In 2011, the Irish government set out to establish Ireland as a center of excellence for Islamic finance. Changes to tax laws and regulations were implemented to ensure they were Shariah compliant and double taxation treaties were signed with Gulf states. Since then, Shariah compliant financial certificates (Sukuk) have been successfully listing on Euronext Dublin (formerly the Irish Stock Exchange). Listings started in 2012 where four Sukuk issuances were listed. The first Sukuk listing was in May 2012 for US$500 million by Dubai Islamic Bank; Qatar Islamic Bank issued two Sukuk that same year. To date, there is no retail Islamic bank operating in Ireland. Since 2020, there have been 48 new listings totaling US$30.7 billion on Euronext Dublin alone.
The financial infrastructure in Ireland, both at a national competent authority level (Central Bank of Ireland) and for listing (Euronext Dublin), are knowledgeable in reviewing Islamic finance issuing documentation and experienced in handling and approving Sukuk applications. This marks Ireland as among the world leaders in attracting and supporting the issue of Sukuk.
Review of 2022
With regards to Sukuk listings, the cost of living crisis, coupled with the Russia–Ukraine war and rising oil prices, has led to rising interest rates and concerns over economic growth. This has had a direct impact on funding costs for issuers which has led to a slump in issuances.
This has also impacted Islamic finance, just like conventional finance, where the Sukuk market in 2022 was affected by the global macroeconomic environment with Fitch Ratings reporting a fall of 14% in the third quarter (Q3) along with a 27.5% drop in Q2.
As can be seen from Chart 1, Sukuk listings have also fallen in 2022 when compared with both 2020 and 2021.
Fitch also report that Sukuk listings, while slow, are building up. The macroeconomic climate will continue to influence the need for oil-rich countries to issue Sukuk. Any need to raise funds may be dampened by increased liquidity from high oil prices, while oil prices, specifically, may play a larger part in the Sukuk market than they do in the conventional market. These prices are linked to the broader geopolitical situation and economic fallout.
The Islamic finance sector in Ireland will be directly impacted by these global macroeconomic pressures. Increasing interest rates and currency fluctuations — particularly in the US dollar — will also play a major role in the Islamic finance issuing pipeline specifically for the first half of 2023.
Preview of 2023
ESG in 2023
An area of growth that has yet to really materialize for Sukuk issuers in Ireland is ESG. GCC issuers, for example, have issued conventional ESG securities; however, growth in Islamic finance ESGs has not mirrored the growth of conventional ESG securities.
The IsDB issued US$2.5 billion ESG trust certificates in 2021 where the proceeds were to be used for health and economic impacts of the coronavirus outbreak and the recovery from the pandemic in its member states.
Despite this example, market sentiment seems to be more ‘wait and see’ with regards to ESG regulation and its role within Shariah compliant finance. However, this does appear to be a major growth opportunity for 2023. To highlight this potential growth market, 88 ESG securities have listed in Ireland year to date but none of these listings have been Sukuk.
Role of fintech
Fintech also continues to be an area for development for all sectors. We would likewise expect to see this continue in Islamic finance; however, there is likely to be a limited impact on the retail level in Islamic finance in Ireland. The introduction of innovations such as distributed ledger technology is being widely examined; however, it is hard to ascertain with any degree of certainty when any developments in this area will become mainstream.
Conclusion
Euronext is the world leader in listing debt securities with more than 52,000 bonds listed in its markets. An important part of this debt financing flow is coming from Islamic finance. Most of our listing activity is directly linked to the macroeconomic conditions that affect the general bond issuing pipeline, and this is also true for Islamic finance.
At present, due to market volatility, interest rate hikes and high oil prices, the market for Islamic finance and Sukuk listing in Ireland is underperforming compared with previous years.
The activity we have seen in this sector mirrors that of the conventional finance sector and although the macroeconomic factors that impact Islamic finance may differ from those affecting conventional finance, the long-term outlook is that once the economic environment settles, the Islamic finance market in Ireland will be well positioned to bounce back.
Maurizio Pastore is the head of debt listing – international primary markets at Euronext. He can be contacted at [email protected].