S&P: Drop in Sukuk issuance due to complexity

Dubai

Lower liquidity in Gulf Cooperation Council (GCC) banking systems is not the main driver of muted Sukuk issuance in recent years, says S&P Global Ratings in a new report. “Some market participants believe that the liquidity drop in Gulf countries, where the majority of Sukuk investors are based, explains the lower issuances volumes,” says S&P Global Ratings’ Dr. Mohamed Damak, Global Head of Islamic Finance.
“We see liquidity in GCC as adequate in a global comparison, though, and believe that the less supportive economic environment is translating into fewer growth opportunities, which could actually encourage banks to reallocate liquidity in the bond and Sukuk market, ultimately leading to an uptick in issuance volumes.”
The decision to issue Sukuk or bonds ultimately lies with the issuer and depends on many factors. These include the cost of issuance, the capacity of the market to absorb the transaction, the issuer’s target investor base, how ready the issuer’s regulatory and legal environment is for Sukuk issuance, and the complexity of structuring Sukuk. “We think that the latter factor is one of the main reasons behind muted Sukuk issuance in 2016 and believe it will continue to weigh on volumes in 2017,” said Dr. Damak.
“In our view, the key to broadening the Sukuk issuer base and volumes lies in market education on Sukuk in Western countries and higher standardisation of legal documentation and Shari’ah interpretation, or at least the establishment of large issuance programmes, as some market participants have suggested,” he said.—Agencies

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