Five major trends are having a significant bearing on the future development of the global sukuk market. Firstly, the bond market is now becoming key to meeting the funding requirements for both the public and private sectors in emerging market economies. This is particularly the case for the Middle East and Asia, which are among the fastest growing regions in the global economy. This includes financial needs of the private sector following the privatisation and implementation of infrastructure projects. The development of the Islamic Bond Market, the Sukuk Market will provide opportunities for the corporate sector, the government agencies, multinational corporations and multinational development institutions to raise funds through the issuance of sukuk to meet their financing requirements. The sukuk market also serves as an important platform, complementing the conventional bond market, in enhancing the effectiveness and efficiency for the mobilisation and allocation of funds within the domestic financial system, as well as in the international financial system. Secondly, while there has been growing interest in the issuance of sukuks by corporations, sovereigns and multinational corporations, the demand for sukuks significantly exceeds the supply. Today, the global sukuk market, denominated in international currencies, is estimated to exceed USD50 billion. Although the size of the market is modest by global standards, the sukuk market is experiencing remarkable growth, increasing at an average rate of growth of forty per cent per annum. The significant demand for sukuks have been spurred by the high levels of surplus savings and reserves in Asia and in the Middle East.
Applying these tools to central banking operations is both easier and harder than in the private sector. Easier, because there is no tension between profit and risk: central banking operations are always designed with risk in mind from the start. But harder, because the events in which central banks are called on to act often lie in the very tails of the distributions, making it hard – often impossible – to calibrate risk tolerance using historic data. And many of our operations are not discretionary, but reflect policy imperatives: so binding risk limits which, if applied, might cause a policy to be aborted mid-course, have little chance of success. At the Bank of England, we have responded to these challenges in three ways. First, we have adopted a risk tolerance that, though qualitative in nature, recognises the importance attached to the safeguarding of public resources and the priority placed on ensuring that policy decisions are always made in full knowledge of the financial risk implications. As I have described, maintaining monetary and financial stability – the Bank’s policy mission – can sometimes mean we have to take on material levels of risk ourselves. But where we do that, we should take on no more risk than is necessary, and we should do so with our eyes open, conscious too of the tradeoffs between financial and non-financial risk.