Wind of Change In The Sukuk Market

Last years has been a frustrating yet still enthralling year for the sukuk market. for the past three consecutive  years, global primary sukuk issuances have passed USD100 billion, but  the primary volume fell short this  year to reach only USD65BLN issuances  as at 23rd DEC 2015. Albeit the fact, the year witnessed new  important issuances and some emerging trends that will shape the sukuk market in the medium term. the  Khazanah, where the  proceeds from the bond  are being channelled to its  trust schools programme.  ii) PT GARUDA INDONESIA’S  inaugural international  USD500 million without  institution guarantee.  iii) The world’s   export  Credit Guarantee  Department (ECGD) of  the UK government sukuk  by the UAE based airline  company, Emirates Airline.  The USD913 million sukuk  is also the biggest deal in  the aviation sector iv) the  debut sovereign sukuk by  Ivory Coast.

It is notable that the on-going global macroeconomic challenges and financial vulnerabilities in major markets have  contributed to the slowdown of global primary sukuk market. Despite the challenges, the sukuk market remains encouraging with several landmark issuances, the growing diversity of sukuk profiles; and with new domiciles joining the sukuk  forces. To date, issuers from 16 different countries have tapped the market this year.

Broadly, the decline in issuance volume is due to the substantial slowdown in sukuk issuances by sovereign issuers.  Sovereign and government related entities’ primary issuances fell significantly from the 2014 volume. In 2015, the sovereign  and multilaterals issuances only recorded about USD40 billion of issuances compared to USD81 billion last year.  Corporate issuances remained steady at USD21 billion  in 2015, where corporate issuances in 2014 were about  USD24 billion. The corporate sukuk market’scontinued  momentum is largely attributed to the issuances by  Islamic banks for Basel III compliant sukuk instruments  in order to satisfy the revised capital standards. This is  further evidenced by looking at sukuk by sector, in which  the share of  sukuk issued in the financial services  sector rose from 21.80% in 2014 to 29% this year. Other sectors that have recorded an increase in terms of  total issuances are the construction and transportation  sectors.


In 2015 YTD, sukuk issuances in USD currency increased its share to 31%, despite lower volume by USD6bln compared to 2014 amount. The growth of foreign-currency sukuk in recent years, especially those denominated in USD, was spurred mainly by Malaysia, Saudi Arabia and the UAE. In addition, Turkey, Hong Kong and Indonesia have also issued USD sukuk.

In the past few years, the market has seen a growth in the size of deals, where the most apparent is in 2014 when there were about 10% of issuances with size of more than USD500 million per individual issuance. This year, the trend is on the reverse, as there is only about 6.5% of issuance with the size of USD500 million and above. Almost half of the large-sized issuances are USD-denominated sukuk. Meanwhile, issuances with below USD100 million increased significantly and are largely contributed by short terms papers by central banks. 2015 also witnessed several key emerging trends in the sukuk industry with the prevailing market conditions. Looking forward, the prospect of the current global economic environment remains indefinite and financial tightening will continue in 2016. The strengthening dollar is asserting downward pressure on capital flows to the emerging economies. Furthermore, the Fed has announced its interest rate hikes, as it believes that the US economy has finally regained its strength and is now able to withstand modestly higher borrowing rates. Many emerging markets are still adjusting to currency depreciations that have resulted into widening of current account deficits and increasing domestic vulnerabilities.



Slowing economic growth in emerging markets would weigh on companies’ capital and their investment spending. Moreover, pressures continue to mount with China’s economic growth slowdown, interest rate hikes by the Fed and low commodity prices. These clearly will keep the market players to stay cautious. 2016 will be another challenging year, but it will commence with the hope that the market will recover gradually, at least to its satisfactory mark in 2011. New jurisdiction in the likes of Hong Kong and countries from the African continent have started to diversify their funding avenues through sukuk. This trend will be a positive development to regain sukuk momentum in the medium term prospects. What should be looked forward to is the development of a robust corporate sukuk market in new Islamic finance markets. Regular issuances by central banks – e.g. Gambia, Bangladesh, Bahrain and Indonesia – will continue to boost the short term sukuk market. Sector wise, it is expected the market remains substantial in the financial, construction and telecommunications sectors. The trend seen in 2015 in terms of currency of deals is likely to stay, given the broad appreciation of the US dollar. USD sukuk issuances are expected to dominate the large issuances. Innovation will emerge in the sphere of socially responsible investment instruments, out of South East Asia and the GCC markets

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