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Malaysia‘s oversubscribed $970m green Islamic bond sale targets environmental projects

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Malaysia’s latest green Islamic bond issuance adds to its leading role in the green sukuk, or sharia compliant, financing space. Local financial institutions taking up half the issuance, led to its oversubscription by 2.38 times. 

  • Malaysia’s first domestic Islamic green bonds sale of $970 million was oversubscribed by 2.38 times.
  • The country is the largest issuer of conventional and green sukuk in the ASEAN region, accounting for 56% of the total such issuance in 2021.
  • While Islamic finance is sometimes considered an ideal for sustainable and green finance, its most popular in economies reliant on high polluting industries. 

Malaysia is emerging a leader in Islamic finance which is becoming a popular growth trend in banking in the Association of Southeast Asian Nations (ASEAN) region, driven by a large Muslim population and strong economic growth.

Yet, Islamic finance may not be the ideal sustainable financing vehicle it is made out to be, with the environmentally sensitive economic and social issues being overlooked in several countries where it is popular.

Malaysia making strides in green and sustainable sukuk issuance

According to the World Bank, Malaysia was the first to introduce green sukuk, and has issued the largest number of such issuances. Sukuk is synonymous with ‘sharia compliant’ bonds.  

Malaysia first set up a green finance framework in 2017, and is furthest along among ASEAN countries in developing a sustainable finance market, according to a report by E&Y.

Malaysian banks, like Maybank, are also setting up their own sustainable finance framework, an important first step in bringing global standards to green and sustainable finance issuance among Malaysian banks.

Islamic finance assets are expected to grow at a compounded annual growth of around 9% to 2025, based on Refinitiv data, which will help Malaysian banks strengthen their position in the category among ASEAN nations.

ASEAN countries take the lead on Islamic finance

Southeast Asia, and particularly, countries in the ASEAN region, has seen the rapid growth of the Islamic finance industry, being home to some of the largest Muslim populations in the region.

This, and the aggressive establishment of Islamic banks have propelled Malaysia and Indonesia to the top among ASEAN banking nations, followed by Brunei, Singapore, the Philippines and Thailand have also shown ambitions in this market.

Liquidity risk, profitability and good governance were among the top risks faced by Islamic banks in the region, according to an academic study conducted by the faculty of two Islamic universities in Indonesia, titled the Vulnerability of Islamic banking in ASEAN.

Islamic finance faces hurdles to qualify as sustainable ideal

Proponents of Islamic finance as an ideal market for green and sustainable financing, point to similarities between its religious tenets, calling for the exclusion of ‘sin’ industries like alcohol and gambling, and the UN Sustainable Development Goals (SDGs), in support of their claims.

The bond market is particularly contentious in terms of sharia law, which is effectively the Islamic legal system. Sharia is opposed to usury, as are many different religions, on the grounds of encouraging negative social impacts. 

In fact, under sharia law the collection of riba, or interest, is forbidden. That means that bond investments under Sharia-compliant structures represent partial ownership rather than a debt obligation.

Yet the economies of many of the countries where it is popular and prevalent are dominated by high polluting and environmentally unfriendly industries.

Malaysia is a prime example of this – together with Indonesia, it accounts for 84% of global palm oil production. Malaysia is also the second-largest oil producer in Southeast Asia, and the third largest exporter of liquefied natural gas (LNG).

As the bank of international settlements sees a surge in global cross-border claims, it highlights liquidity issues in emerging and developing economies as key global risk, brought on by the myriad economic issues facing the world.

An oversubscription by local financial institutions of government issued green bonds in emerging markets, like Malaysia, may help them shore up their balance sheets as growth declines and stress tests require de-risking loan books.

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