Sukuk issuance from key markets in the first half of 2016 rose 11% compared to a year earlier, according to Fitch Ratings' analysis, underlining its expectations for gradually increasing issuance over the long-term as more countries create supportive legal frameworks.
Sukuk as a proportion of total issuance in the Gulf Cooperation Council, Malaysia, Indonesia, Turkey and Pakistan were also slightly ahead of the same period a year ago, but could not maintain the first quarter's very strong market share due to the return of sovereign issuance of conventional bonds by GCC members in recent months.
Total new sukuk issuance (with maturity of more than 18 months) in these key markets rose to USD21.74bn in 1H16 from USD19.54bn in 1H15. Issuance was evenly spread across the first half of the year, with USD11.07bn in 1Q and USD10.67bn in 2Q.
Fitch notes it only looks at longer-term issuance because frequently rolled-over short-term debt can distort underlying trends.
Sukuk represented 30% of total issuance in these countries in the first half, up from 28% in 1H15. The proportion would have been even higher, but for the return of Abu Dhabi and Qatar to the sovereign bond market with issues of USD5bn and USD9bn, respectively. Both sovereigns probably opted for bond financing to help attract international investors.
Among other sovereigns that could come to the market are Kuwait and Saudi Arabia, which are considering capital market funding. The decision whether to issue bonds or sukuk, or a mix, depends on factors including the target investor and funding base (international or regional and local), the existence of a sukuk structure and Islamic finance strategy, and the needs and size of the Islamic finance industry, because Islamic banks are not allowed to invest in traditional bonds.
Investor appetite for the countries included in this analysis moderately improved earlier this year, due to a hunt for yield in light of low rates in mature markets and by stabilization of commodity prices. The UK's vote to leave the European Union has also reinforced the pressure on interest rates. These factors should help issuance volumes.
Sukuk issuance should be supported in the medium to long term by the recent introduction and revamping of sukuk laws in some countries, the growing Islamic finance industry in these countries and increasing sovereign funding needs. Greater harmonization of sukuk standards, structures and legal frameworks resulting in improving transparency would also help improve issuers and investors' acceptance of such instruments.
“We continue to expect issuance to be relatively quiet in the third quarter due to the combination of the summer and Eid breaks, with a pick-up towards year-end. Overall our expectation is for 2016 sukuk issuance to at least match 2015 issuance of around USD32bn,” says Fitch,