Growth in global sukuk issuance that was around $100 billion in 2017 is expected to remain muted this year although issuance volumes are likely stable, thanks to the continued demand for funds from GCC sovereigns and government related entities.

Last year, nearly 80 per cent ($79 billion) sukuk issued had longer maturities (exceeding one year). This was the second highest long-term issuance in history after the $83 billion issued in 2012. The recent growth was driven by large GCC sovereign issuances.

“We expect sukuk issuances to remain broadly stable between $90- $100 billion in 2018, again driven largely by sovereigns, although the recent recovery in oil prices could potentially lower financing needs,” said Nitish Bhojnagarwala, and VP and Senior Analyst at Moody’s.

Corporate and asset-backed sukuk activity was muted in 2017 because of more attractive conventional market opportunities and analysts expect the same in 2018. Longer term, issuances in these sectors could be a source of growth underpinning the industry’s potential.

Government leads

GCC sovereigns were the largest sukuk issuers last year, reversing a trend in 2016 where they opted for conventional bond issuance over sukuk for liquidity. Although the financing needs of sovereigns, banks and corporates in the GCC have decreased in recent months due to higher oil prices, these issuers are expected to continue to support the industry.

Analysts say there is a certain amount of uncertainty on sukuk issuances in the context of tightening global liquidity, rising cost of funds and recent pick up in oil prices.

“While we still foresee significant financing needs for core Islamic finance countries, tighter global liquidity conditions, mounting geopolitical risks, and slow progress on the standardisation of Islamic finance products will continue to hold the market back from its full potential,” said S&P’s credit analyst Mohammad Damak.

Malaysia continues to dominate global sukuk issuance volumes both in the long- and short-term market. In 2017, issuances by Malaysian corporates, financial institutions and the sovereign represented 34 per cent of total global issuances.

Sukuk market activity is also supported by specialised multilateral entities, such as quasi-sovereigns, central banks and supranational entities, including the Islamic Development Bank (IDB), the International Liquidity Management Corporation (IILM) and the Arab Petroleum Investments Corporation (APICORP). These entities have become regular issuers, accounting for around 10 per cent of total sukuk issuance over the last 12 months including government-related entities.

“They play a key role in supplying the sukuk market with high quality issuances much needed by Islamic banks that face a deficit in instruments necessary for efficient liquidity management, a situation further exacerbated by new regulatory requirements under Basel III,” said Bhojnagarwala.

Banks drive demand

In addition to governments’ diversification considerations and financing requirements, increasing demand from domestic banks will underpin future growth in sukuk issuance. Moreover, continued product innovation will help overcome some of the structural constraints that have historically prevented sukuk markets from developing more rapidly.

Though GCC countries drove the market’s overall growth in 2017, a number of other regions also helped develop it over the years. Analysts expect sovereign sukuk issuance volumes to continue to grow in 2018 as governments look to diversify their financing mix and support their strategic objectives of expanding the Islamic finance market both locally and globally. Sovereign issuances (including government-related entities and multilateral development banks) increased by 44 per cent in 2017 compared to a year earlier, reaching $55 billion.

Sovereigns accounted for 70 per cent of total long-term issuances in 2017. Moody’s estimate that total sovereign sukuk volumes will remain stable in 2018 although some of the large issuances in 2017 may not be repeated in 2018, driving a marginal decline in the overall value.

GCC countries and particularly Saudi Arabia — which raised the lion’s share of sukuk $27 billion) — drove last year’s higher issuances. The region’s gross financing requirements increased with the oil price shock, and as such, could fall this year if the recent recovery in oil prices persists. Nevertheless, GCC sovereigns are diversifying their funding towards a combination of conventional and Islamic instruments, reflecting a cultural affinity to the sector and in order to support their governments’ respective Islamic finance agendas.