Non-Malaysian companies issuing ringgit sukuk

The magazine Islamic Finance News in its edition of 18 July 2012 posed the following question to its forum of experts:

The full responses are only available to readers of the magazine. However I have reproduced my own response below.

This is essentially a foreign exchange management question for the central bank, rather than an Islamic finance question.

If the ringgit raised by the sukuk issue will be invested within Malaysia, then there seems to be no reason for concern whether the issuer is foreign or Malaysian, provided the contracts are enforceable in Malaysia under Malaysian law. This will be a case of Malaysian capital being invested in Malaysia. If the contracts are under foreign law, then the central bank may wish to consider investor protection issues. In the case of large denomination sukuk issued to sophisticated investors, the industry can self-regulate since sophisticated investors do not need protection other than strong disclosure laws.

If the ringgit are to be taken overseas after conversion into foreign currency, this will reduce Malaysia’s foreign currency reserves. Malaysia has exchange controls, so any such sukuk issue can be expected to need approval from the Malaysian authorities. While Malaysia has in many cases approved the export of capital to acquire foreign business assets, as in the case of Malaysian companies purchasing foreign companies, there appears to be little merit in giving approval for Malaysian investors to purchase the sukuk of foreign issuers, just as there would be little merit in permitting the export of Malaysian capital to purchase foreign bonds. If in future Malaysia decides it does not need exchange controls, such questions will become irrelevant.