It is a mere eleven years after the global financial crisis, which brought the global financial system to near collapse and threw some too-big-to-fail banks into freefall. The world is still bearing the scars of recession, austerity and the excesses of market greed.
Stakeholders in the financial services industry – regulators, global gatekeepers, banks, financial institutions, investors and consumer bodies have taken some action to ensure that history does not repeat itself. How to do this in an age of increased competition and technology-driven innovation especially in Financial Technology (FinTech), Artificial Intelligence (AI) and Machine Learning (ML)?
As Philip Hammond MP, the UK Chancellor of the Exchequer stressed in HM Treasury’s FinTech Sector Strategy Paper: “The world is being transformed by a technological revolution, with established firms across the economy being challenged by a new wave of digital innovation. This is particularly true in the financial services sector, where FinTech promises to change the way that we bank, invest, insure and even pay for things.” In the context of a Post-Brexit dispensation, the UK of course offers continued opportunities for Islamic Finance and Sukuk.
Indeed, there is growing pressure on financial institutions to consistently innovate to improve customer engagement. Drawing from intelligent automation compliance and deep customer insights, the future of capital markets is taking shape.
Will innovation mean a shrinking capital markets landscape underpinned by over-regulation and the fall of traditional financial centers such as New York and London? Or will we see the emergence of what PwC calls a ‘New Equilibrium’ where government intervention is receding (as memories of the financial and sovereign debt crises fade), traditional financial axis of power further solidifying their positions at the top, and the world seeking stability and predictability in the context of riskier and more uncertain geopolitical situations.
One thing is certain, capital markets will look very different in 2020 than they do today. Change say some observers will come from economic and government policies, from innovation, operational restructuring, technology, from smarter and more demanding clients, companies harnessing powerful data and from continued growth of the shadow banking system.
The challenge is how to manage both technological and enterprise transformation. The PwC Capital Markets 2020 Overview identifies six trends going forward:
Capgemini on the other hand identifies ten trends in capital markets development in 2019 onwards.
Yet it is people who drive enterprise transformation and ultimately derive the value. Not surprisingly business leaders see skills shortages as the greatest threat to growth and returns. Another challenge is the interplay between technology and humans. The PwC Capital Markets report explores putting people at the heart of successful enterprise transformation. This demands a new type of leadership – a ‘tech-savvy humanist’.
The Islamic Capital Market (ICM) of which Sukuk issuance is the mainstay, is no exception. It will eventually have to embrace technological transformation without compromising or sacrificing its core faith-based ethical values.
The ICM and Sukuk Market are driven by three important factors – Malaysia’s continued leadership especially in Sukuk origination and innovation especially into SRI, ESG and Green Sukuk; the emergence of Sovereign Saudi Arabia as the major sovereign issuer of Sukuk; and innovations in social and development impact Sukuk in Turkey (Sukuk certificates backed by Gold); Nigeria where Sukuk is directly linked to rehabilitation of road transport infrastructure and aimed at ultra-retail investors; and Indonesia where the government is championing inter alia regular Sukuk issuances aimed at retail investors to give them a stake in the country’s economic transformation.
In Malaysia, Bank Negara Malaysia and the Securities Commission have adopted value-based intermediation (VBI) – a Shariah equivalent of sustainable and impact financing. As such financing that is deemed not directly supportive of real economic activities, such as personal financing for debt consolidation or lending for trading purposes, is discouraged under the guidelines.
The Securities Commission Chairman, Datuk Syed Zaid Albar, emphasises that the Commission “will continue to pursue an inclusive and sustainable growth agenda while facilitating innovation and improving regulatory efficiency. To ensure inclusive and sustainable growth of our economy moving forward, the capital market must be accessible to the full spectrum of issuers, investors and intermediaries. It must also be agile and evolve in response to changes in the economic landscape as well as user demands. Greater access and flexibility must, however, be accompanied by higher accountability. We will continue to raise standards of governance and conduct, both for issuers and intermediaries in the capital market.”
The Malaysian ICM maintained its market size in 2018 and continued to dominate the RM3.1 trillion size of the overall capital market with a 60.55% share – up from the 59.19% market share in 2017.
According to the latest 2018 Annual Report of the Securities Commission Malaysia (SC), released in March 2019, the ICM market size stood at RM1,880.73 billion as at end 2018 in comparison with RM1,893.47 billion as at end 2017. This comprises total market capitalisation of Shariah compliant equities of RM1,036.52 billion and total Sukuk outstanding amounted to RM844.21 billion.
The overall capital market stood at RM3.1 trillion as of the 31st December 2018, equivalent to 2.2 times the size of the domestic economy. This comprised domestic bonds and Sukuk outstanding, which rose to RM1.4 trillion and equity market capitalisation of RM1.7 trillion. On the buy-side, the fund management industry with assets under management of RM743.6 billion continued to play a key role in savings intermediation.
The capital market sustained its role in financing for the real economy, with total funds raised through bond, Sukuk and equity issuances amounting to RM114.6 billion.
In Saudi Arabia, the Government is building up a domestic and international yield curve for both its Sukuk and bond issuances. In the field of Sukuk, in a 21-month period from July 2017 to March 2019, the DMO has issued SR127.786 billion (US$34.07 billion) of domestic sovereign Sukuk through 20 Saudi Riyal-denominated offerings.
If one adds the US$9 billion debut international Sukuk and the subsequent US$2 billion Sukuk issued in September 2018, then the total volume of Saudi sovereign Sukuk – both international and domestic – issued from April 2017 to March 2019 totaled a staggering US$45.07 billion, which makes the Kingdom the most prolific current issuer of sovereign Sukuk in the world by far.
Apart from the bread-and-butter Sukuk issuances, new areas are opening up in SRI and Green Finance; the use of Block Chain in Sukuk; the Potential for Tokenisation; infrastructure linked Sukuk; Social Sukuk, Smart Sukuk and Social Impact Sukuk/Contracts.
These are some of the issues that will be discussed in the various sessions of the 11th London Sukuk Summit based on the theme ‘The Future of Sukuk – Innovation through Impact, Inclusion, FinTech, ESG & Green Finance’.
If you are already active in the market or wish to find out more about this dynamic and innovative sector then register your place today at the premier Sukuk event of the year!
The 2019 London Sukuk Summit will take place at Ashurst LLP.
Speakers for the 2019 London Sukuk Summit to be announced shortly