Positive outlook for global sukuk industry

The global sukuk industry is expected to be one of the fastest growing segments of the Islamic finance industry with huge growth potential in the Gulf Cooperation Council (GCC) region, a report by the Dubai Chamber of Commerce and Industry has stated.
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.

In an August report from Kuwait Finance House, global primary sukuk market issuances amounted to US$7.95 billion in July, a 31.4% decline month-on-month compared to the US$11.6 billion volume in June. The subdued volume was attributed to Ramadhan, which occurred from late June to late July. 

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. 

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.

Bright outlook for global halal food and beverage market

The halal food and beverage market, which includes raw meats such as chicken and beef as well as processed foods and beverages, was worth US$1.1 trillion industry in 2013, states a research note by the Dubai Chamber of Commerce and Industry based on a recent study by Thomson Reuters in collaboration with the Dinar Standard. 

The report estimates that in 2012, the halal food and beverage market accounted for 16.6% of the global food and beverage market. By 2018, the market is expected to be worth US$1.6 trillion, a CAGR of about 6.9%.

The Dubai Chamber report was released on 10 August against the backdrop of the 10th World Islamic Economic Forum (WIEF), to be held in Dubai from 28-30 October 2014. One of the discussion points at the event will be halal food as a major component of the Islamic economy.

H.E. Abdul Rahman Saif Al Ghurair, Chairman of Dubai Chamber, said: “We see opportunities to enhance the halal food industry. The research finding on halal food sector is of considerable importance for the UAE food and beverage business, especially since halal food is a key pillar in the Dubai Capital of Islamic Economy initiative launched in 2013. Based on the initiative, Dubai has the capability to create new avenues for growth in this sector, and become an international centre for the halal industry.”

According to the Dubai Chamber report, the UAE halal food consumption market was valued at around US$20 billion in 2012. Halal meat is an important component of this market, dominated by unpackaged meat which, according to 2013 estimates, accounted for 78.7% of the market.

Most of the meat sold in the UAE is uncooked, with retail sales accounting for 43.8% of the UAE raw meat market in 2013 while the food service business, including hotels, restaurants and catering outlets, constituted 47.9%.

Highlighting the preference of UAE residents for packaged food as they look for convenience in their busy lifestyle, the research note shows that packaged food worth about AED11,148 million was sold in the UAE in 2013. Increasing demand is expected to take the packaged food market to AED14,078 million by 2018, with sales value growing at a CAGR of 4.78% during this period, indicating a long-term business opportunity for halal food in the UAE. The report identifies branding and franchising in this area as critical to UAE businesses looking to increase profit margins, and new opportunities for international expansion.

Globally, the halal food industry is growing in a number of markets mainly in countries in the Middle East and North Africa (MENA) region, South and Southeast Asia. Indonesia is the biggest halal food market with a market value of US$197 billion in 2012, according to the report. Turkey, with US$100 billion, is the second largest market.

The report highlights the potential for UAE businesses to source lower cost basic food products from a variety of countries across Africa, Asia and Latin America, which can then be further processed, packed and branded to be sold in international markets. 

Dubai imports its meat from different sources. Based on Dubai Customs data, Brazil accounted for more than half of Dubai’s meat imports in 2013, supplying 166 thousand metric tons (TMT) of the total volume of 314 TMT to take 53% of market share, far ahead of the US at second place with 14%, the Dubai Chamber stated. The US exported 43 TMT while Australia was a distant third with 27 TMT, taking just 9% market share. Among the neighbouring countries, Pakistan and India each supplied 5% of the total volume, while Ethiopia cornered 3%.

Business opportunities in global halal food market are not limited to food production, but span the entire halal food value chain. This value chain includes businesses providing inputs such as seeds and fertilisers, farms raising livestock, businesses providing technology for food production, food processing facilities, logistics companies moving perishable food items, importers of food and finally retail outlets selling halal food products, the Dubai Chamber states in the report. Innovation across this value chain could therefore be a driver helping in the search for new markets and greater profits, it adds.

With economic indicators pointing to accelerating growth of the economy of Dubai and the UAE in the coming years, growing manpower requirements will lead to an increase in population, which in turn will raise imports of food, particularly meat which constitutes a major component of the population’s diet, the report states.

Finance industry shifting towards Islamic finance

As part of the preparation for the 10th World Islamic Economic Forum (WIEF), the Dubai Chamber of Commerce and Industry has issued a report based on a study by EY noting that global Islamic banking assets have seen a cumulative annual growth rate of about 16% from 2008 to 2012, reflecting the radical shift from conventional financial system in favour of Islamic finance. 

The 10th WIEF will be organised in Dubai by the Dubai Chamber and the WIEF Foundation from 28 to 30 October 2014.

Islamic banking products and services have consistently gained market share in recent times, growing up to 50% faster than the traditional banking sector in some markets. The UAE is emerging as a serious player in this sector with total Islamic banking assets worth about US$95 billion in 2013 compared to US$83 billion in 2012. This momentum is unlikely to lose steam as the Dubai Chamber report shows that the compound annual growth rate (CAGR) for Islamic banking assets in the UAE is expected to be about 17 per cent over the period 2013-2018.

“The report by Dubai Chamber shows that the prospects of Islamic banking are very promising as indicated by the significantly high growth rates of Islamic banking total assets,” said H.E. Hamad Buamim, President and CEO of Dubai Chamber. “The research note supports Dubai’s recognition of Islamic finance as a key pillar in the strategy to position itself as the centre for Islamic banking and finance as part of the Dubai Capital of Islamic Economy initiative.”

"Dubai has the potential to shape the course of the massive Islamic economy, and this is reflected in the choice of Dubai as the venue for the 10th World Islamic Economic Forum (WIEF). The Forum comes as a unique opportunity for Dubai to give a new direction to the Islamic finance industry, and help consolidate efforts, share knowledge and experiences to leverage the emerging opportunities in the changing dynamics of the global economy,” H.E. Buamim added.

The report estimates that there are 38 million Islamic banking customers around the world with two thirds of them in Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (also known as the QISMUT region). Among these six prominent Islamic finance countries, Saudi Arabia is the biggest market in terms of Islamic banking assets with estimated value of about US$285 billion in 2013 compared to US$245 billion in 2012. 

The research note also shows that Saudi Arabia represents about 43% of the total Islamic banking assets in all the six countries. It also accounts for about 53% of Saudi Arabia’s total domestic banking assets.

According to the World Islamic Banking Competitiveness Report 2013–14, while one-fifth of the banking system assets across QISMUT have transitioned to Islamic banking, in Saudi Arabia, supply push has seen share of Islamic banking cross 50% of system assets.

In 2012, QISMUT was one of the fastest growing markets for Islamic banking, with total Islamic banking assets worth about US$567 billion and registering a CAGR of 16.4% over the period from 2008 to 2012.

The Dubai Chamber research also shows that the global Islamic banking profit pool is projected to reach US$30.5 billion by 2018, driven mainly by a higher retail focus. In 2012, the QISMUT Islamic banking profit pool was estimated at US$9.4 billion and it is expected to reach US$26.4 billion by 2018.

Commenting on the findings, Ashruff Jamal, PwC Global Islamic Finance Leader, said: “Dubai is powering ahead with the creation of its recently announced ‘Capital of the Islamic Economy’ initiative. A number of the building blocks of this initiative, spanning seven key pillars, are already in place as the emirate eyes the US$8 trillion global Islamic economy which accounts for approximately 11% of Global Gross Domestic Product. This will inevitably position Dubai as the global destination of choice for Islamic products, finance and services, encourage public-private partnership in this rapidly growing sector as well as attract local and foreign investments as the emirate ramps up for Expo 2020.”

Jamal added: “A fundamental part of the global Islamic economy is the Islamic finance sector, which is witnessing rapid growth as Islamic financial institutions look to deploy their liquidity into regional and international expansion such as the acquisition of Barclays’ retail portfolio by Abu Dhabi Islamic Bank, and Dubai Islamic Bank’s acquisition of a 25% stake in Indonesian Islamic lender Bank Panin Syariah. Another ‘first’ is the recent announcement of an Islamic Exim (export-import) bank which will be the only institution of its kind in the world with three unique features; it will be Shari'ah compliant, trade based and run largely by the private sector.”

Highlighting Dubai’s status as a leading financial centre for the issue of sukuk, Jamal said: “Dubai’s Islamic capital market is witnessing rapid expansion with more than US$16 billion of sukuk expected to be in issue by the end of this year with Dubai’s sovereign sukuk being ranked as one of the world’s best performing instruments.”

The Dubai Chamber report, however, points out that many Islamic retail banks suffer from lower profitability than the conventional banks, mainly due to higher expenses attributed to complex products, lengthy process steps and more interfaces. It is estimated that on average leading Islamic banks posted 19% lower return on equity (ROE) than comparable conventional peers. The average ROE for the top 20 leading Islamic banks is about 12.6%, compared to an average of 15% at comparable conventional banks, it states.

The Dubai Chamber research note supports recent indications that Islamic finance is extending reach, particularly in the Middle East and North Africa (MENA) region. According to Kuwait Finance House 2013 estimates, the MENA, excluding the Gulf Cooperation Council (GCC) states, remains the focal market for Islamic finance, with US$599.4 billion in total assets, followed by GCC with US$536.9 billion assets. Islamic finance is also gaining ground in North America and Europe with banking assets worth US$59.8 billion and total assets reaching US$71.6 billion in 2013, reflecting the industry success in transcending barriers to gain greater market share in new areas.