Total volume of Sukuk issuances is expected to reach $75-80 billion in 2017, according to Standard and Poors (S&P) Global Ratings.
The rating agency in its latest report said that issuance increased by 37.7 per cent in the first six months of this year compared with the same period of 2016, underpinned primarily by the jumbo issuances of some Gulf Cooperation Council (GCC) countries’ governments.
Over the past 18 months, the stabilization of oil prices, the policy response of GCC governments, and the issuance of large bonds helped reduce liquidity pressure on some GCC governments. After tapping the conventional markets, they have now turned to the Sukuk market to diversify their investor base and tap pockets of local and regional liquidity.
The rating agency expects GCC states’ financing needs to touch around $275 billion between 2017 and 2019 And around 50 per cent of this will be debt-financed, through a combination of bonds and Sukuk, the agency said.
“GCC banks tend to keep sizable amounts of cash and money market instruments on their balance sheets. In their current challenging operating environment, marked by lower opportunities for lending, we think that some of them might divert a portion of their liquidity toward assets that generate higher income compared with cash and money market instruments. In this context, bonds and sukuk appear more attractive than interbank deposits or deposits with the central banks,” the rating agency said in its report.
Issuing Sukuk is still more time-consuming and complex than issuing bonds, but the time and cost gap has reduced over the years.
In the first half of 2017, we have seen the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) along with other heavyweights in the financial industry, pushing the market toward greater standardisation. AAOIFI issued standard exposure drafts on Central Sharia Boards and Sukuk accounting.
“While the AAOIFI’s actions respond directly to the complexity related to Sharia compliance and legal structuring of Sukuk, the process of Sukuk issuance is still not as smooth as the process for issuing a conventional bond. Until we reach that point, we think that issuers will tend to have a preference for bonds,” the report said.
Sukuk issuance by governments and their related entities is necessary to set an example for private sector issuers to follow.