March 12 (Reuters) - Malaysia’s Securities Commission plans to introduce guidelines for the issuance of “socially responsible” sukuk, the regulator said on Wednesday, in an expansion of the standards covering Islamic bonds.
Up to now, sukuk standards introduced by regulators and bodies of scholars around the world have focused on ensuring that the structures of the sukuk and the assets backing them comply with Islamic principles.
Malaysia’s initiative appears to go a step further by setting formal guidelines for the ways in which money raised by sukuk should be used.
The initiative, known as “SRI sukuk”, was announced by Prime Minister Najib Razak in his annual budget speech last October; he said funds raised by SRI sukuk would go towards “sustainable and responsible” investments.
The prime minister did not elaborate on how SRI sukuk would work, and the Securities Commission did not give any details. But the guidelines could attract to Malaysia issuers and investors from the West who are familiar with the concept of socially responsible investing but have yet to venture into the sukuk market.
The new standards may focus on ensuring that money raised is not spent in economic sectors banned by Islam, such as tobacco, gambling and banking based on interest payments. The SRI standards will not be compulsory; sukuk issuers can continue using their current formats.
In its 2013 annual report, the Securities Commission also said it would continue to encourage cross-border and multi-currency bond and sukuk issuance.
According to data released by the commission on Wednesday, Malaysia retained its global lead in many areas of Islamic finance.
Malaysia accounted for 58.8 percent of global sukuk outstanding and 69 percent of sukuk issuance last year. It has been innovating with new sukuk formats: Malaysia became the first country in the region to see a sukuk issue designed to raise capital to meet global Basel III banking standards, and the second country to raise money by selling sukuk to retail buyers.
Last year the Malaysian regulator approved issuance of 49 local-currency sukuk worth a combined 99.1 billion ringgit ($30.2 billion), up from 41 worth 71.1 billion in 2012.
Sukuk, while still dominated by short-term commercial paper and medium-term notes, accounted for two-thirds of total private debt securities issued in Malaysia last year.
Islamic assets under management in Malaysia grew 22.5 percent last year to 97.5 billion ringgit. There were 178 Islamic unit trusts as of December 2013 with 42.82 billion ringgit in assets, up from 169 and 35.56 billion a year earlier.
In the wholesale fund sector, there were 52 Islamic wholesale funds holding 16.43 billion ringgit of assets, up from 41 holding 16.22 billion.
Malaysia’s private retirement scheme (PRS), launched in mid-2012, posted a five-fold increase in Islamic assets under management and had 22,511 accounts at the end of last year.
A total of 17 Islamic PRS funds held 79.52 million ringgit in assets as of December, up from nine with 14.45 million a year earlier. This represented roughly a quarter of all PRS assets. ($1 = 3.2800 Malaysian ringgit) (Additional reporting by Al-Zaquan Amer Hamzah in Kuala Lumpur; Editing by Andrew Torchia)