By A. Stephanie
New sukuk issuance rose 13% in the first quarter of the year (1Q15), on the back of total sukuk and bond issuance jumping 47% compared to the previous quarter (4Q14), a Fitch report has revealed.
The Islamic Finance Monitor 1Q15 report tracked sukuk issuance with a maturity of more than 18 months by Gulf Cooperation Council (GCC) + 7 (Malaysia, Indonesia, Turkey, Singapore, Pakistan, Sri Lanka, and Taiwan) issuers in the quarter.
The ratings agency attributed the remarkably weak 4Q14 volumes to market worries over falling oil prices and rising geopolitical tension as 2014 drew to a close.
“In 1Q15 however, stability in oil prices enabled some new deals. Sukuk accounted for 26% of total new issuance, marginally down from 31% in the previous quarter,” Fitch global Islamic finance head Bashar Al Natoor said in the report.
He noted that in the first quarter, GCC sukuk and bond issuance skyrocketed 138%, reversing the trend from the previous quarter. However, both conventional and Islamic loans in the Gulf and Malaysia dropped 25% in the same period.
Meanwhile, quarter-on-quarter share of Islamic finance deals was up by a massive 198%, accounting for 20% of new loans, of which the majority originated from the Gulf region’s two largest economies – Saudi Arabia and the United Arab Emirates (UAE).
Al Natoor said the sukuk surge was underscored by strong sovereign issuance in the quarter, the two notable large sukuk issues by IDB Trust Services Ltd and RAK Capital, worth US$1 billion (RM3.54 billion) each.
In 1Q15, the total sukuk issuance volume rated by Fitch grew 3.5% to US$45.1 billion, with sovereigns and corporates standing neck and neck at 37.2% and 36.5% respectively, followed by financial institutions accounting for 26.1% of total issuance.
He added that the G20 economies’ (comprising the European Union and 19 individual countries including China, France, Germany, India, and the United Kingdom) decision to examine the use of sukuk to finance infrastructure investment could eventually spur a big increase in the size of the market.
Bashar Al Natoor
“However, there would first need to be a legal structure that would be acceptable to governments, investors and the sukuk’s Syariah boards,” Al Natoor cautioned.
He also noted the recent April launch of one-week Syariah-compliant contracts with Bahrain’s central bank that will benefit the country’s Islamic banks, as they broaden the range of options available for short-term liquidity management.
“The UAE’s central bank has also extended its range of acceptable collateral to include Syariah-compliant securities,” he noted.
Fitch’s outlook on the sector remains positive, expecting sukuk issuances from Jordan, Tunisia, and even Egypt this year.
“Liquidity will become more important due to declining oil reserves and GCC governments’ desire to increase their spending. This could translate to more sukuk issuance, rather than the usual easy bank financing,” Al Natoor opined.
He also noted moves by Islamic banks to strengthen their balance sheets in preparation for the Basel III – the global and voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk – which would mean tapping the sukuk market.
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