Foreign investors' demand for sovereign sukuk : an exploratory study on Malaysia

Abstract

This paper provides an insight on the importance of the demand for Malaysian Government sukuk focusing on Government Investment Issues (GII) by the foreign investors. It first covers the initiatives and milestone that Malaysia has undertaken to build a global hub for Islamic finance since the first issuance of GII in 1983. The numerous efforts and high commitment from the Government have positioned Malaysia to be the most referred country when it comes to developing Islamic finance industry including in the area of Islamic capital market. Notwithstanding that, the Islamic sukuk market in Malaysia still faces liquidity issue with the yield spread for the Islamic instruments being consistently higher for all tenure relative to the conventional issuance. Hence, this paper explores the possible causes of the higher yield spread as compared to conventional sovereign bonds, and presents the effect of the recent effort to increase foreign investors' participation via the inclusion of sovereign papers into the renowned global bond.