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Socially
Socially responsible investment responsible
sukuk (Islamic bond) development investment

in Malaysia
Mahfuzur Rahman and Che Ruhana Isa
Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia
Received 27 September 2019
Ginanjar Dewandaru Revised 2 May 2020
Accepted 14 July 2020
School of Graduate Studies, International Centre for Education in Islamic Finance
(INCEIF), Lorong Universiti, Kuala Lumpur, Malaysia
Mohamed Hisham Hanifa and Nazreen T. Chowdhury
Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur,
Malaysia, and
Moniruzzaman Sarker
Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur,
Malaysia and School of Business and Economics,
United International University, Dhaka, Bangladesh

Abstract
Purpose – This study aims to explore the underlying issues related to the development of socially
responsible investment (SRI) sukuk in Malaysia. It identifies factors attracting investors and issuers, as well
as challenges for the development of SRI sukuk (Islamic bond) in Malaysia.
Design/methodology/approach – This study conducted semi-structured interviews to collect data from the
institutional investors, SRI sukuk issuers and arrangers, as well as researchers. A total of 19 experts were
approached in which 10 participated in the interview. The thematic analysis technique is used to report the findings.
Findings – This study uncovers that social contribution through business activities (i.e. investment in the
education sector) is the key motivational drivers for the investors and issuers. Besides, investment risks, lack of
performance measurement standards, high transaction costs, risks of return, shortage of enough Islamic bonds,
investors’ confidence and lack of awareness are the major challenges for the development of SRI sukuk instruments.
Research limitations/implications – Due to the challenges in finding experts on this subject matter,
this study was able to manage only 10 interviews from the participants, which is a small sample size.
However, the findings of this study cannot be ignored. Future research should carry out with a large sample
size (i.e. at least 30 interviews) to validate the current findings.
Originality/value – This study is among the pioneer in Malaysia, which explores the influencing factors
of selecting Islamic bonds as an investment option. This paper provides some valuable implications for
investors through discovering the challenges for the growth of SRI sukuk in Malaysia, which can also be
applicable in a global setting.
Keywords Islamic finance, Qualitative research, Socially responsible investments, SRI sukuk,
Islamic bond
Paper type Research paper

Qualitative Research in Financial

JEL classification – G1, G2, G15, G31 Markets
We would like to acknowledge the financial support provided by MOHE UM-INCEIF Islamic Finance © Emerald Publishing Limited
1755-4179
Research Programme [Grant Number MO002-2017]. DOI 10.1108/QRFM-09-2019-0117
QRFM 1. Introduction
After a succession of financial crises, natural disasters and social problems, investors
started to become conscious of the idea that their investment could be used to attain social
welfare along with protecting themselves from another crisis. Also, investors are losing their
confidence and trust in the conventional market and conventional banking. As a result,
investors desire such types of investments that can protect their ethical and moral values
attaining social welfare. Socially responsible investment (SRI) instrument is one of the areas
of financial bonds, which deals with protecting environmental and social welfare crisis. It is
also well-regarded as a green bond in the global SRI market, which complies with the
attainment of the United Nations’ sustainable development goals without forfeiting fiscal
revenues (The World Bank, 2017). The amount of green bond and sukuk trade was
approximately US$401.2bn in the final quarter of 2018, in which the green sukuk trade
corresponded to merely US$2.13bn of entire green fixed-revenue trade (Drum, 2019). In 2018,
the total issuance of green bond stood at US$167.3bn from US$81.6bn in 2016, exhibiting a
57.0% three-year compound yearly growth rate in the international market (Owais and
Mustafa, 2018; Green Bonds Highlights, 2016). Besides, the amount of unpaid green bond
and sukuk trade corresponded to around 0.31% of global unpaid arrears (Debt Securities
Statistics (BIS), 2019). Therefore, it is indicative that well-renowned investors are aiming at
investing in the area of ethically and SRI. These developments show the increasing SRI
consciousness among investors. In the long run, SRI and Islamic finance are found to be a
well-liked alternative for socially aware investors (Novethic, 2009). Referring to Barkatulla
(2009), the primary subject matter that binds SRI with Islamic finance is the fundamental
viewpoint of socioeconomic justice they have to showcase. Either SRI or Islamic finance
investors have distinct ethical requirements and various factors for their option to invest
ethically. However, each approach faces the same quandary of stock choice that is consistent
with moral values.
SRI and green sukuks’ potential outcomes in the future are fundamentally dependent on
various factors. For instance, the population of the Gulf Cooperation Council (GCC) countries
is anticipated to reach 53 million by 2020, a 30% increase from the year 2000. It makes the
GCC countries one of the fastest developing regions in the world, driving tremendous
growth in demand for urban infrastructure, electricity and water (Malaysia, 2016). In 2013,
the King Abdullah City for Atomic and Renewable Energy released a white paper outlining
an ambitious plan to produce and invite interest in 54,000 MW of renewable energy by 2032.
Meanwhile, the Dubai Supreme Energy Council established the Dubai Integrated 2030
strategy plans for solar energy to account for 5% of Dubai’s total energy-mix by 2030.
Furthermore, Abu Dhabi Vision 2030 plans to increase the non-hydrocarbon related share of
Abu Dhabi’s economy to 40%–60% with a targeted renewable energy capacity of 7% by
2020 (Malaysia, 2016).
It is observed that SRI sukuk has become an essential stream of investment options in
the global financial markets, which also has enormous prospects in Malaysia. In January
2017, the World Bank, Central Bank of Malaysia (Bank Negara) and Malaysia’s Securities
Commission launched a practical committee to investigate the possibilities of establishing a
green Islamic finance market in Malaysia. The practical committee endorsed the notion of
“green sukuk” and communicated global instances of green bond issuance with the ministry
of energy, green technology and water (KeTTHA), Green Tech Malaysia Sdn Bhd, Ministry
of Finance, financial institutions and potential issuers (The World Bank, 2017). As an effect,
Malaysia was a consistent principal issuer of sukuk for 2017, dominating a 46.4% market
share of total issuances, trailed by Indonesia and the United Arab Emirates, with market
shares of 9.9% and 9.0%, respectively (Owais and Mustafa, 2018).
 However, the growth rate of SRI sukuk in the Malaysian financial market has not been as Socially
high as those in other countries such as the USA, the UK or Europe. Thus, the current study responsible
aims at exploring the factors affecting the growth of SRI sukuk in Malaysia. Specifically,
this study intends to attain several objectives such as:
investment
 to explore the factors that attract investors to subscribe to SRI sukuk in Malaysia;
 to identify the factors that motivate issuers to issue SRI sukuk; and
 to investigate the challenges and benefits encountered by market players in taking
an SRI sukuk portfolio compared to general sukuk.

This study expects to shed light on the value proposition of SRI sukuk investment in
Malaysia, which would assist researchers and practitioners in a global setting.

2. Literature review
Nowadays, climate variation, financial deficiency, food scarcity, water safety, corruption
and joblessness are some of the highest substantial obstacles experienced throughout the
world. World Economic Forum (2017) conducted a study to list down top-10 most
distressing global problems. Results demonstrated that climate variation as the utmost
persistent matter (i.e. 48.8% of respondents selected climate variation as the highest worry),
while 78.1% stated, they would be prepared to alter their daily routines for the sake of
environmental protection. Besides, the survey included other matters of concern amongst
the global populace such as armed conflicts (38.9%), income distribution disparity (30.8%),
financial deficiency (29.2%), religious disputes (23.9%), government responsibility and
openness (22.7%), food and water safety (18.2%), academic inadequacy (15.9%), safety and
security (14.1%) and reduced economic prospects, including joblessness (12.1%) (World
Economic Forum, 2017). SRI sukuk would be one of the essential financial tools to tackle
these global distresses. Islamic finance and SRI concentrate on investors’ ethics and beliefs
and encourage social activities rather than pure financial risk-adjusted returns. Webley et al.
(2001) highlighted that societal philosophy, instead of monetary profit, has been the primary
purpose of SRI sukuk investment. Investors have been observed to retain or raise ethics,
even when their investments perform poorly in the market. With the development of Islamic
finance in non-Muslim nations and innovations in financial product designs, the subsequent
target for Islamic finance is to entice non-Muslim to become clients and stockholders (Ali
et al., 2019). Consequently, efforts on social sukuk can also converge and traverse the ethical,
social effect of conventional investment with that of shariah-compliant investment, thus,
expanding both areas (Mohamad et al., 2017). As stated by Scholtens and Sievanen (2013),
SRI is a distinctive feature of the economy that is linked to precise features of investment,
and this investment is not related to economic openness. They found that the dimension of
the pension industry has a high impact on SRI. If the economy has an enormous pension
industry, there will be more opportunities for SRI.
Socially responsible (SR) investors are categorized in two types. The first type will agree
to take lesser profits in comparison to standard funds, whereas the other type of investors
will only agree to invest in SR funds if fiscal performance is not compromised (Beal et al.,
2005; Jeffrey, 2006). Although conventional and Islamic finance has many standard
methods, procedures and shared aims, SRI and Islamic finance have hardly overlapped with
the conventional market during earlier developmental stages (Moghul and Safar-Aly, 2014).
Nevertheless, advancement has been in progress with SRI expansions, such as green sukuk,
vaccine sukuk and SRI sukuk (Haneef, 2016; IFFIm, 2014). The challenge of issuers is to
convey the calculated worth of SRI sukuk with investors. Marwan and Ali (2016) stated that
QRFM a failed SRI sukuk project not only exposes investors to financial risk but also causes the
government to face reputation risk.
According to Dusuki (2005), the principle of Maqasid al-Shari’ah is strictly followed in
social impact bond and SRI, which both promote social welfare, human development,
governance and protection of the environment. Islamic finance and SRI both have a
universal principle to protect investors’ ethical values and promote social welfare besides
their simple economic returns. These investors not only consider their traditional risks and
returns objectively but also are ready to sacrifice their returns for the sake of social welfare
(The World Bank, 2017). Also, traditional SRI promotes different screening techniques for
portfolios, which are not contradictory to social welfare (Balz, 2010; Barom, 2013). By
negative screening, SRI excludes the businesses, which fail to protect investors’ moral
values towards their society such as tobacco, pornography, casino, defence contractors and
poor environmental records of businesses (Eurosif, 2016). On the other hand, this screening
process serves to stabilize investment opportunities and minimize the overall risk by
eliminating certain leveraged companies (Hussein and Omran, 2005; Abdullah et al., 2007;
Ghoul and Karam, 2007).
According to Marwan and Ali (2015), the return of SRI sukuk instrument is determined
by the performance of the project. SRI sukuk obliges the release of detailed information
about the project and profit earned. However, sukuk holders will not receive their capital in
the event of a successful project. Under the RAM rating (2015), “the nominal value will be
mandatorily written down following a pre-determined formula if the key performance
indicators (KPIs) are achieved”. SR investors have different opinions of SRI risk with more
or more risky than mutual funds, while the remaining believes that mutual funds and SRI
have the same level of risk (Lewis and Mackenzie, 2000). Turjanik (2015) revealed that SRI
sukuk is associated with seven risk factors, namely, model risk, service risk, political risk,
intermediary risk, evaluation risk, financial risk and reputation risk. In SRI sukuk, the
financial risk is carried by the investors and obligators.
Nevertheless, green sukuk investors seem to attain diverse outcomes based on different
procedures. US dollar green sukuk investors expect better profit from prospective SR
characteristics, whereas Malaysian Ringgit green sukuk investors are unlikely to profit from
the same setting. It is because of the regions’ cultural systems, which deal with capital
market structures and sharia compliance. Furthermore, reduced foreign direct investment in
the domestic Malaysian market may worsen liquidity matters for measly net profits (Drum,
2019).

2.1 Relationship between Islamic financial product (sukuk) and socially responsible
investment
The new ethical and moral investment behaviour have their roots from religious beliefs.
Refer to Biema (2008), Jewish encourages ethical activities through the investment in social
welfare. The Christian theology emphasizes using of individuals’ wealth with moral
responsibility, persistent with Christian faith. During the 1960s and 1970s, the ethical
investing behaviour came into play by avoiding companies that were involved in the
Vietnam War or traded with South Africa apartheid. According to Dusuki and Abdullah
(2007), the Shariah supports the welfare of all humankind, in the protection of their faith
(din), their human self (nafs), their intellect (`aql), their posterity (nasl) and their wealth (mal).
Researchers found that SRI can be the bridge product that links the Islamic and
conventional financial markets where the prospect of Islamic finance and SRI prove to be
demand-driven by individual investors (Bennett and Iqbal, 2013). Islamic finance motivates
investors to share risks and returns equally and prevent all kinds of detrimental
investments. Likewise, SRI investors are concerned about the social returns along with their Socially
economic returns. Islamic products can attract western non-Muslim investors by offering responsible
SRI sukuk. Islamic products can be well-accepted by western investors if these products
offer financial returns along with SRI philosophy (Bennett and Iqbal, 2013).
investment

2.2 Concept of socially responsible investment sukuk

Structuring a new sukuk is an in-depth process to guarantee that the fundraise from sukuk
will not finance in any unethical businesses and devoid of harmful activities. Hence, it is
considered that sukuk has built-in characteristics of SRI, which can attract conventional SR
investors. The sukuk funds can be used for a specific development project such as a
renewable energy project, vaccination programme, educational project or low-cost housing
programme, which will be appealing to SRI investors whose ethics and values match with
the welfare (Bennett and Iqbal, 2013). Most of the SRI products are considered as an equity
investment rather than a fixed income investment. Due to fixed income characters along
with equity products, there is a lack of opportunities for SRI investors to select their
portfolio, which fulfils their SRI criteria (Zain et al., 2019). The SRI sukuk issuer receives
capital from a group of investors and the sukuk holder collects intermittent reimbursements,
similar to that of regular sukuk. Following terms and conditions, SRI sukuk holders may
choose to change their investment into monetary contributions at any time (Noordin et al.,
2018).
Malaysia is globally renowned for issuing sukuk. Thus, its reputed forte in SRI sukuk
issuance and implementation helps to support communities and their economy. Yet, certain
matters and obstacles still disrupt the growth of SRI sukuk towards sustaining
communities’ economic development. Currently, there is only a single corporate issuer
(Khazanah) and few entrepreneurs are operating in Malaysia to offer SRI sukuk for feasible
community development (Owais and Mustafa, 2018).
Drum (2019) reported that Tadau Energy Sdn Bhd, a Malaysian firm, allotted the first
green sukuk on 27th July 2017 worth 250.0m Ringgit to finance a large scale 50 MW solar
project, using the SRI sukuk framework. Shortly after, 5 new green sukuk entered the
Malaysian market, all of which were to fund solar projects, except one, which financed the
construction of an 83-floor office building in Kuala Lumpur, Malaysia. Approximately one
year after the first green sukuk issuance, the government of Indonesia allotted the first US
dollar green sukuk on 1st March 2018. Indonesia reprised the issuance of their second green
sukuk in February of 2019. In May 2019, Majid Al Futtaim, a Dubai-based retailer, allotted
the first corporate US dollar green sukuk. By mid-2019, from the $3.47bn green sukuk that
had been issued, 74.9% of the entire green sukuk issuance was in US dollar, while the
remainder (25.1%) was in Malaysian Ringgit (Table 1).

3. Methodology
Research on SRI sukuk is a relatively new phenomenon in Malaysia. Besides, this study
intends to explore underlying issues, motivations and challenges for the development of SRI
sukuk. Levy (2006, p. 369) notes that:
[. . .] if a researcher’s aim is to uncover the issues or factors underlying that phenomenon. Such an
aim would require using a qualitative research methodology, and possibly an interpretive as
opposed to a positivist theoretical perspective.
Hence, the qualitative research method was deemed to be suitable in this study. Bernard
(1988) advocated that the semi-structured interview approach enables the researchers to
reveal the underlying in-depth opinion, motives, analysis of the interviewees regarding a
 QRFM

Table 1.

green sukuk
List of outstanding
Size in No. of Country of
Issuers’ name Programme Currency Amount issued US$ Issued date tranches domicile First maturity Final maturity Industry Structure

Tadau energy
SDN SRI sukuk MYR 250,000,000 58,453,553 7/27/2017 15 Malaysia 7/29/2019 7/27/2033 Alt.energy Al Ijarah
Quantum solar Green SRI
park sukuk MYR 980,000,000 231,312,106 10/6/2017 32 Malaysia 10/4/2019 4/6/2035 Alt.energy Al Murabaha
ASEAN green
PNB merdeka and SRI green Real estate
ventures sukuk MYR 1,874,000,000 462,944,664 12/29/2017 6 Malaysia 12/29/2022 12/29/2031 developer Al Murabaha
Sinar kamiri Green SRI Al-Wakala Bei
SDN sukuk wakalah MYR 245,000,000 62,841,460 1/30/2018 17 Malaysia 1/30/2018 1/30/2036 Alt.energy istihmar
UiTM solar Green SRI
power sukuk MYR 222,300,000 56,716,418 4/27/2018 17 Malaysia 4/27/2020 4/25/2036 Alt.energy Al Murabaha
Al Wakala Bei
SBSN INDOIII ASEAN green USD 1,250,000,000 1,250,000,000 3/1/2018 1 Indonesia 3/1/2023 3/1/2023 Sovereign istihmar
Al Wakala Bei
SBSN INDOIII USD 750,000,000 750,000,000 2/20/2019 1 Indonesia 8/20/2024 8/20/2024 Sovereign istihmar
MAF sukuk Real Estate
LTD USD 600,000,000 600,000,000 5/14/2019 1 UAE 5/14/2029 5/14/2029 Developer Al Murabaha
Total 3,472,268,201

Source: Drum (2019)

subject matter. A semi-structured face-to-face interview technique was also followed to Socially
gather data from the institutional investors, SRI sukuk issuers and SRI sukuk arrangers. responsible
Figure 1 outlines the semi-structured interview framework implemented in this study.
It was also assured that respondents’ identity would keep anonymous, and collected data
investment
will be used for academic purposes only. During the data collection process, out of 19
participants were approached, 9 respondents refused to participate in the interview. They
were targeted based on their expertize in dealing with sukuk, either as an issuer, investor,
researcher or evaluator for data collection purposes. Because of the business operation hub,
all the respondents were located in Kuala Lumpur. Finally, a total of 10 interviews were able
to manage to consist of vice president of an issuing company, general manager and head of
the department of arrangers, assistant general manager and seven senior academicians at
one of the top Islamic banking and finance institutes in Malaysia. The interviews were
carried out from June 2018 to December 2018. It took between 40 and 60 min to complete
each interview. All the interviews were conducted face-to-face within the offices of the
respondents. A summary of the respondents is listed in Table 2.
Semi-structured interview questions were prepared so that SRI sukuk related
information could be provided. The questions were constructed by looking at previous
literature during the semi-structured interview (Kassim and Rahman, 2018). The reliability
and validity of the interview questions were also examined in the commentary by
academicians. The questionnaire was designed to attain the four research objectives from
institutional investors, issuers and arrangers’ perceptions regarding the influential factors of
SRI sukuk in Malaysia. Anderson and Archer (2016) mentioned that there is no one size fits
solution to measure investors’ values on SRI investment. They came out with a decision tree
of questions to find investors’ preferences on SRI investment (Figure 2).

Stakeholder 2: SRI Sukuk Arrangers

Stakeholder 1: SRI Sukuk Issuers • Semi-structured interviews:
SRI Explore the challenges and
• Semi-structured interviews: benefits for arranging SRI Sukuk.
Explore the factors for issuing
SRI Sukuk.

ARRANGER INVESTORS
S

Stakeholder 3: Institutional Investors

• Semi-structured interviews: Figure 1.

Explore the attracting factors to subscribe A research
SRI Sukuk.
framework to find
expected influential
factors of SRI sukuk
growthSource:
Authors’ processing.
Source: Authors’ processing
QRFM On the other hand, Williams (2007) used another survey questionnaire. It includes 21
questions and is divided into 3 parts:
(1) investors psychology related to SRI;
(2) investment preferences to SRI; and
(3) socio-demographical data of investors.

The first part contains eight questions on investors’ attitudes, intentions and beliefs of SRI.
The next section includes five issues, which focus on various elements of investment
conduct and SRI preference. The last part contains questions on socio-demographic
characteristics.
The issuers were asked what perception they have on SRI sukuk and why it is essential
to them. The question of what motivates issuers to act ethically is also up for debate.
Hedrick (2011) addressed it through the question:
What motivates a company or companies to act ethically? Is it really because they share the
values an investor is looking for or is it due to some external source such as government
regulation or other legal action?
Giamporcaro and Pretorius (2012) structured their analysis with the following two questions
for organizations:

No. Organization Individual Respondents’ position

1 A A1 Academician
2 B B1 Vice President
3 C C1 General Manager and Head of Department
4 C C2 Assistant General Manager
5 C C3 Academician
6 D D1 Academician
7 D D2 Academician
8 E E1 Academician
9 E E2 Academician
Table 2. 10 F F1 Academician
Summary of
respondents Source: Authors processing

Figure 2.
Decision tree
 (1) How environmentally responsible investment principles become part of Socially
mainstream investment philosophy? responsible
(2) How they measure environmentally responsible investment data to make the investment
decision?

Many researchers tried to identify the key challenges and benefits of SRI through their
research questions (Chen et al., 2007; Diouf et al., 2016). Inderst et al. (2012) summarized five
elements in the governance structure of green investing such as integration, transparency,
capacity building, data collection and regulation, which can be attractive features for
investors. Strandberg (2005) summarized the future of SRI through questions like:
 What will the future of SR investing hold for investors, managers, advocates and
the sector overall?
 Is it poised for growth or will it retain its niche market status?
 What competitive trends will prevail?

These questions refer to find the main obstacles and incentive structures of the arrangers
from SRI sukuk. This study accounted for the issues mentioned above to explore in-depth
motives of SRI sukuk investment, which are shown in Table 3.
The findings of the interviews are interpreted following the thematic analysis. Braun and
Clarke (2006, pp. 79) state that “thematic analysis is a method for identifying, analyzing and
reporting patterns (themes) within data”. It was evaluated in a conventional format after
gathering data from the semi-structured interview. The analysis in this study begins with
reading the written texts of the interviews to determine the themes of motivational factors
and challenges as guided by the semi-structured interview. The step of checking the data
and transcribing the written texts in detail has been done after reading the written
documents in this research.

4. Findings and discussion

4.1 The factors that attract the investors to subscribe to socially responsible investment
sukuk in Malaysia
The findings of the study revealed that all the interviewees are aware that Malaysians are
passionate about education. Interviewee D1 said:
The motivation of the investors is social awareness and responsibility towards society. Also, SRI
Sukuk contributes systematically in society to address the need for development
SRI sukuk attracts investors through changing their perception of the social impact.
Malaysians are more passionate about education, and most of them want to see their
children doing better in the future. As a response to the social awareness, Khazanah
Nasional Berhad (Khazanah) has formed Yayasan Amir to invest money in-school
programmes, establish trust schools with a five-year tenure and attract investors by
promising returns on an annual basis. The main idea behind these programmes is to ensure
accessibility to quality education at public schools.
Other two interviewees, C1 and C2 stated that:
For very good impact we wanted to bring in investors who are willing, from khazanah to
contribute to socially responsible investment Sukuk. we have done many Sukuk for our
commercial business requirements. But this is different.
QRFM Categories Questions Source

Issuers How will environmentally responsible investment Giamporcaro and

principles become part of mainstream investment Pretorius (2012)
philosophy and practices in future, according to the
respondents?
Is awareness of environmental, social and governance
issues a determining factor in decisions on SRI
investment?
What are the expectations and both in terms of Diouf, Hebb, and
environment, social and governance (ESG) values and Touré (2016)
financial returns?
What will the future of socially responsible investing Strandberg (2005)
hold for investors, managers, advocates and the sector
overall?
Is it poised for growth or will it retain its niche market
status?
Who is the future SRI consumer?
Arrangers 1. Key challenges are that investors should consider on Chen, Lesmond, and
the financial characteristics of a green bond Wei (2007)
Investors 1. Was there a negative impact on returns associated Hedrick (2011)
with SRI?
2. Were there inherent benefits to potential donors by SRI
options being available?
Table 3.
Interview questions Source: Authors’ processing

Unlike other models, if investments perform well investors will get the high return but for SRI
Sukuk it is opposite. This is different because you invest to get some returns and at the end of it,
you will get a good outcome.
The initiative undertaken by Khazanah is a response to the call by the Malaysian
government for more significant public-private partnerships in the education sector towards
improving student outcomes and school performance. The programmes address the need to
promote quality education and emphasize its benefits to individuals, investors, businesses
and the public. Meanwhile, investors are motivated by social awareness and their
responsibility towards society. Therefore, SRI sukuk contributes systematically to
community by addressing the need for development.

4.2 The benefits and motivations for issuers to issue socially responsible investment sukuk
portfolio compared to general sukuk
Findings also revealed that the interviewees are agreed that through SRI sukuk, issuers can
diversify their conventional business to include SRI. Interviewee A1 and C3 said:
We have investors from our industry who have CSR (corporate social responsibility) budget, they
are investing in this instrument and do not expect any form of returns. We aim to attract those
investors to finance SRI Sukuk fund and create an investment environment with great social
impact value.

If we look at the khazanah’s motive it was a response to a government school for greater public-
private partnership in education sector towards improving student outcomes and school
performance.
SRI sukuk can bring investors from different backgrounds into the company, which will Socially
increase the company’s investment funds. Also, issuers will benefit from the support of SRI responsible
sukuk holders who are not interested in conventional lending. To attract SR investors,
issuers have introduced this instrument in contributing development of the society. Besides,
investment
many institutional investors are not interested in investing in a company that does not have
a sukuk instrument. Institutional investors have the budget for corporate social
responsibility (CSR) investments, and issuers want to get those funds by offering SRI sukuk.
This notion will help issuers to attain their desired impact on society.

4.3 Factors (challenges) for the development of socially responsible investment sukuk
Despite its vast potential, however, the green sukuk originally failed to materialize. There
were several reasons for this. Interviewee B1, C1, C2, C3 and E1 stated that:
The struggle in providing a socially responsible investment Sukuk market is to guarantee
stakeholders that the profits will benefit commercially worthwhile endeavours and
simultaneously attain recognised and plausible benchmarks of SRI (High demand).

We are facing difficulties to create the appetite and raise awareness of potential investors and
issuers, as well as the benefits of such issuances (Investors’ confidence and lack of awareness)

As we can see, currently the Malaysian economic condition is not good and investors are not
having expected a return from their other investments option. As a result, they are more reluctant
to invest in SRI Sukuk where the return is less than other investments (High risk of return).

None the less, we can not give the guarantee that SRI Sukuk will not be affected by the financial
crisis as the Sukuk procedures used in the stock market and it experience investment asset risk
(High risk of investment).

Following guidelines, all acknowledged resources need to be protected by takaful plans.

Nevertheless, should a takaful plan is unavailable (or not economically feasible), procurement of a
conventional insurance plan is permitted. With an insured capital, SRI Sukuk can safeguard the
Sukuk investor in a financial predicament (Lack of performance measures).
The most significant factor in attracting conventional SRI investors is to provide fixed
income cash flows from sukuk. In offering stationary cash flows to SRI investors, it is
mandatory to create a structured sukuk that satisfies Shariah requirements and yields cash
flows similar to interest. However, these types of highly structured products always have
expensive transaction costs, are less liquid and create difficulties for investors to value their
investments. The qualitative content analysis reveals seven challenges for the growth of SRI
sukuk (Table 4).
4.3.1 The high-risk profile of socially responsible investment sukuk projects.
Environmentally friendly projects involve sophisticated new technologies. The risks of
these projects, for example, failure to achieve the targeted result, are shared between the
parties involved. Companies involved in such projects not only expose investors to financial
risk but also face the reputational risk of losing public confidence in the performance of their
social welfare obligation. These companies also run the risk of losing the potential
advantages of the success of the SRI and of generating better social results. Few investors
are holding SRI sukuk funds, and hence, the secondary market is small. As the secondary
market for sukuk is not yet well-established, it renders even the tradable sukuk practically
illiquid.
 Malaysia
QRFM

Table 4.

SRI sukuk
development in
Key challenges of
High risk Lack of performance measurement High transaction High risk of High demand for less Investors’ Lack of
No.Respondents investment standard costs return supply confidence awareness

1 A1 H H H H H
2 B1 H H H H H H H
3 C1 H H H H H H
4 C2 H H H H H H H
5 C3 H H H H H
6 D1 H H H H H H
7 D2 H H H H H H H
8 E1 H H H H H
9 E2 H H H H H H
10 F1 H H H H H H
Total 10 8 7 9 9 10 7

Source: Authors’ processing

4.3.2 Absence of standard performance measurement and outcome. Sukuk consists of a Socially
procedure that depends significantly on a series of regulations and an authorization such as responsible
legality, mutually-recognized specifications and substantiation scheme for gauging its
performance. However, a standard procedure to measure performance is still inadequate.
investment
Arguably, standards could reinforce credibility or on the contrary, inhibit growth and
innovation. Also, the cost of notifying updates and overseeing performance increases the
issuers’ obligation towards their investors. The absence of a supportive legal framework is a
hurdle that discourages the issuance of SRI sukuk. It is a common challenge that applies
globally, as well.
The idea of generating an SR outcome – that is not purely commercial – is also
something that links the two markets such as Islamic and conventional. Investing in SRI is
about how investors achieve financial returns in tandem with non-financial returns; in
Islamic finance, the concept is similar, whether investors are referring to avoidance of
excessive returns, enhancing social welfare or equitable distribution. There are several non-
monetary considerations such as social welfare, urban infrastructure that form the key
pillars of decision-making in both markets.
4.3.3 High transaction costs. The complexity in setting up an SRI sukuk increases the
transaction costs. The design of the highly-structured instrument is aimed at reconfiguring
sukuks’ fixed return so that it is not reflected as interest in fulfilling the requirements of
Islamic laws. This structure consequently poses a challenge in meeting investors’ liquidity
expectations. Typically, conventional investors shy away from an unfamiliar set of terms
and contract types. Scholars argue that the novelty of sukuk is lost in the attempt by issuers
to make special efforts to render sukuk identical to conventional securities in easing
potential investors to assess risk. Such efforts undermine the notion of product innovation in
the Islamic finance industry. One of the areas the authorities have been active in is engaging
the government on tax exemptions designed to eliminate the cost differential between
issuing in SRI format and general sukuk. This effort will assist in offsetting and improving
the ecosystem for the extra expenses connected with SRI disclosure and certification.
4.3.4 Risk of return related to socially responsible investment sukuk. To some extent, SRI
sukuk will be affected by a financial crisis if the sukuk procedures used in the conventional
stock market and it will experience investment asset risk. All recognized assets must
undertake takaful insurance under the legislation. However, standard insurance is permitted
if the takaful system is not accessible (or is not commercially feasible). SRI sukuk can secure
the sukuk holders during a crisis through capital insurance. An additional challenge is
currently, the Malaysian economic condition is not right, and investors are not receiving the
expected returns from their other investment options. When issuers issue SRI sukuk, the
money collected will be used to fund SRI projects that have specific KPIs to fulfil. Investors
will get the returns and the KPIs will split upfront on the performance of the project and all
these items will be measured on specific dates throughout the sukuk tenure. Therefore, the
mechanism used is the “pay for success” mechanism. The KPIs are measured after the
project is completed. If the project meets all the KPIs, the investors will receive a lower
return by paying for success. This mechanism is different from other models, where if the
investment performs well, investors will get a high return, but the opposite is true for SRI
sukuk. Investors who have a CSR budget will invest in this instrument without expecting
any form of return. This concept is different from CSR, where investors expect to earn some
returns, and eventually, they will receive a good outcome. SRI sukuk is priced at the fixed
deposit rate for investors who cannot afford to donate the entire amount. Furthermore, SRI
sukuk investors can waive all the returns and the principle amount they are entitled to at
QRFM any time during the project tenure. As a result, many investors are reluctant to invest in SRI
sukuk, as the return is less compared to other investments.
Finally, this study’s outcomes are in line with the results from previous studies.
Concerning the Ihsan SRI sukuk programme, investors were assured entirely by Khazanah
Nasional Berhad (2016). They confirmed that investments and revenues would be
safeguarded regardless of any immediate result. Arguably, there should be no monetary or
non-payment risk for investors, practically invalidating the “risk-sharing” value advertised
regularly for Islamic finance. Ihsan SRI sukuks’ “step-down” policy was highly
contradictory for an Islamic finance product. For instance, higher earnings (4.6%) would be
granted to sukuk-holders if the programme failed to reach its KPIs, as opposed to 4.2%
return if KPIs were attained (CIMB, 2015). Investors would be compensated higher in the
event of programme failure. On the contrary, with SIBs, the programmes’ triumph would
promise monetary profits. In contrast, its failure in achieving KPIs would cause investors to
receive nothing in return, with an added risk of losing their entire capital investment (true
risk-sharing) (Marwan and Haneef, 2019).
4.3.5 Demand and supply of socially responsible investment sukuk. Throughout the
years, the demand for Malaysian SRI sukuk continues to surpass supply despite a steady
flow of new projects. The discrepancy between demand and supply represents investors’
enormous appetite for reliable SRI sukuk investments outside traditional Islamic asset
classes such as capital and real property. Malaysia’s profound capital market promotes
sukuk in local currency; that is why Malaysian sukuk tends to be well-subscribed by
established institutional investors in insurance, pension and asset management sectors in
the country. As a result, even though the Malaysian SRI sukuk market is open to
foreign investors, currently the market is offering SRI sukuk only with the local currency.
The principal advisors also prefer to sell in the local market because of easy access. If the
local market fails to absorb the financing, then foreign investors can play a role to fill up the
subscription. With the demand side indicating the appetite, borrowers and corporate finance
consultants should be confident in using SRI-linked tools to tap the SRI market. The
government is aiming for the growth of more green projects to be based on up to 20% of the
energy mix. To meet the requirement of the borrowers, private issuers must also come up
with SRI sukuk projects.
4.3.6 Investors’ confidence. The contemplation between financial return and social or
environmental return often poses a dilemma for potential investors. The challenge of
establishing an SRI sukuk market is ensuring that investors use the proceeds for
economically valuable projects while respecting SRI norms. Failure in assuring that
proceeds will be used for projects that have a positive impact on society may affect
investors’ confidence. However, sukuk issuers lack in taking effective action eliciting an
investors’ confidence. A balance of financial and social goals that necessitates a disciplined
attitude to long-term sustainable development is a key principle of Islamic economic
systems.
4.3.7 Lack of awareness. It is challenging to create an appetite and raise awareness
among potential investors and issuers, as well as the benefits of such issuances. There was a
lack of awareness in the market, especially among the issuers and investors, on what they
could do and what was available. Then, with the help of Bank Negara Malaysia (BNM) and
the Security Commission (SC), several studies were conducted on SRI sukuk. Many
workshops were carried out to engage more people in this new instrument. Khazanah, as an
issuer tried to target potential investors carefully and meet their need by offering stable
returns. It was only then that issuers started gaining interest from investors to tap into the
SRI sukuk. Besides, when institutional investors consider SRI sukuk for the first time, their
portfolio managers and employees should understand the meaning of the Islamic terms and Socially
understand how they work under the sukuk mechanism. The steps to educate investor responsible
organizations on SRI sukuk often take a long time. To assist in the markets’ growth and
expansion, education must be enhanced so that cognizance can be instilled.
investment
Some other problems need to be resolved. The first concern is the deal size because most
borrowers in the area require less financing than are typically raised in the sukuk market.
Furthermore, the Malaysian Islamic mutual funds, as opposed to their conventional
counterpart, tend to be small-cap-oriented. The sector has much to do to develop structures
for these applicants to tap into the market. The risk evaluation of many of the projects
funded is not necessarily as familiar to investors, partially, as many projects related to SRI
introduce new and innovative techniques. For the regulators, the current discussion signifies
the absence of harmonization of Shariah in Islamic finance and indicate that Shariah
harmonization must be supported by Islamic financial institutions for policymakers and
regulators of the industry to prosper.
This result is parallel to RAM Rating Services Berhad (2019), which revealed that the
laborious progress of SRI funds in Malaysia throughout their preliminary stage was caused by
insufficient responsiveness and reception amongst the public about SRI’s advantages. Without
guiding principles from overseers, satisfactory agreement and organization among government
agencies and profitable green ventures, growth had been very sluggish (The World Bank, 2017).

4.4 Implications for the practice

4.4.1 Involvement of security commission and Malaysian government to promote socially re-
sponsible investment sukuk. The Malaysian government has introduced several initiatives to
promote SRI sukuk among the sukuk issuers for their fundraising. A tax deduction has been
authorized by the Security Committee for issuance of SRI sukuk expenses from 2020. To be
entitled to tax deductions, issuers must guarantee that the money raised is used in qualified SRI
projects, for example, in the natural resources, renewable energy and energy efficiency fields.
Furthermore, the government provides a tax incentive for SRI sukuk issuers to finance
operations in the area of energy, transportation, construction and waste management. Also,
under the green technology financing scheme, issuers can claim funding incentives with
complete RM5b appropriations until 2022. The government encourages issuers, in line with
global procedures, to employ experts to evaluate their projects before issuing SRI sukuk.
4.4.2 The value proposition of socially responsible investment sukuk in attracting
investors. Worldwide strong interests in green funding have created essential opportunities
in which innovative financing tools such as green and SRI sukuk are a feasible solution to
tackle global green requirements and other types of sustainable and accountable funding.
Growth in both Islamic finance and SRI has been mainly demand-driven and in response to
the growing demand for these products from individual investors, financial institutions are
providing additional funds to these two fields. Information accessibility or transparency,
sufficient disclosure of the overall proceeds of SRI sukuk can attract global investors and
help them to evaluate the investment values by themselves. A structured framework
provides investors with a high degree of assurance that their cash will be used for a
particular purpose, given that the SRI sukuk is structured to finance a particular
infrastructure project. Besides, the country’s risk rating is one of the major factors affecting
foreign investors’ decision to enter the local market.
The SRI sukuk should be evaluated before its maturity by an independent auditor who will
prepare a report at an early stage on the KPI to discuss whether the issuer has achieved the
KPI. The report will be submitted to the sukuk trustee, usually the managing director on behalf
of the investors and made available to all investors no later than six months before the maturity
QRFM of the sukuk programme. SRI sukuk investors demand regular, systematic reporting on the
performance of the sukuk. Worldwide, most of the SRI investors are young, highly educated
entrepreneurs who are concerned about the environment, society and corporate governance. By
attracting young investors, SRI sukuk investments will increase the capital depth in the
country. It is also within the interest of the government to preserve the internationalization of
the Malaysian capital markets through SRI sukuk. This effort will attract more overseas direct
investments, as there is much cash in the hands of institutional investors, governments and
other nations and some of the funds ought to be allocated in SRI projects. To attract SRI sukuk
investors worldwide, the government must maintain a stable return on its treasury bond. In
this area, too, BNM can play a crucial role by keeping an enormous reserve that confers trust in
the local market among foreign investors and other nations. Nonetheless, a sole issuer,
especially of a large size, is better suited to entice an assortment of investors compared to
securities with numerous sub-tranches. The by-product of Malaysia’s green sukuk issuance
tendencies indicates that small-tranche issuances are extra attractive to private investors than
to a wide selection of diverse investors. Unwarranted tranche issuance frequently causes
illiquidity, as it is more difficult to persuade investors to apportion capital voluntarily across
products with perplexing sizes and maturities.
Education is perhaps the most significant factor in developing the SRI sukuk market. One
way to do this is by bringing investors into a dialogue with borrowers to demonstrate that
there is a differentiating factor in going down the SRI route. Many investors are naturally still
driven primarily by financial returns, but the pool of SRI-sensitive investors is forming and
growing. Thus, it is necessary to educate the Muslim investors about SRI sukuk so that they
will be encouraged to invest in Shariah-compliant portfolios and become socially and
environmentally concerned without being forced to sacrifice investment performance.
In creating a value proposition, Islamic finance could offer diversity not only to High
Networth Individuals, sovereigns and large corporations but also could be extended and
disseminated within the society. These are similar to the waqf-based social and economic
endeavours during the Ottoman reign and the Muslim-Spanish administration (Mohamad
et al., 2017). Responses from participants showed that investors do not consider the sukuk
structure or the Shari’ah agreements as a priority in the model. Instead, investors focus more
on projected revenues, assurance of profits, incentives offered and the funds’ intention. Their
implementation still imitates the conventional system despite adapting “Shariah-
compliance”, as the authentic essence of Islamic finance in terms of risk dispersion and
social effect is not adhered to. As SRI sukuk’s entry into the market is still at an early stage,
many efforts need to be accomplished. Two crucial paths of study should be instigated on
the feasibility of SRI sukuk. Firstly, the performance of SRI sukuk in other Muslim nations
should be compared to that of Malaysia. Secondly, an effort is required in extending Shariah
matters that pertain to establishing SRI sukuk.

5. Conclusion, limitations and future research

Although considerable uncertainties remain in this new area of fundraising, the
transformation of the global economic landscape to green and sustainable finance seems
unstoppable. This research contributes to the sukuk literature in exploring the factors
affecting the growth of SRI sukuk in Malaysia. It will add to the policy implications in future
guidelines on SRI sukuk to make it more attractive to the local and global investors, issuers
and arrangers. However, the current findings are not without limitations. This research
collected data using a depth interview technique from 10 industry and academic experts.
Results from a study with such a small sample size might have a concern. However, as the
research objective is exploratory, the findings cannot be ignored. A future effort is
suggested with a large sample size to validate the current findings along with exploring Socially
whether any new theme emerges. As the target respondents of this study were the experts of responsible
SRI sukuk investment, the results might not be generalizable ultimately to the views of
actual SRI sukuk investors. Thus, a further investigation is welcome in which only actual
investment
SRI sukuk investors would be interviewed to explore motivational factors and challenges
associated with SRI sukuk in contrast to traditional investment in Malaysia. Furthermore,
quantitative studies are required to understand the theoretical phenomenon concerning the
relationships between motivation factors, challenges and intention to invest in SRI sukuk.
Despite having these drawbacks, the findings may help the stakeholders to rethink how
they can resolve the challenges related to SRI sukuk investment and successfully unlocked
new capital to fund social investments in the Malaysian market.

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Corresponding author
Mahfuzur Rahman can be contacted at: mahfuzur@um.edu.my

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