Sukuk market to remain resilient

Malaysia and GCC will remain leaders while Indonesia is expected to play more significant role

PETALING JAYA: Global sukuk market is expected to remain fairly resilient at around US$55bil to US$65bil (RM231bil to RM273bil) this year compared with US$66.4bil last year, despite ebbing global market sentiment, particularly in Malaysia amid the weaker ringgit, according to RAM Ratings.

Given the steep fall in crude oil prices that have adversely affected the core sukuk markets of Malaysia and the Gulf Cooperation Council (GCC), the rating agency’s projection takes into account these countries’ government expenditure cuts and potential delays in infrastructure spending.

“While Malaysia and the GCC will remain the leaders in global sukuk issuance, supported by the funding requirements of the corporate and quasi-government sectors, we envisage Indonesia in 2016 to still have the economic momentum to play a more significant role in tapping the global sukuk market to fund its government budget,” said RAM head of Islamic finance Ruslena Ramli in a statement.

Malaysia’s global leadership last year was underscored by US$23bil of sukuk issuance from corporate and quasi-government sectors that remained resilient despite economic headwinds.

Historically, more than 90% of global sukuk issuance has originated from Malaysia, the GCC and Indonesia.

Another encouraging trend, she added, was the rising number of sovereign sukuk issues in 2014 and 2015, which are anticipated to spill over into 2016 and increase the number of countries that are keen on expanding their domestic sukuk markets.

RAM had also analysed the sukuk markets of the GCC member countries – the widening deficits of nations that are more dependent on oil exports could prompt the issuance of sovereign sukuk.

Regulatory bodies – the Accounting and Auditing Organisation for Islamic Financial Institutions, Islamic Financial Services Board, International Islamic Financial Market, Islamic Development Bank Group and Malaysia International Islamic Financial Centre – are collectively putting in efforts to build a stronger foundation for Islamic finance.

RAM acknowledges their commitment to promote Islamic finance as part of the mainstream global financial system. As a result of these initiatives, issues involving syariah interpretation, the standardisation of documentation and tax treatment are progressively being looked into to strengthen the cost-effectiveness of issuing sukuk and to lay the foundation for the next stage of development for global sukuk market.

It said the growth for sukuk issuance this year was expected to be driven by, among others, committed infrastructure projects, Basel III capital requirements of Islamic financial institutions and sovereign sukuk issuance to encourage participation by the corporate sector.

Next to government sukuk issuance, Islamic financial institutions have historically been dominant in corporate sukuk issuance.

The implementation of Basel III have prompted Islamic financial institutions to issue Basel III-compliant sukuk to satisfy the revised standards, which include Islamic banks from the GCC, Turkey and Malaysia.