New Sukuk issuance with a maturity over 18 months from the core markets of the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan rose to $40 billion in 2016 from about $32 billion a year earlier.
This represented 28.5 per cent of total bond and Sukuk issuance in these markets in 2016, down marginally from 29 per cent in 2015. Fitch focuses on longer-term issuances because frequently rolled-over short-term debt can distort underlying trends.
The Fitch Ratings report states that they expect Sukuk issuance to grow at a similar rate in 2017 and it believes market share will rise as more sovereigns issue Sukuk alongside conventional bonds.
Sukuk issuance broadly maintained its share of capital markets funding despite large conventional bond issues by Saudi Arabia, Abu Dhabi and Qatar, Fitch Ratings says with a combined issuance of $31.5bn.
The report states that they probably opted for bond financing to attract international investors.
However, seven of 10 key markets did issue sovereign Sukuk in 2016 and other sovereigns in the GCC region have indicated they could issue Sukuk, or a mix, in the future, reinforcing Fitch’s view that the market share of Sukuk will gradually rise.
Oil exporters in the Middle East are also becoming an important source of the flow of international bond and Sukuk issuances, and that trend should continue.
The decision on whether sovereigns issue bonds or Sukuk is driven by three main factors: the target investor and funding base, whether there is an existing Sukuk structure and Islamic finance strategy, and the needs and size of the Islamic finance industry, because Islamic banks cannot invest in traditional bonds.
Outside core markets, issuance prospects are limited due to a lack of standardisation, which makes structuring Sukuk a more complex and time-consuming process than a traditional bond.