Sukuk issuance in 2017 grew by 45.3% y-o-y to reach US$97.9 billion, underpinned primarily by the jumbo issuances of some GCC countries. However it is unclear whether the global sukuk market can stage a repeat performance in 2018 after a strong performance last year, said S&P in a report, “Global Sukuk Market Outlook: Another Strong Performance In 2018?”.
Dr Mohamed Damak, S&P Global Ratings Head of Islamic Finance, attributed the strong performance in 2017 to good liquidity conditions in the GCC and, more generally, globally, as well as activity by some countries with the goal of further developing their Islamic finance industries.
Furthermore, “some issuers (particularly in Saudi Arabia), in our view, were able to choose sukuk over bonds because they were less pressed for time to raise funds”, he said.
By comparison, the outlook for sukuk in 2018 looks uncertain. While S&P still foresees significant financing needs for core Islamic finance countries, tighter global liquidity conditions, mounting geopolitical risks, and slow progress on the standardisation of Islamic finance products will continue to hold the market back from its full potential.
The ratings agency has identified a couple of interesting trends in the market that are likely to shape its performance in 2018 and onward. These include a more stringent application of the profit-and-loss sharing principle and a broadening of the investor base to include retail and waqf money.
“While we do not opine on Shariah compliance, we are of the view that a more stringent application of the profit and loss sharing principle could deprive the market of an important class of investors (fixed-income investors) and ultimately lead to higher pricing,” said Dr Damak.
From a rating perspective, he said “we can rate sukuk issued by financial institutions with loss-absorption features. However, it is unlikely that such sukuk would receive the same rating as their sponsors, since the risks are very likely to be higher.
“Although it is not our role to advise waqf investors about asset allocation, we observe they are generally not after profit maximisation but rather the fulfillment of certain social objectives. In addition, in light of the significant oversubscription of most sukuk issued, we think softness in the market is due to a lack of supply rather than demand.”
Regarding retail sukuk, development of this part of the market necessitates a specific regulatory framework to protect investors and ensure proper access to information about risks, said S&P.
Retail sukuk issuance has been successful in some countries where, for example, authorities provided a tax incentive to drain a portion of the savings toward this market.
In the GCC, there is currently no income tax, so no opportunity for tax relief; local capital markets remain narrow; and the significant amount of unremunerated deposits on banks’ balance sheets suggests that remuneration is not the primary motive for some retail depositors. M