”Conduits” are the more common of the two and account for almost 80 per cent of the outstanding stock of asset-backed commercial paper. An SIV has a more advanced construction than a “conduit”. It is usually highly leveraged, 15-20 times the equity capital. It is not necessarily tied to a bank and the financing is largely for longer durations. But the need for financing in the short-term money market is nevertheless crucial. Although the investment companies in themselves are not banks, they conduct bank-like operations; they have their own balance sheets and names and are in principal independent of the banks. But if an investment company is for some reason unable to issue new corporate certificates when the old ones fall due for payment, the bank guarantees the ability to pay, wholly or partly. The guarantees may be of a formal nature, where the bank commits itself to redeeming the certificate if the investment company is unable to do so. But a guarantee can also be of a more informal nature and based on the bank being unwilling to abandon its investment company in order to protect its name and reputation. Whichever is the case, it means that if an investment company linked to a bank faces financing difficulties, the problem is referred back to the bank, which must provide the company with sufficient liquidity for a short period of time. This is to some extent reminiscent of the situation during the Swedish financial company crisis, which started the 1990s bank crisis.
At the same time, more and more conventional investors are also looking to diversify their portfolios into sukuk as a new asset class. So, issuing sukuk would enable fund-raisers to enjoy a wider and more diverse investor base. 20. Second, you would be able to diversify your funding sources. With the additional option of sukuk in your arsenal, you can choose to issue either conventional bonds or sukuk, depending on the pricing and liquidity in the market at the time of issuance. This would provide more flexibility and a more stable source of funding to fund-raisers, particularly at a time when the funding cost of sukuk is more attractive than that of conventional bonds or when there is difficulty in obtaining liquidity in certain markets. 21. Having said that, sukuk remain a relatively new product type in Hong Kong’s financial market. Some of you may have questions about the mechanics of sukuk, such as what would be suitable underlying assets, how to ensure Shariahcompliance, etc. Malaysia’s experience has clearly shown that there are readily available solutions to address these issues. In particular, while sukuk are assetbased, a number of different sukuk structures are available. So, for companies that do not have much fixed assets, some asset-light sukuk structures may be utilised to  BIS central bankers’ speeches  3  overcome issues concerning availability of tangible assets. I am certain that the experts present here today will be able to provide more guidance and address such questions in detail in later sessions. Concluding remarks 22.