13/01/2016 05:56 AST
The global market for sukuk will remain at below – peak levels in 2016, Standard & Poor’s Rating Services forcast, predicting issuance to reach $50 billion – $55 billion in 2016, compared with $63.5 billion in 2015 and $116.4 billion in 2014.
The correction started last year, mainly because the central bank of Malaysia (Bank Negara Malaysia; BNM) – the largest issuers of sukuk worldwide – stopped issuing. Excluding the BNM effect, sukuk issuance dropped by around 5% in 2015 from 2014. According to S&P, three main factors will shape the performance of the sukuk market in 2016: monetary policy developments in the US and Europe, the drop in oil prices, and the possible lifting of sanctions on Iran. The first two factors are likely to drain liquidity from global and local markets.
“We think that if oil prices remain weak, some governments of oil – exporting countries in the Gulf Cooperation Council (GCC) and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances (conventional and Islamic). In addition, we think that several issuing countries might decide to go the conventional route, rather the Islamic route, because it is less complex,” S&P noted.
However, the market could benefit from the European Central Bank’s program of quantitative easing (QE) in a yield – hunting environment pushing some European investors to the sukuk market. Also, if sanctions against Iran are lifted, and the country starts spending more on infrastructure projects, some new growth opportunities there for the sukuk market is expected.
Over the next few years, S&P believes the market will benefit from the greater involvement of traditional stakeholders – such as the Islamic Development Bank Group, the Islamic Financial Services Board (IFSB), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the International Islamic Financial Market (IIFM) – as – well as new ones like the International Monetary Fund (IMF). These institutions are now working on several projects to strengthen the foundations of the Islamic finance industry and prepare it for greater innovation and accelerated growth. BNM’s pullback in 2015 saw total sukuk issuance shrink by 45% compared with the same period a year earlier. In 2014, BNM alone issued about $50 billion out of total sukuk issuance of $116.4 billion.
BNM withdrew from issuing sukuk as they were attracting significant interest from investors across the board and not only the Malaysian Islamic financial institutions that BNM sukuk were primarily targeting, S&P said. BNM has decided to switch to shorter – term instruments reserved to banks.
Excluding the BNM effect, global sukuk issuance in 2015 performed in line with our expectations, dropping by about 5%. The moderate decline confirmed our belief that falling oil prices would only moderately reduce recurring government spending and spending on infrastructure projects in the GCC and Malaysia. Oil prices will continue to take their toll this year, but we also see two other factors at work, US and European central bank policies and the complexity of sukuk issuance: · Oil prices could dampen the market further if they continue to slide and push some GCC countries and Malaysia to reduce their investment spending. The drop in oil prices is also reducing deposits and therefore liquidity at banks (including Islamic banks). Governments and their related entities are among the top depositors in some of the core markets for Islamic finance, with a share of 15% to 40% for GCC banks.
“We expect that lower liquidity will lead investors to become more prudent about risk and more selective, which will push up prices. · Rate increases by the Fed will also bring a drop in global liquidity that will ineluctably reduce global investor appetite for sukuk and push up prices. Positively, the market could
Saudi Gazette
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