Perhaps the most critical challenge for Green Sukuk is by gaining popularity through international buyers, due to lack of standardisation and legal enforceability threat. Although the creation of the SRI Sukuk framework has partially resolve the issue. However, there is not yet a comprehensive framework or regulation on SRI instruments in Malaysia. The lack of standard verification system for the measurement of green instruments performance has caused investors and issuers thinking twice before stepping into Green Sukuk. The industry is then struggling in holding the tempo with the swiftly converting regulatory surroundings and acquire as a minimum local standardisation.
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'The Main Challenges for Green Sukuk in Malaysia'
In addition, it has taken some time before the issuance of the first green Sukuk in Malaysia in spite of the SRI Sukuk framework have been delivered a few years in the past. One of the reasons for the sluggish progress of green instruments in Malaysia is due to the lack of awareness, especially among the investors and issuers, as to what they could do and what was available. The World Bank has carried out a number of workshops to raise traders’ attention in green Sukuk in response to cope with the problem.
Reflecting the market’s nascent repute, marketplace norms and standards for green bonds are still evolving. It is basically a self-regulated market although diverse voluntary hints exist, maximum extensively the worldwide Capital market association’s Green Bond concepts which have been hooked up in 2014 via a set of banks and attention on use of proceeds, manner for task evaluation and choices, control of proceeds, and reporting. Not to mention too that the secondary market for Green Sukuk is very limited due to the small range of investors holding Sukuk funds and other institutional investors which traditionally looking up to a strong secondary market for meeting the investors’ liquidity expectations. The challenges to achieve crucial mass for the Green Sukuk marketplace which will acquire top of the line expenses of issuance and enable a liquid secondary market buying and selling, which in turn will result in efficient price discovery. This may be recognized as a more diverse set of issuers and investors come to the marketplace to issue and involve in green or SRI Sukuk issuances throughout numerous tenors and threat profiles.
The Climate Bond Initiative also gives guidance, focusing on specific sectors. Other challenges of Green Sukuk include investor’s awareness, demand for energy supply, government support and demand for energy financing. At the same time, as Islamic finance still fantastically new, it appears as logical match for green bonds, or in this case study of Green Sukuk, in which demand should proliferate. As we know, Sukuk is already restricted to a pool of property by using nature which makes it easy to be green. However, accomplishing this purpose comes with large challenges and attaining a sustainable, mounted Green Sukuk marketplace might be a protracted road in advance. Green Sukuk may expose itself to a higher risk profile, this is because most of the environmental friendly projects require a sophisticated degree of new technology based on the construction and operation of green technologies.
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On the other hand, there are also challenges in convincing the issuers to undertake the Shariah-compliant or Sukuk direction while issuing those social impact debt capital marketplace papers as a part of their fundraising requirements. This could not be an issue in Malaysia where the Sukuk issuance is widely accepted or even more preferable than conventional bond issuance. However this issue is more referring to those non-ringgit issuers, as they may realise the complexity of a Sukuk, mixed with the complex requirements of the green bond issuance will be too heavy to comprehend all at once. The Sukuk industry may left far behind soon if the learning curve itself is not settled immediately, as there will be more issuers get onto the social impact in the trend of issuing green bonds. There are also difficulty to guarantee investors that Sukuk proceeds will be used for projects with economic value, at the same time meeting accepted and credible green standards. In other words, Green Sukuk faced a challenge in giving investor more confidence towards their project.
