Global sukuk issuance is likely to maintain its positive long-term growth trends, driven primarily by growing demand for Islamic banking assets and the increasing familiarity of both Islamic and conventional investors with these instruments, says Moody's Investors Service in a new report.
Additional drivers include the promotion of Islamic financial services by governments of Muslim countries and the increasing standardisation of unsecured sukuk structures.
"The strong growth and high likelihood of continued sukuk issuances reflects the growing investor comfort with these instruments as well as the increasing funding needs of sovereigns, corporates and banks particularly in Islamic countries across the Gulf and Asia," says Khalid Howladar, a Moody's Senior Credit Officer and co-author of the report. "Existing issuers as well as new entrants - non-Islamic sovereigns, traditional corporates and infrastructure projects -- will become increasingly at ease with tapping Islamic money alongside more conventional funding."
Moody's says that 2013 was marked by challenging conditions in emerging markets, and issuance of sukuk amounted to around $50 billion, lower than the record volumes of 2012. However, given the difficult operating environment, this level reflects positively on investor appetite for Shari'ah compliant instruments and that 2013 issuance will reach levels slightly in excess to those recorded in 2011, when $51 billion of sukuk were issued.
"Over the past decade we have seen structural improvements in the sukuk market, with the growing issuer and investor base bringing with it market breadth, liquidity and product innovation. In particular, market depth is increasing with the emergence of new instruments, such as amortising structures and more equity-like features," explains co-author Rehan Akbar, a Moody's Analyst. "Longer maturities in excess of five and seven years are now more common and Sukuk are becoming a growing part of issuers' funding mixes for all types of borrowers," says Akbar.
However, despite the increasing volumes Moody's notes the market is likely to remain fragmented. "Although Malaysia and the Gulf will continue dominate new issuance, many jurisdictions have expressed their ambitions to become regional hubs for Islamic finance," adds Howladar. "In addition to providing supportive legislation, those centres that establish a critical mass of sukuk supply and demand will be more likely to succeed in their goals."