The global Sukuk market has once again maintained its sustainability and poised to pass the US$100 billion mark in 2015. Despite the vagaries of the global economic recovery, a manifold of conditions, albeit with certain caveats, augur well for the continued sustainability of the global Sukuk market in 2016 and beyond.
While the past year has proven to be testing given the fall in oil prices and low commodity prices, the continuing political situation in the Middle East, adversity seems to be bringing exciting new opportunities and potentially co-opting important new entrants to the Sukuk market.
Innovation, Infrastructure and Inclusiveness are the emerging buzz words in the Sukuk market, which makes this year’s 10th Anniversary London Sukuk Summit, which is scheduled to be held on the 25th - 26th May 2016 at the Jumeirah Carlton Tower in Knightsbridge, a must attend event.
The compelling reasons for traction in the Sukuk market are clear and present.
- Low oil and commodity prices are turning out to be a blessing in several disguises. The signs are that a low oil price environment is having a potentially positive effect on the bond and Sukuk market as governments hitherto comfortable with a cushion of healthy foreign reserves and holdings and surplus budgets are suddenly resorting to raising ‘cheaper’ funding through bond and Sukuk issuance than continuing to raid their US dollar reserves to mitigate budget deficits. The GCC states are a point in question.
- Oman is a new entrant in the sovereign Sukuk market, with Kuwait, Saudi Arabia, Cote d’Ivoire and Jordan amongst others poised to enter the market in early 2016.
- The huge infrastructure ask in all countries has opened the possibility of the suitability of Sukuk as an infrastructure financing tool. The IMF and the G20 at its Antalya Summit in November 2015 endorsed this possibility. Recognising the large untapped potential associated with Islamic Finance, explained Prime Minister Ahmet Davutoglu, the Turkish Presidency of the G20 also tried to increase the awareness among G20 members on this issue and encourage them to increase the role of non-traditional lending models. The final communiqué called on G20 ministers “to support the development of alternative capital market instruments and asset-based financing models (such as Sukuk), and encourage Multilateral Development Banks (MDBs) to mobilise their resources, optimise their balance sheets, and catalyse private sector funding.”
- Repeat sovereign and corporate issuers from the GCC, Turkey, Malaysia and even Europe (Luxembourg).
- The continuing demand for issuing Sukuk to meet Basel III Tier I and II Capital requirements by financial institutions. Even conventional banks are preferring to raise this capital through Sukuk issuances as opposed to conventional bonds or through a mix of the two.
- The increasing incidence of local currency Sukuk by sovereigns to facilitate liquidity management needs of local Islamic banks and by corporates to finance balance sheet activities especially financing local SMEs.
Public Policy Drivers
- Christine Lagarde, Managing Director of the IMF, speaking at a conference on Islamic Finance in Kuwait City in November 2015, similarly is particularly buoyed by the growth potential of Sukuk. Over the past decade, total outstanding Sukuk assets have seen a ten-fold increase to about US$300 billion. The challenge for policymakers, she advised, is to help this market reach its full potential. “For example, more regular sovereign issuance is needed at different maturities to help establish benchmarks and develop secondary markets. Sovereign Sukuk plans need to be embedded in governments’ debt management strategies; The market needs to be supported by strong legal and regulatory frameworks. The latter would help address persistent uncertainty over investors' rights. Many countries also need to develop money and interbank markets for Shari’ah-compliant instruments to help Islamic banks manage liquidity needs more effectively.”
- Several countries have recently adopted the enabling legal frameworks to facilitate the issuance of Sukuk. These include Kuwait, Uganda, Tunisia and Morocco. This will inevitably pave the way for benchmark sovereign issuances initially followed by corporate offerings. South Africa has also widened its legislation to allow publicly and privately listed entities also to issue international Sukuk.
- The emergence of SRI and Social Impact Sukuk (by Khazanah Nasional Berhad for instance) is set to increase given the ethical connectivity between faith-based finance and social and financial inclusion.
The Need for Innovation
- The debate on tangible and intangible asset pools is becoming passé. Clearly there are tangibility tests to make Sukuk more marketable in certain markets. “We have moved on from asset-backed Sukuk,” explains one prominent Malaysian Islamic banker. “We don’t have to do an Ijara-based Sukuk anymore. We don’t even have to do an asset based Sukuk on physical buildings.”
- The Government of Indonesia sovereign Sukuk was based on a quasi-project finance Sukuk.
- The Malaysia sovereign Sukuk in 2015 was based on the rights to transportation services (vehicle licensing fees) and rights to services on a bundle of hospital buildings.
- The UK Export Finance-backed Emirates Sukuk incorporated the use of a forward purchase agreement for rights to travel on Emirates aircraft in the form of “Available Tonne Kilometres” (ATKMs) over an agreed period.
- Axiata Group Berhad’s latest $500 million Sukuk Wakalah issued in November is based on airtime vouchers, representing entitlement to a specified number of airtime minutes on the mobile telecommunications network of subsidiaries of Axiata for on-net calls.
In the UK, it is government’s export credit agency (ECA), UKEF (UK Export Finance) that could be setting the pace and perhaps pave the way for blue chip and SME corporates to enter the Sukuk market. UKEF is keen to use ECA backed Sukuk structures to access further liquidity in the market and to increase the range of finance options available in connection with UK exports. To that end UKEF is not only considering further aviation-based Sukuk but is also actively looking beyond the aerospace sector such as shipping and railway rolling stock, civil and project financings, and the petrochemical sector.
On large project financings UKEF is happy to consider a combination of financing options, which might see certain tranches being financed through an Islamic compliant structure and other tranches being financed on a more conventional basis. UKEF is also open to the possibility of supporting a Sukuk denominated in a local currency.
All the above developments point to a dynamic Sukuk market going forward.
ICG-Events have once again structured a value-added programme to discuss these very burning issues impacting the global Sukuk market, whether at the IMF/G20 level; the European dimension; developments in its core markets and in emerging new markets; and the structural issues relating to sovereign Sukuk origination in Emerging Markets; regulation, core principles for Islamic Capital Market; liquidity management, monetary policy management tool; ECA-backed Sukuk; infrastructure and urban regeneration; SME financing, mortgage securitisation; new generation of funding solutions; Sukuk and investment; credit enhancement strategies for Sukuk issuance; and Sukuk and Financial Inclusion.
Once again the London Sukuk Summit delivered on its promise to be a key event
The quality of the discussions led by the panellists and also in the margins of the conference was excellent and highly relevant
Sukuk remains an untapped opportunity for European corporates
ICG’s London Sukuk Summit has over the years played an important part in raising the profile of Sukuk and educating the issuers and investors in this important financing instrument.
I was delighted to be asked to give a key note speech at the Sukuk Summit
The opportunity to engage with global experts & industry practitioners was very welcome and I greatly appreciated the hard work of all those involved.