GLOBAL: The financial
community may have been reminded of the shortcomings of the Islamic finance
industry as a result of S&P’s recent dramatic Sukuk forecast revision –
which saw initial 2015 projections halved – but simultaneously, it is
presented with avenues for further growth and development.
The main reason for S&P’s downward revision (from US$100-115 billion to
US$50-60 billion) is the exit of a single issuer – Bank Negara Malaysia
(BNM) – which caused a striking 42.5% plunge in total Sukuk issuance in the
first half of 2015. The Malaysian central bank is one of the world’s
largest Sukuk issuers, accounting for almost 40% of total global offerings
in 2014 at US$45 billion out of US$116.4 billion, supporting Malaysia’s
lead as the world’s largest Sukuk issuer by volume (according to 12 months
rolling data from Dealogic). The country (and its apex bank’s)’s holding in
the international Islamic bond space underlines the over-concentration of
the industry favoring a handful of market players, notably: Malaysia, Saudi
Arabia and the UAE.
However, despite the obvious skewness and the drawbacks it brings, the
Islamic finance industry for the most part is showing signs of maturity as
it welcomes more participants to the table. This widening base has
supported the growth of the Sukuk market despite BNM’s departure as
confirmed by S&P: “Sukuk market performance in the first half of this
year was also aided by returning sovereign issuers (from core and non-core
markets) and large, albeit sporadic issuances from banks and a few
corporate[s] in the Gulf states and Malaysia.” The rating agency noted that
excluding the BNM effect, global Sukuk volume performed within its
expectations, falling only by 10.7% and it confirms that the list of
potential Sukuk issuers continues to increase although the timing for their
issuance is uncertain.
Apart from the phenomenal number of non-Muslim market entries into the
Sukuk arena in 2014 which widened the pool, a yearly comparison of the
latest Dealogic data also shows that the ranks of Islamic bond issuers have
changed this year. A most noteworthy game-changer is Indonesia who is
unapologetic in its surge forward to grab a larger slice of the Sukuk pie.
From fifth last year, the Southeast Asian nation leaped to third while
Saudi Arabia (who was the world’s top Sukuk issuer after Malaysia this time
last year) tumbled to fourth place as Indonesia and the UAE (who moved up
to second from third) displaced the Kingdom. The current league of
top-seven Sukuk issuer nations also greeted Hong Kong and Pakistan, who did
not make the list last year.
BNM’s exit is viewed favorably by S&P as an opportunity for others to
shine. “BNM’s move leaves the door open to issuers such as the
International Islamic Liquidity Management Corporation and the IDB to step
up their issuance and provide the industry with liquidity, thereby
contributing to the development of an Islamic yield curve,” it noted. The
IDB last month already committed to raise its US$10 billion Sukuk program
by more than double to US$25 billion.
A drop in Sukuk volume may be alarming however it does not necessarily mean
the industry is not moving forward. Apart from Sukuk gaining traction in
other markets, BNM’s decision to cease issuing Sukuk as it switches to
other Shariah instruments could also be viewed as a sign of maturity in the
form of a chance for the development of other Islamic liquidity tools to
reduce the reliance on the industry’s poster child.
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