Global sukuk issues jump 45% to reach $97.9b

Muscat: Global sukuk issuance in 2017 increased by 45.3 per cent, reaching $97.9 billion, up from $67.4 billion in 2016, underpinned primarily by the jumbo issuances of some Gulf Cooperation Council (GCC) countries.
After a strong performance last year, it is unclear whether the global sukuk market can stage a repeat performance in 2018, according to a report — “Global Sukuk Market Outlook: Another Strong Performance In 2018?” — published on Monday.
“Driving this performance were good liquidity conditions in the GCC and, more generally, globally, as well as activity by some countries with the goal of further developing their Islamic finance industries,” said S&P global ratings head of Islamic Finance Dr Mohamed Damak.
Moreover, some issuers (particularly in Saudi Arabia) were able to choose sukuk over bonds because they were less pressed for time to raise funds.
In comparison, the outlook for sukuk in 2018 is uncertain. While the report still foresees 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 reaching its full potential.
The report anticipates several interesting trends in the market that are likely to shape its performance in 2018 and beyond. These include a more stringent application of the profit-and-loss sharing principle and a broadening of the investor base to include retail and waqf money.
“While we do not opine on Sharia compliance, we are of the view that a more stringent application of the profit and loss sharing principle could deprive the market of an important class of investors (fixed-income investors) and ultimately lead to higher pricing,” noted Dr Damak.
From a rating perspective, one can rate sukuk issued by the financial institutions with loss-absorption features. However, it is unlikely that such sukuk would receive the same rating as their sponsors, as the risks are likely to be higher.
Although it is not the report’s role to advise waqf investors on asset allocation, it observes they are generally not after profit maximisation but rather the fulfilment of certain social objectives. In addition, in light of the significant oversubscription of most sukuk, the report thinks softness in the market is due to a lack of supply rather than demand.
Regarding retail sukuk, the report believes that the development of this part of the market necessitates a specific regulatory framework to protect investors and ensure proper access to information on risks. Retail sukuk issuance has been successful in some countries where, for example, authorities provided a tax incentive to drain a portion of the savings toward this market.
In the GCC, there is no opportunity for tax relief; local capital markets remain narrow; and the significant amount of unremunerated deposits on the banks’ balance sheets suggests that remuneration is not the primary motive for some retail depositors. Only a rating committee may determine a rating action, and this report does not constitute a rating action.