The sukuk market to be on trend to break records

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Of all the developments in Islamic capital markets, the emergence of sukuk has been one of the most significant. What’s been driving the growth of sukuk, and how can we expect this financial tool to mature in the coming years?

The emergence of sukuk has been the most prominent trend in the Islamic finance sector in the past decade, with total outstanding issuance now likely over $270 billion.

According to the Malaysia International Islamic Financial Centre (MIFC), this number reached $269.4 billion at the end of last year, a 17.5 percent rise on the year earlier figure.

Current-year data shows the sukuk market to be on trend to break records. As of June 20, Dealogic said Islamic bond issuance stood at $20.7 billion for 2014 year-to-date (YTD), the highest YTD total on record and up 15 percent on the $18.0 billion raised in 2013 YTD, although deal activity was down slightly.

Across the world, sukuk activity is becoming more pronounced as a fast-growing Muslim population seeks products compliant with Islamic law and principles. Non-Muslims, too, are increasingly regarding Islamic banking as a mainstream finance option.

“For some, using sukuk is a matter of principle, for others the question is pragmatic; they will do so if the terms are better than for a conventional bond,” said Mohammed Dawood, global head of sukuk financing, HSBC.

“Greater availability of sukuk offers more choice to companies and investors and allows issuers to offer products tailored to specific needs. This has underpinned the growth of the market both inside and outside its core countries.”

According to Dawood, another driver of sukuk’s stellar growth curve is innovation. “Two years ago, the sukuk market was limited and bonds were mostly restricted to five years or less. Now there are longer-term offers, perpetual bonds, and “hybrid capital” issues allowing a mix of debt and equity.”

Since 2008 Malaysia has led global sukuk issues, followed by Saudi Arabia and the UAE. Dubai, in particular, has made a firm push to become the global capital of the Islamic economy, underlined by its recent flood of sukuk announcements.

The Dubai International Financial Centre, the emirate’s main financial free zone, is planning to issue an Islamic bond worth around $700 million this year to refinance old debt and fund infrastructure development, Essa Kazim, the government-owned DIFC’s governor, announced in September this year.

Going Global

What’s more, the Islamic Development Bank announced it would issue a $10 billion sukuk to be listed on the Dubai NASDAQ in 2014, with plans to make this issuance regular on an annual basis.

Along with the traditional strongholds, new and emerging jurisdictions that have tapped into the global corporate and sovereign sukuk markets following the financial crisis include Azerbaijan, Turkey and the UK in 2010; Hong Kong, Jordan and Yemen in 2011; France, Germany and Kazakhstan in 2012; and Luxembourg, Mauritius, Nigeria and Oman in 2013.

In a major shift for the world of Islamic financing, the UK became the first country outside the Islamic world to issue sovereign sukuk this year. On 25 June, the UK government announced that £200 million of the sukuk, maturing on 22 July 2019, had been sold to investors based in the UK and in the major hubs for Islamic finance around the world.

Andy Baldwin, global financial services leader, EY, said: “One of the key reasons the UK has been such a keen supporter of the Islamic finance industry is that the government recognises the important and increasing role Islamic finance is playing in the world economy as the flow of capital become less determined by Western economies.”

In the coming years, the need for large investment in infrastructure, notably in Asia and emerging markets, could offer stellar opportunities for sukuk issuance

Meanwhile, experts predict that sukuk products are set to experience a continued high growth rate, attracting new investors globally.

“Sukuk as an asset class and as a Sharia-compliant fixed income instrument could possibly quadruple, primarily due to strong demand from core Islamic finance markets, as well as new markets,” said Ashar Nazim, global Islamic finance leader, EY.

“Sovereigns currently dominate sukuk issuance but the mix will evolve in favour of large corporates from emerging and European markets.”

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