Exclusive to The Middle East Online… Sukuk: a game changer in the global finance industry

Islamic finance – a comprehensive financial system that adheres to Shariah principles – has been in existence over the last 1,400 years. Its core concepts date back to the 7th Century during the Umayyad (661-750AD) and Abbasid empires (750-1258AD). It was the mainstream financial system under various Islamic empires in the West such as Andalusia (until 1031), Granada (until 1492) granada_alhambra09and the Ottoman Empire (until 1918), and formed the foundation of international trade developments that stretched from Europe to China.

The contemporary Islamic finance industry entered its 5th decade in 2015, and the industry is now a robust and accepted niche in the mainstream global financial system. The proliferation of the Islamic finance industry has seen assets under management grow to an estimated $2 trillion currently, with the year-on-year growth rate showing no signs of abatement. One asset class that is showing spectacular momentum is the global sukuk (Islamic bond) market which last year continued to maintain its sustainability following on from the record $138 billion of sukuk issued in 2012.

Global sukuk issuance is expected to reach $145 billion in 2015, according to figures released at the Sukuk Summit (London 3-4 June) and the demand for sukuk significantly outweighs the supply, with growing investor appetite for more diverse investment opportunities.300x388 sukuk

The market was valued at $118 billion in 2014 with an annual growth rate estimated to be around 20%.

The landscape of sukuk issuance is also changing and maturing; in 2012, 85% of sukuk was issued in the Middle East but by 2014 the region only accounted for 56% of the issuances, with South East Asia (led by Malaysia) becoming a major player; however the Middle East region still accounts for over 50% of “debut sukuks” (ie first time issues).


Interestingly, sukuks are now also been more and more frequently issued by countries that are not described as Islamic;

Between 2007-2012,the main issuers were Malaysia, UAE, Qatar, Bahrain, Saudi Arabia followed by Gambia and Turkey; the new kids on the block between 2013 and 2015 include Pakistan, UK, Hong Kong, South Africa, the Maldives, Senegal and Luxembourg as well as new banks including the World Bank and Goldman Sacks.sukuk1

Both the UK and South Africa launched successful sukuks in 2014 and are planning on repeating the experience later this year. Egypt is also hopeful of launching its first this year, but the Egyptian government will be looking to for financial support, which could come from the IFC or the World Bank.

The total market value for sukuk is estimated at $310 billion and yet it accounts for just a quarter of one per cent (0.25%) of global financing, so the market offers tremendous potential for growth. However, to keep growing the leading players will have to offer innovative products as well as making international (non-Muslim) investors feel confident about the products. The Islamic Development Bank (IDB), which has the single largest Sukuk programme in the world, is taking measures to increase its issuance programme to $20 billion from the current $10 billion.

Sukuk is a great way to fund infrastructure and Malaysia is a case in point where all infrastructure projects are sukuk underpinned.

sukuk malaysiaOther growth drivers for Sukuk issuance include the strong economic prospects (GDP growth, young demographics) in MENA, Asia and Africa; the huge demand for infrastructure investment, which in Asia, Africa and MENA  is projected to reach $3 trillion over the next decade according to the World Bank; the increasing use by airlines and aviation authorities of Sukuk to raise funds to finance fleet acquisitions and airport infrastructure, and Sukuk refinancing which is estimated at $50 billion in 2014/15.

Another driver for growth is a new approach to promote sustainable and responsible investment, known as SRI.  The guidelines for this type of investment were put in place in Malaysia in August 2014; the first Malaysian sukuk subjected to the new guideline was launched in May 2015 by Khazanah Nasional. The projects eligible for SRI sukuks include renewable energy, reduction of greenhouse gases, environmental preservation and those that improve the quality of life for society. A landmark Sukuk in 2014 was the $500 million Vaccine Sukuk issued by The World Bank under its International Finance Facility for Immunisation Co. (IFFI).


Another innovation which is seen as positive on the world market is the adoption of the “Basel III framework”, a cornerstone of resilience through its new capital and liquidity frameworks, which operates on a defined timeline for implementation. The liquidity framework has refined the concept of High Quality Liquid Assets (HQLA) and introduced two standards, the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), amongst others, to bolster this framework. The LCR came into effect in 2014, while the NSFR is to be phased in by 2019. The good news is that certain type of Sukuk can qualify to be included as HQLA. Governor Dr Zeti Akhtar Aziz of Bank Negara Malaysia has confirmed that Malaysia will start phasing in eligible Sukuk as part of the HQLA of Islamic banks authorised in the country from 2015.

By Noura Eskander, exclusive to The Middle East Online . . .



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