Booming Sukuk

A recent report published by KFH research revealed that total Sukuk issuance by end of 2012 reached $131bn with 54% increase than 2011. The sukuk market is witnessing extensive growth in the Islamic Finance sector. It has finally broke out from its shell of being a niche market instrument to enter a new era as an alternative to conventional bonds. Analysts are expecting the demand of Sukuk to reach upto $421 billion by 2016. The demand seems to be rising because of investor’s inclination towards Islamic Capital market. Investors expect 50 percent of their portfolios to be allocated to Islamic finance investments, out of which an average of 35 to 40 percent, would be allocated to Sukuk. The leading countries in Sukuk issuance are: Malaysia, Saudi Arabia, UAE, and Indonesia. 

Malaysia dominated among them in terms of amount issued, accounting for a 90.2 per cent market share. MENA region, and more specifically the GCC region, has been a key market for issuances this year despite no participants from Qatar and Kuwait.In the UAE, the second largest Arab economy, Abu Dhabi’s Al Hilal bank issued a $500mn sukuk this year. The other reason for the growth of Sukuk is due to the declining yields for both corporate and sovereign bonds, the rarity of high quality yielding papers and the flight to fixed income safety amid more concerns emerging from Europe. The Islamic bond got a boost after it was rated by S & P as reliable for GCC companies and infrastructure project. GCC economies are among the leading global spenders on infrastructure, which should in principle open important new opportunities for Shariah-compliant capital market development.The improvement in market conditions, and gradual recovery of the global economy and investor sentiment will also drive the demand for sukuk deals.

The study also suggests certain deficiencies in the existing Sukuk structures and their associated documentation, investor rights, transparency, and illiquidity in the secondary market.  Spread between demand and supply is expected to widen more than $280 billion within the next four years. These challenges in the Sukuk market will act as impediments in the growth of Islamic finance market. To free the arteries of the Islamic capital market and subsequently enrich its tributaries and downstreams, there is a need for practical studies that address its challenges, and that will provide a clearer picture of its current and forecasted status.

Few potential investors are reluctant to invest in Sukuk due to their poor featured structure and low yield as compared to conventional bonds. For example the most common Sukuk structureprevalent in the market is Al-Ijara that requires a huge investment irrespective of less return compared to high returns on the same investment in conventional bonds. Islamic finance experts have replaced this with musharaka and mudaraba bonds with good returns and high flexibility.

The point to be noted is that the major chunk of growth that was seen during the year 2012 was due to Euro crisis and global credit crunch. The policy revamp favoring the conventional economy will turn the growth arrow mark back on track. Eventually the financial market will also show positive turns and increase in bond investors. Therefore Islamic bonds to retain its growth and meet its expected return must focus on how far they can compete with the conventional bonds in terms of yields and attributes. The niche opportunity that Sukuk has can be converted into a wider opportunity only if trust worthiness of the customers are unhindered and retained for a long time. Not to forget, the most important principle of the all these developments and changes must be in compliance with the Shariah.

Booming Sukuk