LONDON: The proportion of sukuk bond issuance hit a record of over $11billion in the first quarter of 2016 in the main markets for this form of finance, according to Fitch Ratings’ analysis.
The data reinforces a trend of gradually increasing use of sharia-compliant borrowing as more countries create legal frameworks to support issuance and as issuers attempt to attract a broader investor base, including Islamic finance investors.
Total new sukuk issuance (with a maturity of more than 18 months) in the Gulf Cooperation Council, Malaysia, Indonesia, Turkey, Singapore and Pakistan was around USD11.1bn in 1Q16. Issuance was up 22% from 4Q15 and 21% from a year earlier, while non-sukuk bond issuance of USD17.1bn was down 23% qoq and 45% yoy. Sukuk represented 39.3% of total bond and sukuk issuance in these countries during the quarter – the highest proportion in the past eight years.
The proportion of sukuk issuance in five of the last six quarters has now been above the average since the start of 2009. We expect sukuk issuance, both overall and as a proportion of total issuance, to remain relatively strong in the second quarter based on the pipeline of deals and the potential for some governments to issue debt to make up for weak oil revenues. The third quarter is likely to be quieter, due the combination of the summer break and Ramadan. Overall our expectation is for 2016 sukuk issuance to at least match 2015 issuance.
New sukuk laws in some countries should support issuance by helping create a standardised structure and improving transparency. The most recent country to update its sukuk regulation is Oman, where a new law was published last week that includes requirements to set up a trustee structure and a special purpose vehicle. This follows new rules in Kuwait in 2015, where the lack of a specialised legal framework was as a key factor in the limited issuance in the country for the previous few years.
Issuance in 1Q16 was led by sovereigns and supranational, including USD2.5bn by the Indonesian government and USD1.5bn by the Islamic Development Bank. These types of issuer are likely to remain dominant, but there is also the potential for bank and corporate issuance, especially as bank liquidity has become tighter as oil prices have dropped.
Given the difficult economic environment issuers are likely to favour issuing a mix of bonds and sukuk, or solely sukuk, rather than solely bonds, as they will not want to exclude part of the market. The Islamic banking sector, for example, is not allowed to invest in traditional bonds, while regional and international investors are increasingly comfortable investing in sukuk.
