While the year 2019 was a record year for primary Sukuk issuance, the year 2020 seems to be cautiously holding its own despite the economic and health impact of COVID-19 on the main issuing markets in the Middle East & North Africa (MENA) region and in South East Asia, especially Malaysia and Indonesia.
The authors of the two most authoritative global Sukuk reports issued in July 2020 – Fitch Ratings Global Sukuk Market Dashboard 2020 and the International Islamic Financial market (IIFM’s) 2020 Sukuk Report – both acknowledge that while COVID-19 could negatively affect segments of the market such as offerings by corporates and Islamic financial institutions, there are equally compelling reasons for optimism for Sukuk issuance in 2020.
“Sukuk issuance,” says Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings, “is expected to rise in the short and medium term, as sovereigns, financial institutions and corporates diversify their funding and take advantage of low funding costs. Investors are expected to continue seeking higher yields in Emerging Markets, where key Sukuk-issuing jurisdictions are domiciled. However, investors will remain focused on issuers with strong credit fundamentals.
“The market activity of Sukuk issuance, which almost came to a standstill in March-April 2020 due to the fallout from the coronavirus, has resumed in 2Q20, similar to the levels of in the first two months of the year. This could indicate that both issuers and investors have readjusted their investment and funding strategies to reflect the new normal. In 1H20, there have also been innovative issuance trends like Formosa, sustainable, green and hybrid sukuk, which helped attract a wider investor base.”
Similarly, according to Ijlal Ahmed Alvi, Chief Executive of IIFM, the issuance of more debut Sukuk and successful refinancing of maturing Sukuk has contributed in maintaining the positive Sukuk volume trajectory and the indications were that this trend would have continued in 2020 given the relatively strong issuance expected in the pipeline.
“However, the unprecedented event of COVID-19 is threatening to negatively affect Sukuk issuances particularly corporate and financial institutions. It is expected that sovereigns are likely to issue Sukuk to meet their fiscal budgetary short fall which may in turn support the market,” he adds. IIFM is the industry standard-setting body established in 2002 and hosted by the Central Bank of Bahrain, which focuses on standardization of Sharia’a-compliant financial contracts and product templates relating to the Islamic financial services industry.
In 2019, according to Fitch Ratings, Sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan rose by 6%. The volume of outstanding Fitch-rated Sukuk reached US$105 billion at the end Q4 2019, of which about 32% is estimated to mature in 2020-2022. The issues remain concentrated in Saudi Arabia (38.5%), UAE (16.2%), Indonesia (14.3%) and Malaysia (10.7%). About 83% of issues are investment grade and 17% are speculative grade. Moody’s Investors Service also reported Sukuk issuance rose 36 per cent to US$179 billion in 2019.
IIFM research in contrast shows that Sukuk primary market issuance totaled a record US$145.70 billion in 2019 – an increase of 18.32% in Sukuk issuances compared to 2018. The IIFM Sukuk Report 2020 – the 9th edition of the annual report – was launched at a webinar where an international panel of experts representing IIFM, International Islamic Liquidity Management Corporation (IILM), Bank ABC Islamic, Kuwait Finance House (Bahrain), Standard Chartered Bank, National Commercial Bank, DDCAP Limited (represented by Managing Director, Stella Cox, CBE) and Clifford Chance LLP spoke on Sukuk issuances in the time of COVID-19, trends and expectations, buy-side and sell-side perspectives, opportunities in environment friendly Green Sukuk and socially responsible SRI Sukuk, use of securitization in structuring Sukuk and IIFM’s Sukuk Al Ijarah and Sukuk Al Mudarabah standard documentation initiatives.
As of December 2019, stressed the IIFM Report, around 94% of the US$551.44 billion Sukuk outstanding globally were issued from well established markets, namely Malaysia, Saudi Arabia, Indonesia, United Arab Emirates, Turkey and Bahrain, while other countries such as Pakistan, Qatar, Oman and regions such as Africa in particular are gradually increasing their market share. Similarly, Sukuk (with issue size of US$100 million or above and with tenor of more than a year) set to mature during 2020 and 2021 amounts to around US$70.82 billion. Due to the current tough economic conditions globally caused by the COVID 19 pandemic, maturing Sukuk particularly from sovereign issuers are likely to be refinanced with new Sukuk issuances while corporate and financial institutions may delay issuing new Sukuk.
The key drivers of the Sukuk market in 2019 were issuances from well-established jurisdictions, the entry of several news issuers, issuance of Tier 1 and Tier 2 Sukuk (Basel III compliant Sukuk), longer tenors (10 to 30 years Sukuk) including perpetual Sukuk issuances by financial institutions, infrastructure Sukuk and relatively larger volume of Retail Sukuk issuances particularly from Indonesia.
The demand for Sukuk from GCC countries namely Bahrain, Saudi Arabia, UAE, Oman; other Islamic jurisdictions including Malaysia, Indonesia, Turkey, Pakistan, Brunei Darussalam as well as the Islamic Development Bank and the African region remain the main force in maintaining the appeal and growth of the Sukuk market. Bahrain, Brunei, Indonesia, Malaysia, Turkey and certain African countries were the most frequent issuers of short-term Sukuk in 2019, albeit the multilateral International Islamic Liquidity Management Corporation (IILM) remains an active issuer of short term international Sukuk, offering an alternative liquidity management avenue to Islamic financial institutions which are active in the short-term market and looking for low risk securities.
Domestic Sukuk issuances during 2019 totalled US$107.20 billion compared to U$ 90.00 billion in 2018. Malaysia maintained a dominant share in terms of both volume and value and remains the largest domestic Sukuk issuer with 50.45% (US$54.09 billion). The total outstanding domestic Sukuk at end 2019 stood at US$407.00 billion, which is US$46 billion higher than the previous year.
A word of advice though from IIFM Chairman Khalid Hamad Al-Hamad of the Central Bank of Bahrain: “Sukuk’s commercial success should not lead us to ignore the underlying principles which are its distinguishing factors when compared to conventional bonds. Sukuk are an innovative way to raise financing in a Sharia’a compliant manner with link to the real economy.”
IIFM’s Ijlal Alvi concurs that at the time of publication of the report, the global financial markets are facing a great deal of uncertainty caused by the COVID-19 pandemic which may momentarily impact the Sukuk primary market. However, given the unique features of Sukuk, he maintains, the environmental, social and educational financing requirements present a huge potential to be realized in the medium term.
The Sukuk market, he stresses, continues to evolve, and in recent years, it has witnessed over reliance on certain Sukuk structures such as Wakalah. “This development in particular needs to be monitored, as a structurally diversified global Sukuk market is recommended. Moreover, Sukuk market also need more asset backed or securitized Sukuk issuances and perhaps a covered bond structure equivalent can be introduced for Sukuk issuance as well,” he added.