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Global sukuk issuance poised for a big leap

Rating agencies see big surge in sukuk issuance

Gulf News

Dubai: Global sukuk issuance is expected to maintain its positive long-term growth driven primarily by growing demand for Islamic banking assets and the increasing familiarity of both Islamic and conventional investors with these instruments, according to two new studies by rating agencies Moody’s and Standard & Poor’s.

Additional drivers include the promotion of Islamic financial services by governments of Muslim countries and the increasing standardisation of unsecured sukuk structures.

“The strong growth and high likelihood of continued sukuk issuances reflect the growing investor comfort with these instruments as well as the increasing funding needs of sovereigns, corporates and banks, particularly in Islamic countries across the Gulf and Asia,” says Khalid Howladar, a Moody’s Senior Credit Officer . “Existing issuers as well as new entrants — non-Islamic sovereigns, traditional corporates and infrastructure projects — will become increasingly at ease with tapping Islamic money alongside more conventional funding.”

S&P expects demand for sukuk by corporate and infrastructure issuers in the GCC region likely to continue growing at a double-digit pace in the year or two ahead, and could pick up in Malaysia after a weak 2013.

Refinancing requirements

“Support for the market is coming from refinancing requirements, a huge need to finance infrastructure projects, the pullback in bank lending, and supportive governments, though investor uncertainty continues to hold back even stronger growth,” said Standard & Poor’s credit analyst Karim Nassif.

Moody’s says that 2013 was marked by challenging conditions in emerging markets, and issuance of sukuk amounted to around $50 billion, lower than the record volumes of 2012. However, given the difficult operating environment, this level reflects positively on investor appetite for Sharia compliant instruments and that 2013 issuance will reach levels slightly in excess to those recorded in 2011, when $51 billion of sukuk were issued.

“Over the past decade we have seen structural improvements in the sukuk market, with the growing issuer and investor base bringing with it market breadth, liquidity and product innovation. In particular, market depth is increasing with the emergence of new instruments, such as amortising structures and more equity-like features,” said Rehan Akbar, an analyst at Moody’s. “Longer maturities in excess of five and seven years are now more common and Sukuk are becoming a growing part of issuers’ funding mixes for all types of borrowers” he says.

However, despite the increasing volumes Moody’s notes the market is likely to remain fragmented “Although Malaysia and the Gulf will continue to dominate new issuance, many jurisdictions have expressed their ambitions to become regional hubs for Islamic finance” said Howladar “In addition to providing supportive legislation, those centres that establish a critical mass of sukuk supply and demand will be more likely to succeed in their goals”.

Malaysia and the Gulf countries will continue to dominate new issuances, although Turkey and Indonesia have the potential to become key sukuk markets in the long term. Issuance volumes will remain concentrated in regions that have a natural cultural affinity with the sector, such as in the GCC markets, where Islamic banking asset estimates range from 10 per cent in the UAE to 50 per cent in Saudi Arabia, although compared to Malaysia there is still a relative shortage of institutional, long-term investors such as pension or takaful funds that are necessary for the market to reach its full potential


Global trends in sukuk issuance