Improved yield and liquidity as well as the sukuk’s inclusion into benchmark indices are the top factors that Malaysian bond investors believe could boost the investor base for Government Investment Issue (GII) – a long-term sukuk used to fund development projects. Asset Benchmark Research (ABR) asked institutional investors if they expected an increase in the investor base for GIIs as part of the Asian Local Currency Bond Benchmark Review in the first half of this year.

Higher yield or better relative value compared to conventional Malaysian government securities (MGS) was among key drivers cited in the survey that can promote GII ownership. Improved liquidity in the secondary market, inclusion in various benchmark indices were also mentioned. More GII issuance and greater social awareness and education were the other factors detailed by investors.

The first issuance of GII was in 1983; the purpose primarily being to allow Islamic banks to hold liquid papers to meet their statutory liquidity requirements. Over the years, many initiatives have been undertaken to develop the government sukuk market: improving liquidity by increasing the frequency and size of issuance; the lengthening of maturities; and supporting secondary market liquidity through the principal dealer network. According to the latest central bank data, government sukuk accounts for 39% of total sovereign debt in Malaysia.

The addition of GII into the Barclays Global Aggregate Index in March last year was a significant milestone for Islamic finance. The inclusion of the debt instruments into the benchmark index of investment grade debt from 24 local currency markets should encourage offshore investors to invest in Islamic instruments to a greater degree. A report by Nomura Research stated that the foreign ownership of GII early this year was at 6.9%, the highest level in the past ten years.

Respondents surveyed suggested that a greater demand for Islamic assets could be also be achieved through standardized Shariah investment mandates or an increase in local Islamic funds within Malaysia. Other drivers to increase the GII investor base that were raised included favourable regulation and mandatory two-way prices for benchmark GII from principal dealers. The government’s role in positioning Malaysia as an Islamic finance hub was another factor cited.

ABR’s annual survey probes into the product needs of fixed-income investors and the market penetration of banks active in Asian local currency bonds.  Additional reporting by Jacky Fung