Islamic financial markets were not immune from the impact of the US Federal Reserve’s tapering deliberations in 2013. Global sukuk issuance fell by 13% year on year, dropping to $117bn from a record $131bn in 2012, as investor caution over emerging market volatility hit total issuances in Malaysia, and to a lesser extent, the Gulf Co-operation Council (GCC) countries. Since then, a nascent revival of fixed-income markets in these regions has gone hand in hand with a swift rebound of sukuk transactions.
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In the final quarter of 2013, total issuances amounted to $36bn, while in the first quarter of this year that figure fell slightly to $31bn. Despite this first quarter dip, many observers feel 2014 could be close to a record-breaking year for total sukuk issuance.
Capital position
Leading this market revival is Malaysia, the world’s largest issuer of sukuk and long-time pioneer of innovative sharia-compliant debt structures. Malaysian sukuk issuances accounted for about 63% of the 2014 first-quarter total. “After the economic turbulence of 2013, investor confidence is returning to south-east Asian markets. The hunt is on for quality investments in emerging economies,” says Badlisyah Abdul Ghani, CEO and executive director of CIMB Islamic, the global Islamic banking and finance arm of CIMB Group. “In addition, most investors typically have confidence in Islamic instruments issued from Malaysia.”
This resurgent confidence is driving new issuances in Malaysia and beyond. In February, the Export-Import Bank of Malaysia became the first export-import bank in the world to execute a sukuk transaction. “Despite the bank going to market with a $300m issuance, the order book was more than 10 times oversubscribed, reaching $3.2bn,” says Mr Badlisyah. The transaction was successfully distributed to 185 Islamic and conventional investors around the world, with the majority of take up from Asian investors, who accounted for about 65%, with the GCC and European investors securing 19% and 16% stakes, respectively.
In March, Dubai’s Department of Economic Development announced plans to create the world’s first fully sharia-compliant export-import bank to promote the emirate’s global trade relations. The announcement, coupled with Dubai’s $750m April sukuk issuance, builds on the emirate’s push to become one of the great capitals of global Islamic finance.
“Having a fully fledged Islamic export-import bank will be an exciting development, and will support the growth of Islamic finance more generally, particularly in terms of activities. Yet, it is worth noting that Malaysia’s export-import bank has been executing Islamic finance transactions for many years and its activities and expertise are fairly significant. Taken together with Dubai’s proposed sharia-compliant institution, there will be substantially more traction in the Islamic finance space with respect to international trade,” says Mr Badlisyah.
Going global
While the pace of sukuk issuance recovery has been considerable, the relatively localised nature of sukuk markets has meant that much of the associated issuance remains at the domestic level. In an April 2014 Standard & Poor’s report, the agency noted that only 16% of sukuk issued in 2013 could be considered ‘international’, with listings on the major stock exchanges or issuances in hard currencies.
“Financial markets, whether conventional or Islamic, must start from a domestic base. A deal has to be performed locally before it can gain transnational or global momentum. In this sense, the sukuk market is still relatively domestic. Yet, the marketplace in Malaysia is both advanced and sophisticated, and ready to go beyond its borders to export its activities. The GCC area has also come a long way in this sense, with cross-border transactions becoming increasingly common,” says Mr Badlisyah.
In line with this view, the pipeline for sukuk issuance in 2014 is promising. While corporate issuances are expected to sustain their positive momentum, the outlook for non-Malaysian sovereign transactions has also gained some traction in light of recent announcements from governments in Europe, Asia and Africa about upcoming sukuk transactions.
“I think it remains to be seen whether sovereign issuances will come strongly into the market over the next few years. There has been quite a lot of interest shown recently by a few countries – such as the UK, Hong Kong and Japan, and a few others – to issue sukuk. CIMB Islamic is involved in most of these discussions, but this process is taking time. As such, I see more corporate issuances dominating the market in the next two years,” says Mr Badlisyah.
