Dubai: Sukuk issuance by regional governments, corporates and banks are expected to lag conventional offerings this year according to rating agencies, bankers and analysts.
In terms of instrument type, bonds dominated the market during 2016 while sukuk issuance took a backseat, although globally sukuk issuance was slightly higher than 2015.
Sukuk issuance for the MENA region declined for the third consecutive year by 25 per cent in 2016, slightly lower than the 27 per cent decline during 2015. On the other hand, bond issuance jumped from $42 billion (Dh154.26 billion) in 2015 to $75.8 billion during 2016, a surge of more than 80 per cent.
“The decline in sukuk issuance in 2016 came primarily as banking liquidity came under pressure due to the decline in oil deposits and this could have affected the demand for Sharia-compliant instruments from Islamic banks and funds. As a result, sovereigns had to rely on international investors to raise funds,” said Faisal Hasan, Head — Investment Research at Kamco.
The market is slowly accepting the evidence that the process of issuing sukuk can be painful and it has become more reticent in issuing such instruments. The relative ease of conventional bond issuance has prompted many regional sovereigns to tap the bond markets instead of sukuk markets.
“A government that needs money to pay civil servants or contractors will not ask them to wait for few months until its sukuk is issued. Rather, it will go to the conventional markets,” said Mohammad Damak, Director — Global Head of Islamic Finance, Standard & Poor's.
Contraction in local liquidity and global liquidity are also contributing to the woes of the sukuk market. Local liquidity, in Islamic finance core markets, depends largely on the oil sector.
Global sukuk issuance increased marginally by 2.2 per cent in 2016 to reach $77.1 billion as compared to $75.4 billion during 2015. This increase was much smaller than the 5.5 per cent growth seen in 2015. The deceleration in growth was primarily due to the fall in sukuk issuance by Malaysia to $28.2 billion in 2016 compared to $34.4 billion in 2015), in addition to the GCC countries that recorded a decline of $2.2 billion in 2016.
“A decision by Malaysia’s central bank to halt short-term issuance, in conjunction with challenging emerging market conditions and GCC focus on international investors, has led to subdued global issuance volumes,” said Khalid Howladar, Global Head of Islamic Finance at Moody’s.
New sukuk issuance volumes have remained subdued by more challenging economic conditions in emerging markets and the Gulf Cooperation Council (GCC) desire to tap conventional liquidity from international investors, as quantitative easing has driven yields to zero or even negative rates in various markets.
Malaysia continued to dominate the market accounting for 38 per cent of total global sukuk issuances in 2016 compared to 47 per cent during 2015 followed by Indonesia at 27 per cent and Cayman Islands at 12 per cent. Despite the significant push by GCC countries to promote sukuk, the overall region accounted for a minuscule portion of the global sukuk market accounting for 7 per cent in 2016, lower than a 10 per cent share during 2015.
In terms of issuer breakdown, corporates dominated the sukuk market during 2016 with an even higher share of the total pie during the year. Total sukuk issuance by corporates increased by $7.4 billion during 2016 to reach $50.4 billion or 65 per cent of total amount issued in 2016. Sovereign issuances declined by $5.8 billion or 17.8 per cent during 2016 to reach $26.6 billion due to a shift in preference favouring conventional bonds.
