The report further noted that Dubai is a key centre for sukuk, which are expected to play an important role over the next decade in securing funds for the substantial line-up of new projects. The observations in the report, based on UK Islamic Finance Secretariat (UKIFS) and Malaysia International Islamic Financial Centre (MIFC) data, are important against the backdrop of the 10th World Islamic Economy Forum which will be organised in Dubai from 28-30 October 2014 by Dubai Chamber and the WIEF Foundation.
“Islamic economy has become increasingly relevant in the modern world, offering new hopes of revival for the fragile global economy. The 10th World Islamic Economy Forum in Dubai will put the spotlight on the massive opportunities available in various segments of this growing sector,” said H.E. Abdul Rahman Saif Al Ghurair, Chairman of Dubai Chamber.
“The Dubai Chamber research note highlights the sukuk market is one of the most attractive areas of Islamic finance that has attracted considerable interest from the business community worldwide. In addition, the sukuk market has remarkable growth avenues that can be effectively tapped to support the growing investment requirements in various sectors.”
While the GCC and Malaysia have emerged as the main hubs for issuing sukuk, the main issuers of the sukuk in the global market are sovereigns, followed by corporates and government-related enterprises. Countries such as Tunisia, Mauritania, Senegal and Oman are set to be key markets for sukuk, Dubai Chamber observes in the research note.
However, sukuk issuance is not limited to Islamic countries. In 2014, a number of high profile debut sovereign issues are expected to take place in countries such as the UK, Ireland, and South Africa. It is further anticipated that sovereign issues by the UK are likely to spur interest in Europe for sovereign sukuk as they provide access to the growing Islamic liquidity pool, the report says.
According to PricewaterhouseCoopers (PwC), over US$16 billion of sukuk are expected to be issued by 2014 with Dubai already emerging as a centre for this asset class. The UK, which announced its maiden sovereign sukuk issue at the 9th WIEF in London last year, has already completed the issue earlier this year. With so much activity in the sukuk market, development and implementation of laws and regulations for the issuance of sukuk has been introduced by a number of countries, PwC observes.
Currently, compared to the conventional bond market, the sukuk market is still relatively small. According to the Dubai Chamber research note, global financial assets are dominated by Islamic banking assets, which accounted for about 80% of the total assets in 2013 while sukuk made up just 15% of the market. However, the good news is that sukuk bond issuance has significantly grown over the last decade.
The Dubai Chamber report, citing data from Rasameel Structural Finance, shows that the issue of sukuk bonds has registered cumulative annual growth rate of about 47% from 2001 to 2013.
The upward positive momentum is more pronounced from 2010 when the global sukuk market, having overcome the initial shock of the financial crisis, witnessed a very successful run. In 2012 it crossed the US$100 billion mark with issues valued at about US$137 billion, and in 2013, it surpassed US$100 billion for the second consecutive year, despite slowing down 12% compared to 2012 with issues worth US$119.7 billion, the Dubai Chamber research note says.
The slowdown, which was evident during the first three quarters of 2013, has been mainly attributed to the Federal Reserve (Fed) announcement in May 2013 to cut-back on the US monthly stimulus programme. The report observes that the announcement by the Fed had a profound effect on the global bond market which saw prices of fixed-income instruments, including sukuk, falling sharply as fears spread that the reduced bond purchases by the Fed would push investors to higher yielding assets on an improving US economy. Now with the Fed’s aggressive bond-buying programme tapering since January 2014, sukuk issuance may again be impacted in 2014, the report states.
The report further notes that despite the huge potential for growth and the increased diversity of sukuk products, the market not only requires more instruments but existing ones need to be refined as some sukuk structures are yet to gain wider acceptance. The market is also struggling with legal uncertainty over regulatory disparity in different countries, Dubai Chamber observes in the report.
The upward positive momentum is more pronounced from 2010 when the global sukuk market, having overcome the initial shock of the financial crisis, witnessed a very successful run. In 2012 it crossed the US$100 billion mark with issues valued at about US$137 billion, and in 2013, it surpassed US$100 billion for the second consecutive year, despite slowing down 12% compared to 2012 with issues worth US$119.7 billion, the Dubai Chamber research note says.
The slowdown, which was evident during the first three quarters of 2013, has been mainly attributed to the Federal Reserve (Fed) announcement in May 2013 to cut-back on the US monthly stimulus programme. The report observes that the announcement by the Fed had a profound effect on the global bond market which saw prices of fixed-income instruments, including sukuk, falling sharply as fears spread that the reduced bond purchases by the Fed would push investors to higher yielding assets on an improving US economy. Now with the Fed’s aggressive bond-buying programme tapering since January 2014, sukuk issuance may again be impacted in 2014, the report states.
The report further notes that despite the huge potential for growth and the increased diversity of sukuk products, the market not only requires more instruments but existing ones need to be refined as some sukuk structures are yet to gain wider acceptance. The market is also struggling with legal uncertainty over regulatory disparity in different countries, Dubai Chamber observes in the report.
Corporate issuers throughout the global markets remained absent from the primary market with the exception of few corporate sukuk issued in Malaysia and a sole corporate sukuk issued in Indonesia. Collectively, these corporate sukuk produced a volume of US$1.16 billion, or less than 15% of the new issuances market share in July as compared to the US$5.24 billion volume or 45.3% market share in June.
Notably, the two global Islamic finance mandated multilateral entities, the Islamic Development Bank (IDB) and the International Islamic Liquidity Management Corporation (IILM) tapped the market in July, raising US$1.86 billion. The IDB issued a US$1 billion tranche on 17 July in a-privately placed transaction. This issue marks IDB’s third issuance this year following the US$1.5 billion publicly-listed tranche in March and a privately-placed US$100 million tranche in April.
Meanwhile, the IILM issued its third US$860 million tranche, as a re-issuance for the second tranche of the same volume issued earlier in April this year and that matured on 23 July. This latest issuance marks IILM’s seventh issuance to date since its inaugural issuance in August last year. The reissuance maintains IILM’s total short term sukuk outstanding portfolio at US$1.35 billion.
KFH said the global primary market volume has reached US$74.15 billion in the seven months of the year ending July 2014 (7M14), 6.8% higher than the US$69.42 billion volume in 7M13. Despite a decline in corporate issuances in July, sovereign and quasi-sovereign issuers have steered the market to ensure 2014’s annual issuances to date remain on track to overcome last year’s annual issue volume of US$119.7 billion.
The primary market activity was heavily concentrated in Malaysia which accounted for 80.6% or US$6.41 billion of the total new issuances in July (June 2014: US$6.1 billion or 52.8%). The Malaysian market was spearheaded by Bank Negara Malaysia, which issued over US$3.4 billion worth of short-term maturity sukuk. Approximately USD$931 million was also raised by two Malaysian government-related entities, Dana Infra Nasional (US$787.6 million) and Cagamas (US$144.5 million). In the Malaysian corporate sukuk sector, five issuers tapped the market in July collectively raising US$1.14 billion in proceeds.
Other than Malaysia, the primary sukuk market activity across global markets remained subdued. Obligors based in five other jurisdictions tapped the market, namely Saudi Arabia, Senegal, Indonesia, Bahrain and Gambia. The sole Saudi-originated sukuk issuance was by the Jeddah-based Islamic Development Bank which issued a US$1 billion tranche, accounting for 12.6% of the total monthly issuances volume.
KFH said the global primary market volume has reached US$74.15 billion in the seven months of the year ending July 2014 (7M14), 6.8% higher than the US$69.42 billion volume in 7M13. Despite a decline in corporate issuances in July, sovereign and quasi-sovereign issuers have steered the market to ensure 2014’s annual issuances to date remain on track to overcome last year’s annual issue volume of US$119.7 billion.
The primary market activity was heavily concentrated in Malaysia which accounted for 80.6% or US$6.41 billion of the total new issuances in July (June 2014: US$6.1 billion or 52.8%). The Malaysian market was spearheaded by Bank Negara Malaysia, which issued over US$3.4 billion worth of short-term maturity sukuk. Approximately USD$931 million was also raised by two Malaysian government-related entities, Dana Infra Nasional (US$787.6 million) and Cagamas (US$144.5 million). In the Malaysian corporate sukuk sector, five issuers tapped the market in July collectively raising US$1.14 billion in proceeds.
Other than Malaysia, the primary sukuk market activity across global markets remained subdued. Obligors based in five other jurisdictions tapped the market, namely Saudi Arabia, Senegal, Indonesia, Bahrain and Gambia. The sole Saudi-originated sukuk issuance was by the Jeddah-based Islamic Development Bank which issued a US$1 billion tranche, accounting for 12.6% of the total monthly issuances volume.
In Indonesia, sukuk worth US$188.12 million were issued in July, accounting for 2.37% share of the market. Notably, the Indonesian primary market witnessed the issuance of the jurisdiction’s first corporate sukuk of 2014, worth US$25.11 million by Bank International Indonesia. In 7M14, the Indonesian primary market has been entirely dominated by sovereign issuances by the country’s Ministry of Finance. Bahrain accounted for US$149.26 million, or 1.9% market share.
All issuers in July issued sukuk denominated in the respective local currencies of their domiciles. The only two exceptions were the multilaterals, the Saudi-based IDB and the Malaysia-based IILM, which issued in US dollars. Based on this, the Malaysian ringgit accounted for bulk of the issuances, representing 69.8% of the total market (June 2014: 54.9%). The US dollar was the second major currency accounting for 23.4% of the total market share, spearheaded by the IDB and IILM sukuk tranches worth a combined US$1.86 billion. The West Africa CFA franc (XOF) was a new entry in the global sukuk market following Senegal’s debut and accounted for 2.5% of the market. The market shares of the remaining currencies were as follows: Indonesian rupiah 2.37%; Bahraini dinar 1.9% and Gambian dalasi 0.01%.
By structure of issuances, the market share of murabahah sukuk increased a notch to 63.3% in July (June 2014: 50.6%) while that of ijarah declined to 6.5% (June 2014: 13.8%). None of the sukuk issued in July were structured as hybrids/combination, whereas these accounted for 18% of the total in June. The change is mainly on account of an absence of GCC-based sukuk issuers in July as the ijarah and hybrid sukuk structures are popular in the GCC. In contrast, murabahah is the most popular sukuk structure among Malaysian issuers that accounted for bulk of the sukuk issuances in July. The share of wakalah or wakalah bil istithmar sukuk surged to 23.4% in July (June 2014: 10.1%) spearheaded by the large tranches issued by the IDB and IILM respectively.
By sector, government issuances accounted for 50.3% or almost US$4 billion of total issuances in July (June 2014: 47% or US$5.44 billion), followed by the financial services sector with a 25.7% or US$2.04 billion share (June 2014: 31.2% or US$3.62 billion). Power and utilities was the other major sector in July accounting for 13.7% or US$1.09 billion of the issuances volume while the real estate and construction sector accounted for the remaining 10.3% or US$820 million of the volume issued in July.
Overall, a total of 78 sukuk tranches were issued in July, an increased number compared to the previous months (June 2014: 65; May: 62; April: 68). This increase is mainly due to the greater amount of issuances by Malaysian issuers that generally issue several smaller-sized tranches under one sukuk programme. For example, 33 corporate sukuk tranches were issued by five Malaysian corporate entities in July, and were worth a combined US$1.14 billion. Comparatively the GCC issuers have traditionally issued single but larger value tranches.
Among the sukuks issued in July, 34 tranches were issued by the corporate sector totalling US$1.16 billion which compares with the 32 sukuks issued in June, worth a much higher US$5.24 billion. The value of corporate sukuk in June had been substantially uplifted by huge tranches issued in Saudi Arabia, the UAE and Turkey where corporate issuers had timed the market ahead of the month of Ramadhan.
Meanwhile, sovereign issuers issued 32 sukuk (including short-term central bank sukuk) worth US$5.86 billion in July, a slight increase compared to the 29 sukuk worth US$5.44 billion issued in June. Similarly, 12 government-related entity sukuk were issued in Malaysia in July, worth US$931.1 million, against the four sukuk worth US$902 million issued the month before.
Moving forward, KFH notes that a strong pipeline remains in place for the rest of 2014. Particularly in the sovereign sukuk sector, debut pipeline issuances in 3Q14 include Hong Kong, the Emirate of Sharjah and also potentially Oman. The horizons of the sukuk market continue expanding as more and more jurisdictions tap the market with an increased number of business sectors issuing sukuk.
To date, KFH predicts that at least 29 jurisdictions have tapped the sukuk market (excluding offshore domiciles) and more are expected to follow suit, particularly in Africa. Overall, based on 2014’s performance so far, the outlook for the global sukuk market remains promising and it is expected that 2014 may turn out to be another record breaking year compared to 2012’s annual issuances volume of US$131.2 billion.