The strong momentum of the sukuk market is underpinned by the increasing demand for sukuk, especially sukuk of high credit ratings, from Islamic investors. Over the years, the Gulf region has accumulated a huge amount of oil revenue. The  1  Source: KFH Research  2  Source: KFH Research  3  Source: Zawya  BIS central bankers’ speeches  1  current account surpluses in the Gulf Cooperation Council (GCC) countries last year were estimated to be more than $ billion,4 while assets under management by sovereign wealth funds in those countries amounted to as much as $ trillion at the end of last year.5 Islamic investors in the Middle East and other Islamic countries generally have a preference for investing in Shariah-compliant assets. With the expanding liquidity pool in the Islamic world, naturally, there is a commensurate increase in the demand for Islamic investment instruments globally. 7. As an international financial centre and given our unique role as a gateway to China, Hong Kong is well-positioned to provide an effective platform to channel the surplus funds from the Islamic world to this part of the world where there is a huge financing need to sustain the high growth of the Asian economies. Our platform will enable Islamic investors to access investment opportunities in Asia, particularly China, while at the same time allowing fund raisers to tap into the liquidity pool in the Islamic world. 8. What’s more, sukuk are becoming a mainstream asset class in the global financial system.
Yet there is an effective limit to lowering rates since ultimately this conflicts with the ability of citizens to hold cash. Therefore some scholars have called for the imposition of electronic money and the abolition of cash. As I have discussed at length elsewhere, I see serious problems with such an approach.8 It risks gambling with central banks’ credibility at a time when credibility is paramount. And perhaps even more importantly, it denies the crucial social function of cash. Another option proposed by some observers is for central banks to raise their inflation objectives and therefore to lift equilibrium nominal rates. Leaving aside the debate about the costs of higher inflation, I am not sure that this idea is entirely convincing. The reason is that the mechanism through which it works is the signalling channel – people expect higher inflation, so inflation rises. But at a time when inflation is low everywhere, and when central banks are running very accommodative monetary policies just to achieve that, one can question whether such signals would really be credible. I see a risk, in fact, that changing our strategy to rely on fuzzy concepts and unobservables would only end up damaging our credibility. So what we need today, in my view, is to shift the debate away from its narrow focus on monetary policy. Rather than concocting more and more innovative solutions for central banks to get around the lower bound, we should focus instead on what other policy areas can contribute.