Opening Address by DG Nik Mohamed Din Nik Musa at the Webinar on Publication of Annual ‘IIFM Sukuk Report 12 Edition'
Webinar on Publication of Annual IIFM Sukuk Report 12th Edition

06 September 2023

Opening Address By

Mr Nik Mohamed Din Bin Nik Musa
Director-General, Labuan FSA
A’uzubillahi minas syaitonir rajim

Dr. Sami Al-Suwailem
Acting Director General, Islamic Development Bank Institute (IsDBi),

Brother Ijlal Ahmed Alvi
Chief Executive Officer of the International Islamic Financial Market,

Distinguished Guests,

Ladies and Gentlemen,

Assalaamu’alaykum Warahmatullahi Wabarakatuh and good day to all.

1. Alhamdulillah, praise be to Allah the Almighty for with His blessing and guidance, we are able to meet here today. I would like to extend my warm welcome to everyone to this event held in conjunction with the issuance of the IIFM annual publication – The 12th Edition of the IIFM Sukuk Report. The publication of the IIFM Sukuk Report not only shows the commitment by the IIFM workforce to publish a quality and comprehensive report on global sukuk development, but also the determination to provide continuous support to the Islamic finance industry, predominantly in the global Islamic capital market.

2. I am grateful to IIFM for the opportunity to deliver the special address for today’s event. As you all are aware, the evolution of sukuk market began with the issuance of the first corporate sukuk in 1990 by Shell Malaysia. Today, sukuk market has grown by leaps and bound in size and sophistication, with the strength lies in its distinct structure. Sukuk is an asset-based instrument, bringing unique value propositions to both investors and issuers. We are now at the verge of another metamorphosis of the digital era, in which digitisation has affected the market landscape by becoming an enabler for greater connectivity, accessibility, and inclusivity for issuers, investors, and intermediaries. This represents opportunities for the Islamic capital market to leverage on financial technology in facilitating innovative structures such as digital sukuk, also known as sukuk token, which will become a trend in the years to come.

3. This time around I wish to highlight three (3) points on diversification of sukuk specifically on structures, issuers and investors of the new sukuk tokens.

4. There are various structures of sukuk namely ijarah, musharakah, murabaha, wakalah, musawamah, to name a few. Each structure can be tailored to meet the specific needs of the issuers and investors, while adhering to Shariah principles. At the same time, there are hybrid sukuk structures that are positioning itself in the sukuk market industry. Hybrid sukuk as we know are a type of sukuk structure in which the underlying pool of assets consists of two or more Islamic finance contracts. We believe that these structures are suitable for sukuk token or digital tokens as they are for traditional sukuk which in fact enhances it with standardisation, efficiency, and transparency through the use of blockchain, depending on the particular needs of an institution.

5. In this connection, I wish to highlight here that IIFM in its effort to facilitate Shariah harmonisation, has published two (2) standard product templates on sukuk, namely sukuk al-Ijarah and sukuk al-Mudarabah. These standards offer Islamic financial institutions with a comprehensive set of widely accepted and legally sound financial documents and product confirmations. As a result, Islamic financial institutions can benefit significantly from being IIFM members and adopting its standards. We sincerely hope that more Islamic financial institutions would join the IIFM and play an active role in deliberating and shaping the standards being developed by the IIFM.

6. In terms of diversification of issuers and investors, digitalising the sukuk via sukuk tokenization opens to a new spectrum of issuers and investors. Tokenisation makes it possible to materialise and unitize existing assets from the physical world to the digital world. This could lead to new business models and potentially as a new means to raise investments or fundings in the future, therefore diversifying the issuer to include the smaller and medium enterprises. Essentially, digital sukuk allows new types of issuers to tokenise their assets -- similar to investment in sukuk -- where a digital token is created on a blockchain that supports smart contracts to represent interest in the underlying assets, beneficial ownership and constructive possession. Smart contracts also determine how the token can be purchased, traded and sold in a compliant fashion, and since they are blockchain based, the transactions are immutable, traceable and fully transparent. The Artificial Intelligence or AI technology at work will ensure the Shariah compliance is end-to-end with less human intervention.

7. In terms of investors diversification, digital sukuk provides greater accessibility to retail investors. Traditionally, sukuk issuance has been limited to institutional investors and high-net-worth individuals due to the minimum investment requirements and the complexity of the process. However, digital sukuk can be easily traded on digital platforms, which can open up investment opportunities to a wider range of investors, including retail investors. Retail investors can participate in more bite-sized sukuk offerings with lower investment amounts, allowing them to diversify their investment portfolios and potentially benefit from the returns generated by sukuk that is certainly more cost effective.

8. By leveraging on digital technology and blockchain, digital sukuk can provide a more user-friendly and simplified investment experience for retail investors, making it easier for them to research, invest, and manage their sukuk investments. Nevertheless, it is important for retail investors to conduct their due diligence and understand the risks associated with investing in sukuk, as with any investment. They should also ensure they comply with any regulatory requirements and seek professional advice if needed.

Ladies and gentlemen,

9. It is envisaged that more and more Islamic finance centres will embark on digitalisation as a step towards modernising the funding and investment avenues. Pursuing Labuan IBFC’s aspiration as Asia’s Islamic Digital Asset Centre or IDAC, apart from the pronouncement on the minimum compliance criteria for offering of Labuan Islamic digital-based solutions, Labuan IBFC launched its first Shariah-compliant ESG-based digital exchange last October, potentially making it one of the first Islamic digital exchanges on offering. This exchange platform focuses on tokenisation of securities including sukuk, gold and immovable properties, allowing for immediate buying and selling of securities through its integrated blockchain technology solution and support from a comprehensive ecosystem. It creates a competitive market environment for Labuan IBFC as a fund raising and investment hub in the digital space.

10. Labuan IBFC has much to offer to the global financial world. As we continue to grow our digital ecosystem, some of these opportunities can be further explored with the hope that insights can be gained on the benefits and usefulness of such offerings, insyaAllah. It is certainly an exciting time, to be at the dawn of the next phase of evolution of the sukuk offering to witness the sukuk token or digital sukuk taking shape.

11. On that note, I end my speech by wishing you a fruitful and engaging webinar ahead. Thank you and wabillahitawfik walhidayah wassalam W.R.T.
Mr Nik Mohamed Din Bin Nik Musa
Director-General, Labuan FSA
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