of the issuer isn’t 

exactly in the ringgit currency, and it has to be swapped 

back into the currency which the issuer can use in their day 

to day business. Sometimes you will see Sukuk issuances 

in the ringgit market go up, or some taper off. At the back of 

this there really is no concern. It is simple economics; once 

they (the issuer) swap into a currency they can use, can it still 

be considered a competitive financing for them? That is what 

drives the issuances from the Middle East to the ringgit market; 

when it is viable for them to competitively tap 

this liquid and growing market.” 

Another fundamental to Malaysia’s 

popularity as an up and coming 

jurisdiction for cross-border deals 

involving Middle East entities is 

its legal system, which is based 

on Common law. Saad Rahman, 

the executive director for global 

Islamic banking at Credit Agricole 

explains: “Most cross-border deals 

are based on English, New York 

or Texas law. As an issuer, you are 

looking for transparency of contracts, 

proper enforcement, and to seek 

satisfaction under the enforcement; and 

you get that under English law more 

than civil law. There is a precedence 

which exists in more codified forms of 

law. As an investor and issuer you want 

robustness of the contract and a legal 

jurisdiction that gives you comfort on 

both sides when it comes to a crossborder 

deal.” 

Badlisyah Abdul Ghani (caricature 

right), CEO of CIMB Islamic believes 

that it is imperative for the industry 

to take a step back and evaluate its 

position in the market. “Outside of 

Malaysia, the Islamic capital markets 

in other jurisdictions need to be aware 

of the need to chart greater growth in 

the future, and to create a platform 

that will ensure success. In my 

opinion, the infrastructure in 

the global Islamic capital 

markets is already there: with 

RegS and 144A regulations 

in place, however, from a 

jurisdictional perspective, it is 

unstable to rely on the global 

market at all times.” 

He added: “The framework is 

available and the liquidity is 

there. But as a nation, you do 

not have control over the global 

market, which creates instability. 

What we want as a player is to be 

able to go into a particular jurisdiction and to do transactions 

in the local currency. Because in the long-run, that would be 

more stable for issuers in terms of ability to tap the currency 

that they require in a particular jurisdiction. As CIMB Islamic 

try and facilitate issuers and issue Sukuk globally, we always 

advise the issuer to do it in their local currency first, then in US 

dollars. Outside of Malaysia and Saudi Arabia however, there is 

currently no local currency market.” 

Change in mindset 

It has been said time and again that Islamic investors are 

incredibly risk-averse, which in reality goes against the main 

tenets of Islamic finance which promotes the sharing of risk. 

This has proven to be a major drawback for the Islamic capital 

markets, especially in its bid to create a more equity-based 

issuance and investment environment. 

According to Usman, innovation and growth can only 

be achieved if the industry moves beyond fixed-income 

instruments and embodies the true spirit of Shariah financing; 

which involves the willingness to take up equity-type risk. “In 

the capital markets we have only just scratched the surface 

by relatively integrating Islamic finance with fixed-income 

instruments. However, we haven’t even explored truly assetbacked 

securities, infrastructure financing and equity-linked 

issuances. It is important to understand first what differentiates 

Riba from profit. It is the risk related to ownership; and therefore 

we have to take real risk, relate to ownership of assets. 

“We are still very far from the true spirit of Islamic finance, 

and that is exactly what is holding us back in terms of the 

development of new instruments. The whole world will open 

up to us if we are willing to take equity-type risk. Fixed-income 

Sukuk should just be seen as a means to an end. Issuers 

should be encouraged to do Sukuk issuances because then 

their equity will become Shariah compliant, and if they do a 

November 2012 5

Cover story 

debt on a Shariah compliant basis, they will be able to tap into 

a much bigger equity investor base that will come from the 

Islamic finance market. Islamic investments have to be coupled 

with risk-taking appetite.” 

Market challenges and moving forward 

The all-time low yields currently being experienced by Middle 

East issuers is seen as a catch-22 amongst some industry 

players. Although it has attracted an unprecedented number of 

issuers to the market, some worry that the market will become 

hollow once this low-yield run ends. 

Sabri notes that: “As a treasurer, it is important to keep in mind 

that although the cost of funding is very low today, it might not 

stay the same for the next five to ten years. This is worrying 

if you are tapping into the market with low-yield Sukuk. At 

present, most conventional issuers are shortening their 

borrowing from the market, because they can’t find investors, 

and even if they can, the price of the conventional bond is very 

high. For instance, Spain’s sovereign bond saw a pricing of 3% 

compared to Turkey’s debut sovereign Sukuk; which was below 

investment grade paper, but priced at 2.8%. On the other hand, 

it is encouraging to see the Sukuk investor base evolve to almost 

a 50-50 share between conventional and Islamic investors. We 

are seeing conventional pension funds and banks subscribe to 

Islamic paper mainly because for issuers, from a credit-rating 

and cash flow perspective, Sukuk is more reliable than the 

conventional or European issuances at present.” 

Although the recent impact from Dana Gas’ inability to meet 

its Sukuk repayment deadline on the 31 st October for its US$1 

billion issuance has yet to be thoroughly explored, industry 

players are clearly divided. On one hand, many believe that 

Dana Gas’ standstill with its creditors is just a mere hiccup in 

the Islamic finance capital market space, and on the other, 

some worry that this might have a spillover effect into the UAE 

Islamic issuance market and deflate any ambition of a market 

resurgence in the Middle East. 

Khalid Howladar, vice president/ senior credit officer at Moody’s 

believes that the market was already primed on the Dana Gas 

situation and a possibility of a default, in the several months 

leading up to the standstill; thus eliminating the shock factor 

which is usually the main reason for panic in the market. He 

said: “Dana Gas has been in trouble for a while, so it’s not really 

a shock. The market was already aware of the situation, unlike 

the Dubai World/Nakheel Sukuk— which was a bit of a surprise 

at that time. Broadly, the UAE market is recovering, and the 

economy is much better. So this is just a small piece of bad 

news in what is overall a much improved credit environment. 

So, I don’t think it is that significant. In terms of the Sukuk 

market, it’s not so much a negative signal about Sukuk, and 

it’s more about the company, so I don’t think it would affect the 

Sukuk market that much.” 

In terms of its effects on the credibility of the UAE credit 

market, Khalid believes that there are more pressing issues 

at the moment, including Dubai Holdings’ current financial 

woes: “There are still bigger problems outstanding such as the 

companies of Dubai Holdings that are under restructuring. It 

has been a year but there is still no resolution on that. That’s a 

much bigger story and in terms of exposure in the market, that 

will have more of an impact. This (Dana Gas) is relatively small 

at US$920 million and the banking system is well capitalized 

and liquid.” 

The lessons to be taken from this nail-biting experience, Khalid 

believes, are aplenty: “From an issuer’s perspective, companies 

need to look at their capital structure and take on debt based 

on solid cash flow projections. I think they need to take a more 

conservative approach to future cash flow forecasting to ensure 

that they can pay back all the debt borrowed and not be carried 

away by the boom times. Investors on the other hand need to 

study the company, their cash flows and the ratings they get, 

and make sure they understand the risks in the bond… such 

as, will the company be able to pay me back in bad times as 

well as good times? People need to do their due diligence in 

these investments to make sure that the company is in a strong 

position to pay back the money that they borrow.” 

As the market evolves and the industry becomes clearer of 

its goals and objectives, market players are becoming more 

perceptive of what investors want and what motivates bankers 

to become part of the growing global Islamic finance movement. 

“From an issuer’s perspective, their primary objective is to 

tap liquidity, build a profile with investors they haven’t really 

explored before, and ensure diversity of their funding base. At 

the heart of every Islamic capital market issuance is the desire 

to get core Islamic demand from issuing an Islamic finance 

transaction. Sustainability has to be driven by the ability and the 

increased participation of Islamic banks to anchor a transaction 

that is issued in a Shariah compliant manner,” said Usman. 

He added: “Transactions are substantially driven by demand 

from non-Islamic banks and conventional investors, and that 

should encourage more issuers to look at the Islamic market. 

It is primarily a case of investor demand driving sustainability.” 

According to Saad, it is important to bear in mind that the Islamic 

capital markets is far from isolated from the conventional space, 

and that Islamic finance exists in a greater credit model of global 

liquidity. “We are still working in a very much conventional 

environment and issues in this market have a direct impact on 

the Islamic finance industry. For instance, in terms of Sukuk, 

many times it is the conventional investor who drives the 

pricing down, and although this is to the benefit of issuer, it 

does not necessarily bode well for the Islamic investor looking 

to come into the deal. Islamic finance cannot be a standalone 



industry.” 





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November 2012 

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act as a fiduciary or an investment advisor except where registered as such.

interview 

Addressing Relevance 

Afaq Khan, CEO of Standard Chartered Saadiq shares his views with 

Islamic Finance news on the global Islamic capital market, and 

prioritizing for the future. 

Standard Chartered Saadiq, ever since its inception in 2004, 

has come leaps and bounds in the global Islamic banking and 

finance space. The bank, which has successfully remained 

on track in terms of fulfilling its clients’ needs and providing 

them with a complete suite of Islamic products for end-to-end 

solutions is also a major player in the Islamic capital markets 

space; having been involved in landmark Sukuk deals this 

year, including the Qatar Government’s US$4 billion issuance 

and Abu Dhabi National Energy’s RM650 million (US$213.07 

million) innovative cross-border transaction. 

Although Sukuk is a good 

proxy for the health of 

the industry, we should be very 

careful. It is not the only 

proxy 

“This year we have had two significant milestones: we 

launched a global private banking business recently, and 

also launched the Islamic Euro Clearing Account in Turkey 

in September this year. This has been very well-received 

in the market, and we are constantly looking to expand by 

products, businesses and geographies. Overall, the journey 

has been very rewarding. We have a very cohesive, clientcentric 

mandate to serve our clients, to offer a complete Islamic 

banking alternative product suite to meet the end-to-end 

requirements of our clients,” Afaq said. 

However, despite the bank’s many successes in arranging 

major Islamic capital market deals throughout the year, and 

a healthy deal pipeline moving forward, Afaq insists that the 

bank’s priorities extend beyond Sukuk. “Although Sukuk is a 

good proxy for the health of the industry, we should be very 

careful. It is not the only proxy. Islamic banking is an alternative 

to the entire conventional banking space. In the conventional 

banking space, nobody says that if the capital markets are 

down, then the entire banking system is down. The same 

applies to Islamic banking. Trade finance and syndication are 

also growing sectors.” 

“Sukuk in itself is an instrument that allows medium-term capital 

raising. As and when the clients need medium-term capital, they 

currently have three options: to do bilateral financing, go to the 

syndications market, or go to the Sukuk market. But that is only 

a small part of it, clients are constantly doing treasury activities, 

buying products, using Islamic banks, doing trade finance and 

cash management activities too,” he added. 

Afaq also warns that most of the Islamic capital market activity 

moving forward hinges on the global economy, and to an extent, 

the outcome of the Eurozone crisis. He said: “I am optimistic 

for next year’s issuances, but a lot depends on what happens 

to the global economy. This is because medium-term capital 

is raised for expansion or new projects, for restructuring and 

lowering cost of capital. And if everyone has refinanced and 

lowered their cost of capital, then there is no need for them to 

keep coming to the market.” 

8 November 2012

interview 

What the market needs, Afaq says, are more players issuing 

paper in order to expand the current issuer base: “The market 

needs more players to issue paper. We were very excited that 

the government of Turkey had recently issued a sovereign, and 

I believe that Malaysia and Indonesia should become repeat 

issuers in the market, and new counterparts should also look to 

enter the Sukuk market. This is because banks have regulatory 

limits on how much exposure they can have to each client as a 

proportion of their capital. Therefore we need the issuer base 

to expand.” 

Islamic treasury: Area of focus 

Based on the current issuer and investor trend, particularly 

in the GCC and Malaysia, it is evident that there is ample 

liquidity to be tapped in the market, and there is still much 

Shariah compliant liquidity looking for Islamic assets to invest 

in. However, this can only be engaged effectively with the 

proper deployment of Islamic treasury products, including risk 

management. 

Afaq explained: “We are very focused on risk management, 

because I believe it is very important to manage risk as the 

industry grows in size and scale. In the real economy, Islamic 

banking is exposed to these risks, and it is important to keep in 

mind that derivatives are not for speculative purposes, and are 

essentially restricted to hedging purposes. Risk management 

is a very important catalyst to the growth of Islamic finance 

as the product suite grows and the gap between conventional 

and Islamic finance is breached. Innovation and product 

development will remain a key growth driver for the next decade 

for Islamic banking. For us to become relevant to the needs of 

society and the economy, we must meet the needs of society 

and the economy.” 

I believe it is very 

important to manage risk 

as the industry grows in 

size and scale 

According to Afaq, there are currently two types of treasury 

products in the market; one is for the money-market, in which 

Malaysia has taken the lead in terms of having a complete 

product suite, and was generally a pioneer in this area with 

support from Bank Negara Malaysia. “The progress is good 

in this area, as a lot of other countries such as the UAE and 

Pakistan have now started issuing money-market products, 

and the International Islamic Liquidity Management Corporation 

(IILM) has also begun work in this area. These are all important 

initiatives.” 

“Because we operate in the real economy, we are exposed to 

the risks in the real economy whether it is exchange rate risk, 

yield curve risk, etc.- these are facts of the economy. And this 

is true from the perspective of the bank’s balance sheet and 

our clients’ viewpoint; because our clients are also exposed 

to these risks and need to hedge them. We currently have a 

comprehensive product suite covering currencies, rates and 

commodities hedging solutions. I believe these are important 

for the corporates, because we are offering them end-to-end 

solutions, and for Islamic banks, because they are growing 

in size, and becoming material to the banking system in the 

country. Therefore, they must have risk management tools 

to manage the risk. For instance, Malaysia’s Islamic banking 

sector currently stands at 20%, and there are aspirations to 

double this figure. However, this cannot be done without risk 

management tools. We are very focused on this, and it is 

essential to the growth of the Islamic market, where we have 

balanced growth, with business and risk going hand in hand,” 

he added. 

Industry initiatives 

Afaq believes that the industry is currently already committed to 

grow Islamic treasury and risk management products, with the 

International Islamic Financial Market (IIFM) actively involved 

in drafting standardized commodity Murabahah, and profit-rate 

swap documents. “Standard Chartered was on the working 

committee for these standards, and as the market grows, these 

standards will start as best practice, and then the market will 

use them as the base document and either adopt them or 

tweak them based on local norms and local regulations. It is 

a very good start. We believe that this whole area needs more 

attention and more exposure.” 

New frontiers 

In terms of new markets, Standard Chartered has revealed 

its aspirations to tap into the African Islamic banking space in 

the medium-term. “The market is growing, and we are excited 

about the market there. There has to be a change in regulations 

in some markets, and we are currently studying the prospects 

there. To successfully launch in the country, you need a 

regulatory and legal framework in place. We are currently 

talking to different stakeholders in Africa, and as Standard 

Chartered is very client-centric, we will choose which products 

to launch based on the feedback we receive from the clients.” 

Afaq also believes that there is much potential amongst the 

Arab Spring countries such as Egypt and Libya. There is a great 

opportunity for these countries to rebuild, and Islamic banking 

is looking for new markets. Therefore, it appears to be a perfect 

match. What timeframe the regulations will be passed and how 

welcoming they will be in terms of giving licenses remains to be 

seen; but clearly there are opportunities due to their proximity 



to the Middle East and a common language.” 

Afaq Khan 

Chief executive officer 

Standard Chartered Saadiq 

Building One, DIFC Gate Precinct 

Dubai International Financial Centre 

Dubai, UAE 

Email: afaq.khan@sc.com 

Web: standardchartered.com 







saadiq 

November 2012 9

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feature 

Islamic Private Equity and Venture 

Capital: Still Misunderstood? 

Until issuers and investors alike accept risk sharing as a fundamental 

aspect of Islamic finance, the Islamic private equity and venture capital 

space will continue to struggle. NAZNEEN HALIM studies the prospects 

of this virtually non-existent sector and its potential contribution to 

the Islamic finance industry as a whole. 

At present, industry experts unanimously agree that investments 

in private equity and venture capital in the Shariah compliant 

universe are almost zero. Despite the myriad of family-owned 

businesses and start-ups in Islamic finance strongholds in the 

Middle East and Asia, investments in Islamic private equity 

have been dismal to say the least. 

Opportunities in this sector also extend beyond these two 

regions, into countries such as Germany where SME businesses 

and start-ups are well-regulated and a common phenomenon. 

Considering the continuous calls for Islamic liquidity and 

investments to be channelled into real economic activity, and 

for the sharing of risk and rewards in a Shariah compliant 

transaction, it is ironic that this sector remains dormant as 

private equity and venture capital investments are the perfect 

fit for the Shariah compliant investment universe. 

Amongst the most common structures prescribed for investing 

in Islamic private equity and venture capital are Mudarabah, 

Musharakah and Wakalah. These structures involve profit 

sharing (Mudarabah), partnership between two parties 

(Musharakah) and the use of an agent to act on behalf of the 

principal (Wakalah). In a Mudarabah arrangement, a contract 

is made between two parties to finance a business venture. 

The parties are a Rab al maal (investor) who solely provides 

November 2012 11

feature 

the capital and Mudarib (entrepreneur) who solely manages the 

project. 

Ahmad Lutfi Abdul Mutallip, a partner of global financial services 

and Islamic banking at Azmi & Associates, wrote: “This is akin 

to a conventional PE/VC, where there exists a relationship 

between the capital provider and the entrepreneur. If the venture 

is profitable, the profit will be distributed based on a pre-agreed 

ratio. In the event of a business loss, it should be borne solely 

by the capital provider, to the extent of the capital contribution 

while the entrepreneur will lose his time and effort. The key to a 

Mudarabah structure is the fact that the entrepreneur cannot be 

placed at risk to bear losses, unless proven negligent.” 

In Malaysia, the Securities Commission issued guidelines 

and best practices for Islamic venture Capital in March 2008, 

solidifying the regulator’s support for the sector. The guidelines 

specify the core requirements for establishing an Islamic venture 

capital corporation or an Islamic venture capital management 

corporation, and set out the best practices intended to assist 

such corporations in carrying out Islamic venture capital 

activities. 

According to the guidelines’ core requirements, the 

corporation must first be registered under the Guidelines for 

the Registration of Venture Capital Corporations and Venture 

Capital Management Corporations issued by the Securities 

Commission. In addition, all activities of the VCC and VCMC 

must be Shariah compliant, and an independent Shariah 

advisor must be appointed to ensure adherence to the Shariah. 

The Shariah advisor is also expected to disclose, on an annual 

basis, and declare to the board of directors of the Islamic private 

equity/ venture capital fund company that the Islamic private 

equity/ venture capital fund company is managed according to 

Shariah principles. 

The Shariah advisor is also expected to endorse any investment 

decision and to ensure that the activities of the investee 

companies remain Shariah compliant right to the point of full 

divestment. 

The key to a Mudarabah 

structure is the fact that 

the entrepreneur cannot be placed 

at risk to bear losses, 

unless proven negligent 

According to Lutfi, the four key considerations involving 

the investment into Islamic private equity/ venture capital 

companies include Shariah compliant documentation, financing 

and investment structures; Shariah compliant underlying 

assets and investments; legal documentation, which includes 

the powers of the Shariah advisor; and an express provision 

and understanding between the parties involved that any profit 

of the Islamic private equity/ venture capital fund company 

shall be based on returns from investment of the fund, with no 

guaranteed profit return and there should also be a provision for 

reinvestment of profits into the Islamic private equity/ venture 

capital fund company. 

What is needed now to create some sort of momentum in 

the Islamic private equity and venture capital space – apart 

from a change of mindset amongst Islamic investors – is 

regulatory support; particularly in ensuring transparency and 

proper regulation of these companies, the creation of attractive 

and innovative structures to encourage investments, the 

establishment of legal and regulatory frameworks, as well as 



guidelines specific to this sector across the board. 







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12 November 2012

chapter 

A Bright Path Ahead 

The outlook is favorable for Sukuk issuance in Malaysia this year and 

in the future, as issuance is expected to continue to grow exponentially. 

External economic shocks such as the Eurozone crisis are not likely to 

affect the domestic Sukuk market due to ample liquidity, but will have 

an impact on the international capital markets. 

Malaysia maintained its pole position with 71% of Sukuk issued, 

followed by Saudi Arabia with 15% . 

In addition, global Sukuk issuance in the first quarter of 2012 

reached US$43.5 billion, up by an impressive 55% from the 

corresponding period last year. 

According to Zulkifli Ishak, CEO of Eastspring Al-Wara’ 

Investments (formerly known as Prudential Al-Wara’ Asset 

Management), Malaysia will continue to lead the market 

as the world’s largest Sukuk center. The latest issue of 

Malaysia’s sovereign Sukuk earned a strong response and was 

oversubscribed by almost five times. 

At the same time, there has been a marginal downside to Sukuk 

in that there are default cases in Malaysia and other countries. 

But these isolated cases are not likely to dampen sentiment for 

Sukuk in future. 

Elaborating on this, Zulkifli says: “Standing true to Islamic 

principles, Sukuk are perceived to be ethically protected from 

turning bad. However, when Sukuk defaults were scrutinized by 

the practitioners and academicians, concerns were raised on 

the reliability of their structures and Shariah supervision. This 

has created the perception that Sukuk may not be any safer 

than conventional bonds in terms of investor protection and the 

treatment of defaults.” 

On a brighter note, unlike the high profile default and neardefault 

cases in the Middle East, Malaysia’s Sukuk defaults 

have received less criticism and scrutiny from global industry 

players. 

Some reasons for this are Malaysia’s robust supervisory 

structure, established governance and disclosure standards; 

and the highly developed legal framework and court system 

which provide the necessary protection and comfort to investors. 

November 2012 13

chapter 

A default occurs due to the breach of binding obligations under 

the original terms of the agreement between the issuer and 

the Sukukholders. Both contractual parties must fulfill their 

obligations under the contract or agreement. The level of 

investor protection provided by a Sukuk structure is a factor 

in credit assessment, but from a rating perspective, assessing 

the issuer’s inherent credit strength is fundamental to the final 

rating outcome. In other words, the financial and operating 

outlook of the Sukuk issuer highly affects the final rating on the 

Sukuk itself. 

The Accounting and Auditing Organization for Islamic Financial 

Institutions (AAOIFI) guidelines emphasize the difference 

between Sukuk and conventional bonds. These guidelines 

show that Sukuk does not represent a debt owed to the 

certificateholder by the issuer, so that the owners share the 

returns and the losses. 

De-mystifying Sukuk 

The most common Sukuk issued in Malaysia are Sukuk 

Musharakah and Sukuk BBA. Sukuk BBA were the Sukuk most 

issued in Malaysia in 2004, before the Malaysian Sukuk market 

got dominated by Sukuk Musharakah beginning 2006. 

Sukuk are not similar to bonds because the latter represents a 

debt obligation of the issuer. It is created to service the need 

for working capital or to re-finance existing debt, normally to 

be used in the transportation sector, especially in the shipping 

and aircraft sectors, real estate, construction, and also for 

petrochemical projects. 

Despite the wide variance in ratings, the default rate for 

Malaysian Sukuk in 2009 was relatively low at 0.46% . Between 

1997-2010, there were 24 cases of Sukuk default. Most were 

mainly structured based on Murabahah and BBA contracts – 12 

on Murabahah, 11 BBA, and only one on Ijarah. 

Industry experts maintain that Sukuk defaults in Malaysia will 

not pose a significant threat to the local capital market; however, 

they may have a slight impact on the overall reputation of 

Malaysia as the hub for global Islamic finance. 

“We are optimistic about the performance of Sukuk in Malaysia 

and the rest of the world. And we will highlight the positive 

points of diversification to our investors,” concluded Zulkifli. 

According to Securities Commission Malaysia, total outstanding 

global Sukuk amounted to US$243 billion as at June 2012, 



with Malaysia continuing to be in the forefront of the market. 







Zulkifli Ishak 

Chief executive officer 

Eastspring Al-Wara’ Investments Berhad 

(formerly known as Prudential Al-Wara’ Asset Management Berhad) 

Level 12, Menara Prudential, Jalan Sultan Ismail, 50250 

Kuala Lumpur, Malaysia 

Tel: +603 2072 8808 

Web: www.eastspringinvestments.com.my 

14 November 2012

feature 

Secondary Markets Stalemate? 

Liquidity and the secondary market, or the lack thereof, in the Islamic 

finance industry, has been hot on the lips of industry players since the 

inception of the Islamic capital markets. A lackluster secondary market 

has had an effect on the overall growth of the industry, particularly in 

the long-term, NAZNEEN HALIM discovers. 

The Islamic investor is known for his penchant to buy-to-hold 

papers to maturity, which is perhaps one of the main reasons for 

the current tepid movement in the secondary markets. Driven 

by the mechanics of supply and demand, pricing in the Islamic 

secondary market has also been relatively disappointing as the 

buy-to-hold mentality and a limited diversity of Sukuk investors 

have inhibited efficient price discovery. 

Despite efforts from central banks such as the Central Bank of 

Bahrain and Bank Negara Malaysia to drive secondary market 

growth – through the issuance of short-term paper and the 

establishment of the International Islamic Liquidity Management 

center, which is meant to facilitate more efficient and effective 

global liquidity management solutions for Islamic financial 

institutions and to create greater cross-border investments; the 

money market has yet to truly yield the results of these efforts. 

In a paper by the IMF entitled: “Islamic bond issuance – what 

sovereign debt managers need to know” it was suggested that 

the development of a liquid secondary market will depend on 

Shariah compliant short-term liquidity facilities and Sukuk as an 

interbank money market instruments. It said: “Given the current 

short-term nature of bank liabilities, the creation of money 

market instruments, and asset securitization with shorter 

maturities should help to encourage a secondary market for 

Sukuk. Although Islamic banks are currently one of the largest 

buyers of Shariah compliant products (with long maturities), 

they would benefit most from issues at shorter tenors. 

November 2012 15

feature 

Short-term Sukuk could serve as money market instruments for 

liquidity management purposes. Malaysia and Bahrain are the 

only Muslim countries that have developed an active interbank 

market. Since 2001, the Central Bank of Bahrain has issued 

short-term Sukuk of either three- or six-month maturities (in 

addition to medium- and long-term notes). In the GCC, 20% 

over-subscription for these Sukuk indicates the substantial 

demand for a Shariah compliant interbank market. In Malaysia, 

similar considerations apply to Government Investment Issues 

(GII) and Bank Negara Malaysia Negotiable Notes (BNNN). 

Alternatively, banks can resort to asset securitization in order to 

transform the proceeds from Islamic contracts into customized 

capital market securities with variable maturities. One such 

transaction was completed in July 2005 by Cagamas, the 

National Mortgage Corporation of Malaysia, when it issued the 

first Islamic mortgage-based securities as Mudarabah bonds 

with varying returns and maturities, ranging from three to 20 

years.” 

A silver lining to have emerged this year is the increased 

utilization of Sukuk for the funding of project finance and 

infrastructure development in Asia and the Arab world. Issuers 

are also beginning to look into new, previously untapped 

markets to access Islamic liquidity and plug the demand gap for 

more Shariah compliant paper linked to the real economy. An 

industry player based in Dubai revealed that at present, there 

is simply not enough Shariah compliant paper in the market 

to fulfil investor appetite, and that issuances from highly-rated 

issuers and sovereigns are still few and far between. “The 

outcome of this is that Islamic investors are unable to purchase 

enough Sukuk, and this supply and demand imbalance has 

caused Sukuk-holders to feel unwilling to trade out of a position 

for fear of not finding another Sukuk of similar credentials to 

invest in,” he said. 

A difference in opinion amongst scholars with regards to the 

Shariah compliance of Islamic paper and their acceptability 

has also been a reason for the lack of cross-border trading 

across jurisdictions, causing a lack of diversity amongst 

investors and creating a homogenous and largely domestic 

trading environment. Dominic Harvey, project finance partner 

at Vinson & Elkins, and Barry Cosgrave, finance associate at 

the same firm wrote in a paper: “Barriers to secondary market 

trading are not the result of a lack of effective valuation alone; 

there are also other considerations relating to differences of 

opinion among scholars as to the acceptability or not of certain 

structures. It is possible that certain investors shy away from 

secondary market trading because of a lack of clarity as to the 

acceptability or not of the transaction structure employed. Were 

a scholar to rule against a particular structure, and a secondary 

market trade to be sought to be unwound, it would cause huge 

complications both on a practical level and from the point of 

view of market reaction.” 

A lack of mark to market (MTM) valuations for Sukuk, which 

became apparent over the last few years as a result of the 

restructuring activities in the Middle East has also impacted 

the Islamic secondary market. Harvey and Cosgrave wrote: 

“As balance sheets became distressed over the past few 

years and options to restructure were being explored, one of 

the factors that caught a number of restructuring advisors from 

conventional markets off guard was this lack of MTM valuation. 

This led to difficult conversations with certain creditors when 

‘hair cuts’ were being discussed. 

A lack of MTM valuation also impacts secondary markets as 

it does not establish any sort of profit-making opportunity for 

traders. Without effective valuation of Sukuk there is no way to 

establish a market and as a result trading does not happen.” 

The growth of the Islamic secondary market requires a 

collective effort amongst all the stakeholders of the Islamic 

finance industry; from central banks propagating high-quality 

short-term paper and encouraging the growth of the inter-bank 

money market, bourses working to encourage trading through 

Shariah compliant trading platforms, standardization and 

agreement amongst scholars to create universally accepted 

papers to increase investor diversity on a global scale, and 

the creation of effective risk management tools to engage the 



otherwise risk-averse Islamic investor. 






November 2012 

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• IFN Indonesia Forum 

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21 st & 22 nd May 

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27 th & 28 th June 

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21 st & 22 nd October 

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18 th & 19 th November 

The renowned ‘Issuers & Investors’ format will again feature at 

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www.REDmoneyevents.com

chapter 

Sukuk Investing: Diversification for 

Resilient Performance 

The 2009 Dubai debt crisis erroneously gave the global investment 

community a poor impression of Sukuk (Shariah-compliant fixed 

income) investing. Having fully recovered from this, the Sukuk market 

performance has proved resilient for the past two years. Sukuk 

investing not only enhances potential returns relative to conventional 

fixed income investing but also reduces portfolio volatility. 

This article will shed light on how Sukuk investing offers 

diversification benefits by examining the investment universe, 

sector weightings and country spread. It will conclude with 

a case study of how investors who have limited themselves 

to investing in the conventional fixed income asset class can 

definitively add value to their portfolios by allocating a portion 

to the Sukuk investment universe. 

The Dow Jones Sukuk Index (DJSI), designed to measure 

the performance of global Sukuk, comprised merely seven 

constituents when it was first introduced in October 2005. At 

that time, the index lacked breadth and depth in comparison 

to the conventional bond index, the World Broad Investment 

Grade Bond Index (WBIG). The 2008 global financial crisis and 

2009 Dubai debt crisis were the first real tests for Sukuk. The 

combined headwinds proved damaging to the nascent Sukuk 

market and several issuances slumped to their lowest level 

during these crises. However, in spite of the challenges, or 

because of them, the Sukuk investment universe has staged 

a strong comeback since 2009, and has reestablished itself 

as a vibrant and attractive new asset class today. The DJSI 

has not only improved from the unimpressive performance of 

its five and seven-year returns, but it also went on to produce 

superior returns by outperforming the conventional index 

over a two-year time period as at the end of September 2012. 

Table 1: Annualized returns of DJSI and WBIG 

Annualised Returns 

2-year 5-year 7-year 

Dow Jones Sukuk Index 6.27% 4.87% 4.63% 

World Broad Investment Grade 4.52% 5.55% 5.17% 

(WBIG) Bond Index 

Source: Bloomberg and CIMB-Principal Islamic Asset Management as 

at end-September 2012. 

Repeat of the Dubai debt crisis unlikely 

With Dubai and state-controlled Dubai corporates being early 

entrants as issuers in the Sukuk market, Dubai’s 2009 crisis 

reverberated forcefully into the Sukuk space. With the onset 

of the global financial crisis that adversely affected economies 

everywhere, Dubai’s real estate market declined after a sixyear 

boom. On the 24 th November 2009, state-controlled 

Dubai World rattled financial markets by announcing that it 

was seeking to delay payments on US$59 billion of debt 1 . The 

collapse of the real estate market in Dubai severely affected 

the mortgage sector and hence, the broader Dubai economy. 

Uncertainties surrounding how the Sukuk securities would fare, 

caused many global investors to flock to what they viewed as 

the comparative safety of conventional fixed income. 

Chart 1: Sept 2005 — Sept 2012 (7 years) 

250 

Dubai crisis 

200 

150 

100 

50 

0 

9/30/2005 

9/30/2006 

Source: Bloomberg 

9/30/2007 

9/30/2008 

However, investor fears in the 2009 Sukuk market proved to 

be unfounded. Dubai did not actually default on its public debt. 

In fact, Dubai received financial assistance from Abu Dhabi, 

the ‘patriarch’ of the UAE. In similar fashion to what investors 

had seen related to the global banking firms a year earlier, Abu 

Dhabi stepped in to support Dubai with a US$20 billion bailout 2 . 

Following the extension of financial support to Dubai from 

Abu Dhabi, the Government of Dubai made concerted efforts 

to strengthen its banking system by implementing a scoring 

system to evaluate individual borrowers’ creditworthiness. 

In addition, the Gulf Cooperation Council (GCC) banks have 

made a variety of efforts to strengthen their balance sheets 

to protect against declines in loan recovery rates and asset 

prices. The banks’ tier 1 capital adequacy ratios have steadily 

increased over the last four years and were in the region of 

15% at end-2011. More importantly, equity forms the bulk of the 

banks’ capital base, and their equity-to-assets ratios are high, 

ranging from 10% in Bahrain to 16% in Qatar 3 . 

9/30/2009 

9/30/2010 

DJSI 

WBIG 

9/30/2011 

9/30/2012 

18 November 2012

chapter 

Global Sukuk makes a high quality recovery 

The DJSI has recovered completely from the crisis. The index 

has matured with respect to both the quality and quantity of 

its constituents. This has led to markedly lower volatility given 

the higher creditworthiness of the investment universe. The 

returns volatility of the DJSI has fallen significantly to 2.08% 

for the two-year period compared to the five and seven-year 

periods of 10.13% and 8.58% respectively. At 2.08% the return 

volatility in the Sukuk space is less than half of that in the 

conventional space over the same period, which registered 

at 5.16% for the WBIG. This lower volatility is coupled with a 

tripling of the number of constituents in the index, meaning that 

a severe fluctuation of any one constituent has less singular 

effect on the overall index. 

Table 2: Returns volatility of DJSI and WBIG 

Returns Volatility 


Dow Jones Sukuk Index 2.08% 10.13% 8.58% 

World Broad Investment Grade 5.16% 6.29% 5.99% 



at end-September 2012 

A further examination of the DJSI’s returns reveals a significant 

increase in the Sharpe Ratio, a measure commonly used to 

better analyze performance by taking risk into consideration. 

A portfolio with a higher Sharpe Ratio is considered to have 

exhibited better performance as the Sharpe Ratio measures 

how well the return of an asset compensates the investor for 

the risk taken. 

The Sharpe Ratio for the DJSI is 2.96 over the most recent two 

year period, versus 0.47 and 0.53 over the five and seven-year 

periods respectively. In contrast, the Sharpe Ratio of the WBIG 

remained similar over the two, five and seven-year periods 

at average of 0.86. Therefore in examining the quality of the 

Sukuk index performance while considering both return and 

risk, we find that its superior performance is further enhanced 

with lower volatility and a higher Sharpe Ratio. 

Table 3: Sharpe ratios of DJSI and WBIG 

Sharpe Ratio 


Dow Jones Sukuk Index 2.96 0.47 0.53 

World Broad Investment Grade 0.87 0.87 0.85 




Sukuk investing offers an enlarged investment universe 

Unlike Shariah compliant equity investing, which is a subset of 

global equity, Sukuk is a unique investment space that enlarges 

the existing conventional fixed income investment universe 

to grant conservative investors attractive opportunities in a 

completely separate class of fixed income assets. 

The number of constituents in the DJSI has tripled in two 

years, largely due to active participation by governments and 

corporations that have facilitated numerous Sukuk offerings. 

The number of constituents in DJSI has increased from 13 

(in June 2010) to 36 (as at the end of September 2012) 4 . In 

addition, the constituents of the DJSI have similar ratings to 

those of the WBIG. Both indices require a minimum quality of 

‘BBB-‘ or ‘Baa3’ by the rating agencies 5 . 

Moving forward, we anticipate that more issuers will participate 

in the Sukuk market. Today Sukuk investors are seeing several 

first time issuers come to issue in their market. For instance, 

the Republic of Turkey issued a US$750 million benchmark 

issuance in September with Citigroup and HSBC included as 

bookrunners. Further, following on the sovereign issuance, 

Turkey’s Sukuk market is gathering even more momentum as 

companies from the national airline to the biggest telephone 

operator plan Sukuk offerings 6 . 

Sukuk investing offers strong international 

diversification 

The performance of the DJSI has remained resilient despite 

political unrest in pockets of the Middle East. The stability of 

the index is a reflection of the geographical diversification it 

offers. The sovereign representation of Sukuk issuers in the 

DJSI leads with Malaysia, and is followed by Saudi Arabia, 

Qatar and Indonesia. 

Table 4: Percentages of sovereign debt in Dow Jones Sukuk Index 

Country 

Percentages 

Malaysia 17.08% 

Saudi Arabia 16.21% 

Qatar 13.60% 

Indonesia 6.04% 

Dubai 5.53% 

Abu Dhabi 3.60% 

Total 62.06% 

Source: Bloomberg and CIMB-Principal Islamic Asset Management 

In addition to the benefits of diversification, these jurisdictions 

have strong macroeconomic fundamentals and offer exposure 

to oil and gas-related revenue streams which offer deep 

reserves support to issuers. In addition, more than 60% of the 

investment universe of DJSI is comprised of investment grade 

Sukuk from countries which may not register significantly, if at 

all, inside the conventional index. 

Sukuk investing offers Shariah compliant exposure to 

financials 

Investment exposure to the financial sector is considered a 

proxy for the growth of an economy since banking prospers 

with an economic expansion. 

However the Shariah compliant equity portfolio will typically 

filter out the financial sector, as they tend to be conventional 

banking and financial services entities. Shariah-sensitive 

investors who want exposure to the financial sector can still 

access the sector through the Sukuk asset class. Below are 

the sector weightings of both indices: 

November 2012 19

chapter 

Table 5: WBIG and DJSI Sector Weightings 

Sector 

Dow Jones 

Sukuk Index 

Weightings (%) 

World Broad Investment 

Grade (WBIG) Bond Index 

Government and 53.47 68 

governments 

sponsored 

Financials 29.42 5.33 

Utilities 6.30 2.31 

Industrial 5.53 6.35 

Energy 5.28 1.00 

Collaterised (MBS 0 17 

and Covered Bonds) 



As shown in table 5, financials constitute the second-largest 

sector of about 30% in the DJSI. This is also an investment 

opportunity for conventional investors who want to diversify 

the quality of their overall portfolio’s exposure to the financial 

sector as they can gain exposure to Islamic banks such as QIB 

Sukuk Funding (Qatar), IDB Trust SVCS (Saudi Arabia) and 

Abu Dhabi Islamic Bank (UAE). 

Case study: Sukuk investing as a diversification 

strategy 

The benefits of diversification with Sukuk securities is not 

just theoretical, it is demonstrable. For example, one can 

examine the results of the following two scenarios to determine 

if investing in Sukuk serves as a good diversification strategy 

without compromising investment returns: 

1. One portfolio which tracks the conventional index completely, 

and 

2. A second portfolio which is split, whereby 20% tracks the 

DJSI and 80% tracks the conventional index 

For the two-year period ending the 28 th September 2012, the 

annualized returns of the second portfolio resulted in a slight 

enhanced return of 4.88%, versus 4.52% in the first portfolio. 

In addition, the second portfolio’s Sharpe Ratio was increased 

significantly to 1.14 versus 0.87. 

Table 6: Two-year returns and Sharpe ratios improved with 

20% Sukuk allocation 

Portfolio 1: 

100% tracking the World Broad 

Investment Grade Bond Index 

Portfolio 2: 

20% tracking the Dow Jones 

Sukuk Index and 80% tracking 

the World Broad Investment Grade 

Bond Index 

Annualized 

returns 

Sharpe 

Ratio 

4.52% 0.87 

4.88% 1.14 



Given low yield markets worldwide, a 36 basis points differential 

in and of itself is not an insignificant improvement. Equally as 

important, the improvement in the Sharpe Ratio shows that the 

strategy can generate alpha or additional returns that better 

compensate for risk. 

Conclusion 

As one can see, investment exposure to Sukuk can offer 

diversification benefits. In addition, prices of Sukuk generally 

hold up well by virtue that they are often treated as a ‘buy and 

hold’ investment. This grants an additional layer of insulation 

against volatility relative to conventional fixed incomes. With 

additional information and enhanced knowledge, investors 

are becoming more comfortable with Sukuk investing. One of 

the most convenient and easiest ways to access the Sukuk 

asset class is via a fund which invests in diversified portfolio 

of global investment grade Sukuk such as the Al Hilal Global 

Sukuk Fund. Launched in early 2012, the Al Hilal Global Sukuk 

Fund has delivered a strong performance of 4.3% in only six 

months since its March debut. The fund invests in a diversified 

portfolio of Shariah compliant Sukuk issued by sovereign, 

quasi-sovereign and corporations and aims to generate regular 

income as well as capital appreciation. 

There are clear signs that the Sukuk market is maturing and 

spurring a growing interest in gaining investment exposure to 

the asset class. Over the two-year period, we found similar 

investment results with lower volatility compared to the 

conventional fixed incomes. These similar investment results 

also showed a clear improvement in the Sharpe Ratio over 

the conventional index. Closer examination of the Sukuk 

investment space revealed further diversification benefits for 

investors who have until now only invested in the traditional fixed 

income space. From its ability to enlarge the total fixed income 

investment universe to offering international diversification with 

credit quality and Shariah compliant financial sector exposure, 

there is evidence which shows that diversifying a portion of 

one’s overall investment portfolio to Sukuk investments away 

from traditional fixed income will show an improvement in the 



Sharpe Ratio without diminishing investment returns. 







Endnotes: 

1 

Source: Dubai World Seeks to Delay Debt Payments as Default Risk 

Soars 

2 

Source: After Crisis, Dubai Keeps Building, but Soberly from the NY 

Times on the 29 th September 2010 

3 

Source: Middle East Credit Compendium 2012 by Standard Chartered 

Bank dated 2 nd May 2012 

4 

& 5 Source: Bloomberg 

6 

Source: Sukuk Taking Flight as Airline Readies Debut Sale: Turkey 

Credit by Bloomberg dated 3 rd October 2012 

CIMB-Principal Islamic Asset Management 

Level 5, Menara Milenium, 8, Jalan Damanlela, 

Bukit Damansara 


www.cimb-principalislamic.com.my 

20 November 2012

chapter Profile 

CIMB-Principal Islamic Asset Management (CIMB-Principal Islamic) is a dedicated Islamic global institutional asset management house, 

combining the strength of 2 credible shareholders. The joint venture between CIMB Group and Principal Global Investors allows CIMB- 

Principal Islamic to leverage on the compelling global Islamic credentials of CIMB Group (via CIMB Islamic) while Principal Global 

Investor’s lends its expertise in global asset management. 

CIMB-Principal Islamic won Best Overall Islamic Asset Management Provider of the Year 2012, Best Islamic Asset Management Company 

in Asia, and Best Institutional Solutions Provider of the Year 2012 by Islamic Finance News Awards - Islamic Investor Poll 2012. At the 

International Takaful Awards 2012 (London), the company was awarded The Best Asset Management House in Asia for the third year in 

a row and also earned the Islamic Asset Management House of the Year by The Asset’s Triple A Islamic Finance Awards 2012. 

Headquartered in Kuala Lumpur, Malaysia, the firm is strategically located in the world’s first country with a complete Islamic financial 

system operating in parallel to the conventional banking system. This allows the firm to leverage on Malaysia’s comprehensive Islamic 

financial infrastructure and its adopted global regulatory, legal and Shariah best practices. 

Ramlie Kamsari 

Deputy Chief Executive 


Email: ramlie.kamsari@cimb.com 

Ramlie Kamsari is the deputy chief executive of CIMB-Principal 

Islamic Asset Management (CIMB-Principal Islamic). As the head 

of global sales & marketing, he also drives and oversees the global 

institutional sales of CIMB-Principal Islamic’s full range of Islamic 

funds to institutional investors in Europe, Middle East and Asia. 

His responsibilities include implementing successful sales efforts 

which targets relevant institutions and third parties, as well as 

identifying new business opportunities and driving transactions 

through to the close. 

Since joining CIMB Group in 2004, he has held several senior 

positions, including CEO and head, institutional sales of CIMB 

Futures and CEO and director of CIMB Insurance Brokers. He 

was also director and head, Islamic equity markets & derivatives of 

CIMB Investment Bank. 

Ramlie has extensive experience in the global financial industry, 

spanning over 18 years across major financial markets and 

covering the areas of global sales, advisory services and deal 

executions of capital market products, derivatives products, risk 

transfer solutions, and most recently, Shariah investment products. 

In Singapore, his previous stints include Barings Futures, Daiwa 

Co. and Refco Investment Services. Prior to joining CIMB Group, 

he was vice president and head of global services at FIMAT, the 

global derivatives trading division of Societe Generale. He holds a 

Bachelor of Commerce from the University of Western Sydney and 

a Graduate Diploma in Financial Management from the Singapore 

Institute of Management. 

Michael S. Zorich, CFA 

Chief Investment Officer 


Email: zorich.michael@cimb.com 

Michael Zorich is the chief investment officer of CIMB-Principal 

Islamic Asset Management (CIMB-Principal Islamic). He is 

responsible for establishing and implementing investment 

strategies for the firm’s clients and overseeing the performance of 

both global Islamic equity and global sukuk portfolios. 

A seasoned fixed income professional with a strong credit 

background, Zorich has worked in tandem with portfolio managers 

in the management of multi-sector portfolios. Previously, he was 

managing director, special assets, for Principal Global Investors 

(PGI) Fixed Income. 

As the head of special assets group, he was responsible for 

negotiations with distressed companies and the oversight of the 

analysis, valuation and restructuring of all distressed debt in PGI’s 

fixed income portfolios. Zorich joined PGI in 2001. Prior to that, he 

was a senior associate at PrimeSolutions Capital Corporation. 

Zorich is a Chartered Financial Analyst (CFA) and a member of the 

CFA Institute. He obtained his Masters in Business Administration 

(MBA) from Carnegie Mellon University and his Juris Doctor (JD) 

from the University of Pittsburgh, School of Law. He is a member 

of the Pennsylvania Bar and has a Bachelor’s Degree in Business 

and Communications from the University of Pittsburgh. 

Ramlie Kamsari, 

Deputy Chief Executive 

Tel: +603 2084 2289 

E-Mail: ramlie.kamsari@cimb.com 


Level 5, Menara Milenium, 8, Jalan Damanlela, 

Bukit Damansara 


www.cimb-principalislamic.com.my 

November 2012 21

chapter 

Dispute Resolution: The Final Piece 

of the Puzzle 

With an eye on the growing complexity and internationalization of the 

Islamic finance market, The Kuala Lumpur Regional Arbitration Center 

(KLRCA) has become the first organization in the world to launch 

its i-Arbitration Rules; a dispute resolution mechanism specifically 

formulated for Shariah compliant transactions. Islamic Finance news 

speaks to Sundra Rajoo, director of the KLRCA on this cutting-edge 

idea and its role in pushing the industry to new heights. 

The Islamic finance industry is fast attaining a globalized status; 

taking a more international approach in the structuring of 

products and contracts, and through the proliferation of crossborder 

transactions amongst issuers and investors. Although 

Malaysia is considered to be one of the most sophisticated 

jurisdictions in terms of regulations and resolving contractual 

disputes for Shariah compliant transactions, based on Bank 

Negara Malaysia’ Shariah Advisory Council’s rules established 

by the Central Bank Act 2009 and the Shariah council 

established by the Securities Commission under the Securities 

Commission Act 1993, the country’s dispute resolution 

capabilities can still be considered insular, as the judgment of 

the courts are only enforceable in Malaysia. 

Although the practice of alternative dispute resolutions for 

Islamic finance contracts are becoming more common in civil 

and common law courts, the system is far from impervious to 

further dispute. Issues with ambiguity concerning the language 

used in the contract, and in some cases the constitutional 

limitations imposed on judges to interpret laws derived from 

religious sources have all become prevalent issues in the legal 

decision making process. 

22 November 2012

chapter 

In a bid to create an effective and internationally enforceable set 

of rules for Islamic commercial transactions, and to increase the 

fluidity of cross-border transactions, the KLRCA’s i-Arbitration 

rules were launched as a set of procedural rules which cover 

all aspects of the arbitration process, allowing for the resolution 

of disputes from any contract or agreement containing Shariah 

issues. 

The rules, which are the first in the world to adopt the United 

Nations Commission on International Trade Law (UNCITRAL) 

Arbitration Rules, ensures international recognition, while 

taking into account Shariah principles. Essentially, it is the 

first set of arbitration rules that cater to both conventional and 

Shariah compliant transactions and contracts. 

The rules are also based on the 1958 United Nations 

Convention on the Recognition and Enforcement of Arbitral 

Awards, or the New York convention – the defining element 

within the i-Arbitration rules, according to Sundra. “The New 

York convention is a convention in which countries enter into 

and they agree to enforce foreign arbitral awards. This makes 

arbitration different from litigation, where the foreign court ruling 

of one country cannot be enforced in another country. It is so far 

the most successful convention in the history of mankind, and 

on the last count, involved 146 participating nations. Basically, 

if you are a serious business nation, you are already part of 

it. Our main challenge in structuring the rules was how to 

make it compliant with the New York convention to ensure its 

enforceability on a global level.” 

“The most elegant ideas are usually the most simple,” Sundra 

revealed; referring to the additional component- Rule 8, which is 

activated in the event of a dispute involving a Shariah compliant 

transaction. “The approach that the center has taken is that we 

have to provide an avenue when an item of such significance 

comes along, and see how it will be resolved in the arbitration. 

Rule 8 comes into effect when there is a Shariah dispute. The 

Shariah component is submitted to a Shariah Advisory Council 

or expert for an opinion, and when the opinion comes back, it 

is applied. For example, in a dispute involving Islamic financial 

instruments, parties and the arbitral tribunal may agree to refer 

the matter to Bank Negara Malaysia’s Shariah Advisory Council 

or the Malaysian Securities Commission’s Capital Markets Actwhichever 

is deemed relevant. In the instance of a situation 

involving a Shii’te dispute for example, the parties and the 

tribunal can appoint their own Shariah expert, as provided in 

the UNCITRAL Rule, under article 26. Therefore, parties will 

always be able to choose which Islamic school of thought 

(madhab) to apply to their dispute. ” 

Long-term view 

It is the internationalization of the Islamic finance market which 

spurred Sundra and his team at the KLRCA to formulate a 

dispute resolution mechanism based on international laws and 

acceptability before incorporating the Shariah element. “It is a 

cutting-edge product. It took us two years to come up with this, 

to deal with expert opinion and how it all ties together. A lot of 

people will start with Shariah as a base, but we decided to work 

from the New York convention and then incorporate the Shariah 

element.” 

“These rules can be used even when there is no Shariah 

component involved. Rule 8 only gets activated when a Shariah 

component comes into play. In Item 6 of Rule 8, it states that 

the ruling of the relevant council or the Shariah expert may 

only relate to the issue or question so submitted by the arbitral 

tribunal; and the relevant council or Shariah expert shall not 

have any jurisdiction in making discovery of facts or applying 

the ruling or formulating the decision relating to any fact of 

the matter which is solely for the arbitral tribunal to decide. 

Therefore, they (the Shariah council) can only decide on the 

Shariah component. It is the arbitral tribunal, not the Shariah 

Advisory Council or expert, who is the final determinant on 

the matter as the tribunal cannot delegate its powers to make 

decisions.” he added. 

“In the recent International Bar Association (IBA) Conference 

in Dublin, the question of how people are dealing with Shariah 

issues was raised, and to be honest, there is no experience 

outside of Malaysia except in limited pockets such as Dubai 

and Bahrain. The Malaysian system is so far the most 

comprehensive,” Sundra explained. 

Sundra believes that the best way to resolve disputes, 

particularly from a business point of view is through arbitration: 

“From my understanding, what is not forbidden is allowed in 

Shariah. Most of these Shariah compliant products are the 

ones that are allowed and not forbidden. And when you have 

those products, you are marketing to the world at large and 

therefore, there needs to be a dispute resolution mechanism 

because people will have disagreements. And for business 

people, resolution of those disagreements or disputes is best 

done through arbitration.” 

“For the first time, there is a viable dispute resolution mechanism 

for Shariah-compliant products. The Islamic world has not 

really explored international commercial arbitration, and after 

a certain point, there is a dichotomy between a religious and 

secular dispute system. In all honesty, business people do 

not want to go to the Shariah court, and prefer a legal secular 

system. A great deal of thought and care would have gone 

into putting together the complex and sophisticated Shariahcompliant 

deals and products, but if a business dispute arose, 

they would have to go to conventional arbitration. With the 

KLRCA i-Arbitration Rules, there is now an option for a dispute 

resolution mechanism that is Shariah-compliant, thereby 

putting the last block in place for a complete Shariah compliant 



transaction,” he concluded. 







Sundra Rajoo 

Director 

Kuala Lumpur Regional Centre for Arbitration 

No.12, Jalan Conlay, 50450 Kuala Lumpur 

Tel: +603 2142 0103 

Email: sundra@klrca.org.my 

Web: www.klrca.org.my 

November 2012 23

feature 

The Islamic Fund Management 

Industry – Back to Basics 

The Islamic fund management sector is still grappling with fundamental 

challenges that could prove to be crippling to this nascent industry. 

NAZNEEN HALIM explores. 

Although there are no current definitive figures, the size of 

global Islamic assets is estimated at around US$1.2 trillion, 

and is expected to grow at a rate of 10-15% in the next three 

years, according to industry forecasts. Despite standing at only 

0.5% of conventional assets, Islamic assets are still looking 

to be managed and marketed effectively in order to mobilize 

the sector and to create an efficient global Islamic fund 

management industry. According to the 2011 Ernst & Young 

report on Islamic Funds and Investments, Islamic funds’ assets 

under management grew by 7.6% from 2010 to US$58 billion 

in 2011; with Sukuk, commodities and capital protected funds 

featuring as the investment modes of choice for the Islamic 

investor. 

However, it is hard to ignore the gap between total Islamic assets 

and total assets under management, particularly in high growth 

areas such as Asia and the Middle East. According to Raja Teh 

Maimunah, the managing director at Hong Leong Islamic Bank, 

Malaysia and Saudi Arabia still remain the top jurisdictions 

for the Islamic fund management industry, particularly due to 

regulatory efforts in providing screening services, especially 

in Malaysia. “Only Malaysia has a list of screened equities - 

and apart from Malaysia and Saudi Arabia, the Islamic fund 

management industry is still small and insignificant,” she said. 

“There are Shariah compliant equities in the Middle East which 

you simply do not have access to. And it becomes expensive 

to buy equities outside of Malaysia. From my experience in the 

Middle East, we had to hire experts to screen the stock; thus 

adding to the cost of the fund by 25 to 50 basis points (bps). 

We had to hire screening consultants to seek equities for us 

to invest in. Additionally, the channels for asset management 

are still difficult to access outside of equities. In the fixed 

income arena for example, the Sukuk market is still very much 

concentrated in Malaysia. Apart from the ringgit market, there 

is some activity in the MENA region. Investors are currently 

focused on equities and fixed-income products, whilst most of 

them post-crisis have moved to cash,” said Raja Teh. 

A recent comparison done between the asset allocation for the 

November 2012 25

feature 

Investment preferences amongst conventional and Islamic 

investors 

Alternative 

assets 5% 

Emerging market 

bonds 20% 

Global bonds 15% 

Emerging market 

equities 25% 

Global equities 35% 

conventional and Islamic markets by AmIslamic showed an 

almost identical breakdown in terms of investment preferences 

amongst conventional and Islamic investors - 25% in emerging 

market equities, 35% in global equities, 15% in global bonds, 

20% in emerging market bonds, and 5% in alternative assets. 

The difference between the Islamic and conventional market lies 

in the need for investments in Shariah compliant alternatives, 

and the Islamic fund management industry will continue to 

struggle as long as there is a lack of Shariah compliant solutions 

in the market. 

In the equities space for instance, the report by AmIslamic said: 

“It is not possible to have an Islamic version available for every 

conventional (non Islamic) investment product/ strategy out 

there. For example, a typical equity asset allocation includes 

an allocation to Smart Beta and when it comes to the Islamic 

space, there are almost no Islamic Smart Beta funds available.” 

On the fixed income side, the report commented: “A global 

Sukuk fund will have significant exposure to emerging markets 

and minimal exposure to developed markets as there are hardly 

any Sukuk issues from developed markets. Therefore, it is not 

possible to get a global Bond fund’s geographical allocation 

with a global Sukuk fund. One of the solutions is to seek other 

alternatives that replicate the payoff of a Sukuk (periodic 

return and lower risk). We have developed an equity-based 

solution that exhibits lower volatility and yields periodic income 

(high dividend) to replicate the payoff profile of a Sukuk fund. 

This solution supplements the allocation to global Sukuk and 

addresses the geographical coverage/diversification issue.” 

Monem Salam, the president of Saturna Capital, highlighted 

the challenges currently facing the Islamic asset management 

industry: including limited opportunities in the cross-border 

space, higher fees and lack of competitiveness with the 

conventional markets: “Most Islamic funds are currently 

domiciled in Malaysia, and there is very limited opportunity for 

cross-border distribution of funds. The Malaysian Securities 

Commission is working hard to facilitate this with Dubai and 

Hong Kong, but there are many other markets fund managers 

are interested in. The opening up of other markets has to be 

done on a regulatory level. Second, fees tend to be much 

higher across the board in Asia compared to those in the west; 

particularly the US and Europe. If you can access an Asian fund 

in Europe which you can buy at less than a 1% expense ratio, 

then why would you come to Asia to buy the same product at 

1.5 – 2%? We have to be competitive on a global level in terms 

of fees. Although the cost of running funds is a lot cheaper in 

Asia, expenses are lower in US and Europe.” 

In terms of Islamic exchange-traded funds, education still 

remains a key issue, says Mahazir Othman, CEO at i-VCAP. 

“The Islamic ETF market is still underdeveloped, and 

education is still a main concern. There also needs to be 

more understanding on how investors actually use Islamic 

ETFs in their portfolio to enable them to meet their investment 

objectives. The current mentality in Asia is: ‘Why do we need 

to go beta when we can do our own stock-picking?’ and most 

Asian investors are stock-pickers. Another challenge is product 

depth. There are currently not enough Islamic ETFs in the 

market for investors to asset allocate their portfolios using this 

instrument. It is important to get managers to roll out more 

products to address this challenge.” 

There are Shariah compliant 

equities in the Middle East 

which you simply do not 

have access to 

The ongoing debate on the use of derivatives to hedge risk in 

the Islamic finance space has also brought about challenges 

in the Islamic fund management industry; with the divide 

between the proponents of derivatives and those who disagree 

becoming more apparent. From a fund manager’s perspective, 

Monem believes that it is possible to avoid the use of derivatives 

all together, simply by picking the best stocks to invest in. “It 

depends on the mandate of the portfolio. When we look at the 

fundamentals of derivatives and their purpose, it is essentially 

to transfer the risk from you to someone else. Islamic finance is 

about sharing risk, whilst derivatives are about transferring risk. 

In Islamic finance, the gains and losses are shared. 

“The way you can fundamentally do that is by going back to 

the fundamentals of investments – i.e. plain vanilla structures. 

We have managed to provide our clients with high returns and 

low volatility investment products without derivatives, simply by 

buying companies that pay you back in dividends so you can 

utilize the gains in your portfolio, and by holding cash if you 

don’t like a certain investment. If you stick to the fundamentals, 

you will realise that the use of derivatives simply add cost to 

your portfolio and lower your returns - and that doesn’t really 

help. In the conventional space for instance, normal indexes 

actually outperform hedge fund indexes, so what is the point of 

doing that (derivatives) except for someone lining their pockets 

with money?” he added. 

It is absolutely vital for the Islamic industry to develop effective 

products with competitive returns to enable the efficient 

management of Islamic liquidity, in order to create a robust 

investment environment and attract more investors to ensure 



the health and sustainability of the Islamic capital markets. 






November 2012 

www.MIFforum.com

chapter 

Diverging Models Shape The 

Growth Prospects For Takaful 

The growing need for insurance that complies with Shariah law 

means that the global Takaful sector is becoming an increasingly 

significant niche within the wider insurance industry. In the following 

Q&A, Standard & Poor’s Ratings Services (S&P) compares the Takaful 

markets in the Middle East and Asia, and discusses the outlook for the 

sector amid the global economic slowdown. 

What’s fueling the growth of Takaful globally? 

Global Takaful growth was about 20% in 2011, although actual 

rates varied widely between regions. Sharp spikes in growth 

in countries such as Saudi Arabia were triggered by regulatory 

action to expand compulsory insurance covers, particularly 

medical insurance. For Asia, the family sector was boosted by 

the customers’ needs and growth of agents and bank channels 

distribution. 

Is such growth sustainable? 

We expect to see generally strong growth over 

the long-term, however, we don’t anticipate 

that the sector will sustain 20% growth over 

the next few years, given the stuttering global 

economy and the relative maturity of some 

of the larger Takaful markets. Nevertheless, 

Takaful has developed most fully in countries 

that have relatively high economic growth 

rates, and where the state follows Islamic 

principles. Economic growth can support 

greater personal wealth, leading to an 

increase in insurable asset risk. In addition, 

if sufficient wealth is created, we expect the 

longer-term family (life) insurance sector will 

also expand, especially in the GCC region. 

Connie 

How does the Takaful market in Asia 

compare to that in the Middle East? 

Takaful has developed most in the Gulf Cooperation Council 

(GCC) region and Southeast Asia, but individual countries in 

each region have taken different routes to develop the sector. 

Malaysia is the most well-established Takaful market, which is 

reflected in its size and relative sophistication. It contributes 

over 17% to global contributions and has grown five-fold over 

the past decade. In Malaysia’s Takaful market, family business 

was about 63% of total contributions - the remainder comprised 

general business. Most family business is linked to mortgage 

lending (about 47% of total family contributions in 2011), 

which perhaps reflects linkages between Takaful companies 

and banks. For general business, mirroring the conventional 

market, motor is the dominant business line, accounting for 

55% of total general contributions in 2011. 

The market in Saudi Arabia is larger but less seasoned. All 

insurers have to operate to a cooperative model broadly 

comparable with the various Takaful models used elsewhere. 

While the country has seen very high growth recently, the main 

source of growth over the past five years has been regulatory 

action to introduce compulsory medical and motor insurance. 

As a result, over 50% of global Takaful sector contributions 

derive from Saudi Arabia. We do not expect the industry to 

maintain the growth levels it saw after these changes, but it 

is likely to remain high relative to global levels. 

Is the investment approach similar between 

Asian and Middle East Takaful companies? 

A fundamental requirement of Takaful companies 

is to provide a fully Shariah compliant service 

to both fund members (policyholders) and 

investors. Southeast Asia makes greater use of 

Sukuk for Islamic finance than the GCC region. 

Its more developed market provides meaningful 

volumes for the Takaful sector to invest in. In 

Malaysia, more than half of Takaful insurers’ 

portfolios are invested in Sukuk, with the 

remainder invested in cash & equivalent, 

equities and other assets. 

In contrast, a shortage of Shariah compliant 

rated instruments in the GCC region means that Takaful 

companies tend to invest in equities and real estate at a higher 

portfolio than in Malaysia. Such investments can carry high 

levels of value volatility and illiquidity and can drag on Takaful 

companies’ balance sheets. However, the Sukuk portfolio for 

GCC Takaful operators is increasing, reflecting the increase in 

Sukuk issuance in recent years. 

Many Takaful companies, particularly in the GCC region, 

were set up during the boom years of the early 2000s. The 

historically high investment valuations that operated when 

they purchased their assets subsequently resulted in realized 

losses. The current low investment yields strain bottom-line 

results further. In our analysis, we consider the limited range of 

acceptable instruments in which Takaful companies can invest 

November 2012 27

chapter 

of the companies involved will sustain their profitability over 

the longer term, particularly in the GCC region. However, 

developments in Malaysia - the largest Takaful market in 

Southeast Asia - appear much more healthy and sustainable. 

They are supported by more sophisticated regulatory oversight 

and the stronger investment profile of the industry. 

How is the global economic slowdown affecting the growth 

of Takaful? 

The worldwide slowdown in economic activity will ultimately 

depress growth in economies that provide resources for 

manufacturing; this happens to include many of the resourcerich 

countries where Takaful is developing. For insurers, this 

constrains growth, partly by reducing demand for insurance, 

but also by limiting investment yields. 

Globally, the current low investment yields have hurt insurance 

providers and markets. Insurance, Takaful included, is an 

asset-rich business. Fierce competition in the economies 

where Takaful is developing is putting underwriting margins 

under pressure, especially in the high-volume, low-margin 

retail lines that form the bulk of Takaful business. Meanwhile, 

yields on Shariah compliant instruments and investments 

are increasingly depressed. Providers will therefore need to 

maintain their underwriting profitability to succeed. 

to be a constraint that places downward pressure on their riskbased 

capital position. 

Is there potential for cross-border Takaful 

activity? 

To date, the primary Takaful sector in 

Southeast Asia and the GCC region has 

tended to comprise local operators that rarely 

engage in cross-border activity. This reflects 

the relatively small operational scale of the 

sector and its still-developing status. 

However re-Takaful companies, which 

provide protection to the primary Takaful 

sector, are operating in increasingly diverse 

geographical areas. We see Southeast 

Asian-based re-Takaful companies Willis 

competing and working with GCC-based re- 

Takaful companies to develop and service 

the growing capacity needs of the primary 

sector in Africa, Southeast Asia, and the GCC region. As local 

companies become increasingly mature and financially robust, 

we expect cross-border activity in the primary sector to grow. 

We also expect to see some consolidation in the more overpopulated 

insurance markets. 

What is S&P’s key concern for the Takaful market? 

We remain concerned by widespread use of high-risk 

investment strategies by Takaful providers, and by the sector’s 

lack of global standards in areas such as accounting standards 

and Shariah compliance. In our view, it is unclear how many 

What are the growth prospects of Takaful versus 

conventional insurance? 

Over the next 12-18 months, S&P expects Takaful company 

contributions in the GCC region to significantly outgrow 

premiums in the local conventional insurance industry, as 

well as the global insurance industry. Global 

insurance premium growth is expected to be 

little more than 2% in 2012; by contrast, in its 

World Takaful Report, Ernst & Young estimates 

that gross Takaful contribution for 2012 will grow 

to US$12 billion, a year-on-year increase of 

24%. 

In Southeast Asia, we anticipate that tightening 

regulatory requirements in Malaysia could 

depress the strong growth momentum the 

industry has built up over the short-to-medium 

term. That said, tighter solvency calculations 

are likely to strengthen the financial profiles of 

Takaful operators and operators will also benefit 

from revised risk management practices in the 



long term. 







Connie Wong, 

Managing Director and Analytical Manager for Insurance Ratings, 

Asia-Pacific, Standard & Poor’s 

Kevin Willis, 

Director, Insurance Ratings, Standard & Poor’s 

28 November 2012

May 2012 

July 2012 

March 2012 

The Takaful and 

re-Takaful industry 

Features Chapters 

On the 

Horizon 

Effective 

Engagement 

The Global Islamic 

Debt Market: Has it 

reached a plateau? 

Takaful and 

Waqf: An ideal 

partnership? 

GUIDE 

February 2012 

Deals of the Year 

Handbook 

Case studies 

SATORP Sukuk 

 

Salik One Danga Capital 

syndication Yuan Sukuk 

First Sukuk in 

Jordan 

The Civil Law 

Chokehold 

Features Chapter 

The Size 

Issue 

Decree 57: A Much 

Needed Innovation 

Market 

Games 

 

Resolving Disputes 

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