These two countries made up close to 96% of all sukuk issuance in Asia ex-Japan since 2010, according to Dealogic, although their dominance is not a surprise given their strong Muslim populations.

For the same reasons, this has also meant that very few of their north Asian counterparts have chosen the asset class as a funding avenue. That has slowly started to change in recent years with Hong Kong, in particular, keen to establish itself as the north Asian hub for Islamic financing.

The Hong Kong government raised a total of $2bn through two well-documented transactions in 2014 and 2015, setting dollar benchmarks for an ijara as well as a wakala sukuk.

Others in north Asia, though, are yet to follow in the city’s footsteps. But the one issuer in the region that has expressed an interest in sukuk, Country Garden, has opted to issue in ringgit.

The real estate company revealed on October 5 it has appointed CIMB as lead arranger and lead manager for a MR2.5bn ($597m) MTN programme based on the principles of Murabahah.

Chinese bank to question the need for Hong Kong, or north Asia, to develop an Islamic finance market in the first place. While he agreed that sukuk do provide companies with an alternative source of funding, investor diversification is never a convincing argument for issuers.

“The few savvy ones might care, but the majority only care about size, price and efficiency,” he said. “Most Chinese issuers even find 144A documentation troublesome, so how do you convince them to do a shariah-compliant bond?”

Unique case

More importantly, the banker pointed out that there are no obvious pricing discrepancies between a sukuk and a conventional bond, which makes it harder to get issuers interested.

“You need to tick a lot of boxes to make [sukuk] work and it only makes sense for Country Garden because it’s doing it for a very specific purpose,” said one Hong Kong-based head of DCM syndicate.

Country Garden plans to part-finance three of its projects in Malaysia with the sukuk, which will be issued via its Malaysian subsidiary. And since more than half of the country’s bond market is made up of sukuk, it makes sense for the company to use Islamic financing instead of a conventional bond, the syndicate head added.

So even though Country Garden will be breaking new ground, several market participants told GlobalCapital Asia that it would be more or less considered a Malaysian trade and is not a sign that north Asia is warming up to Islamic finance.

One of the main reasons the ringgit sukuk market is thriving is the relatively relaxed tax regime, said Mark Lim, head of the finance and projects practice group at Wong & Partners, member firm of Baker & McKenzie. Issuing a sukuk in the ringgit market tends to be cheaper than a conventional bond thanks to a series of tax incentives the Malaysian government introduced over the past 25 years to promote Islamic financing.

The only other north Asian sukuk issuer, Hong Kong-based but Singapore-listed Noble Group, also chose the ringgit market for the same reasons. Noble issued three ringgit-denominated sukuk in 2012-2013, raising a combined MR900m ($206m).

Tax is key

In order for sukuk to grow in Asia, other jurisdictions will first need to promote Islamic financing to be on equal footing with conventional bond fundraising, Lim said.

As it stands, issuing a sukuk in many Asian countries is more expensive due to tax. A sukuk typically involves an underlying agreement such as the sale and leaseback of assets. In jurisdictions where legislations do not cater to Islamic banking, both the selling and leaseback process may be subject to stamp duty.

“One of the common problems with sukuk gaining traction elsewhere has always been tax,” Lim said. “From an economics perspective, it doesn’t make sense for many issuers to issue sukuk because it is more costly.”

Lim added that the only solution for the market to grow is for governments to push through changes in their respective legislation, which he concedes takes

time.

Australia, for example, has been looking to address its legal constraints to accommodate Islamic finance for a number of years. So has Japan. But while such moves have long been mooted, nothing has materialised.

More incentives needed

John Chong, chief executive of Maybank Investment Bank and Maybank Kim Eng Group, agrees that tax is one of the main issues impeding the growth of sukuk.

That, however, pertains mainly to the sell-side and Chong reckons that a lot more work also needs to be done to improve the situation for the buy-side. One way to achieve this would be to set up takaful (Islamic insurance), Islamic fund management and Islamic interbank bond markets.

“A range of changes need to be performed to improve the situation and not one singular thing in isolation. A healthy sell-side should complement a healthy buy-side,” he said, adding that growing a sukuk investor base is important as it would reduce the competition with conventional bonds.

Promod Dass, deputy CEO of RAM Rating Services in Malaysia, said that if countries in Asia are serious about developing Islamic finance, it is the domestic bond market and not the international market they should focus on.

He pointed out that sukuk in Malaysia represent more than 50% of the bond market. In comparison, in the global bond market, the outstanding amount of global sukuk is just 0.3%.

The relatively small size means international funds are only setting aside a very small portion of their portfolios for sukuk. While he expects the situation to improve over time, that is only likely to be a very gradual process.

While Hong Kong did get a good reception for its two dollar sukuk, Dass reckons the question to ask is whether international investors who participated were motivated because of the sukuk or Hong Kong’s sovereign credit.

Country Garden is yet to release details regarding its issuance, although one Singapore-based credit analyst said he expects a coupon of 5%-6%, with issuance likely to come in different tranches. He expects the first portion to be roughly MR600m-MR800m ($141.66m-$188.88) in size.