The impact of the COVID-19 pandemic which extended into 2021 has posed unprecedented challenges for the world and is affecting both societies and economies at their core. While the challenges differ from country to country, it is almost certain to increase poverty and inequalities on a global scale. This makes the UN Sustainable Development Goals (SDGs) to be even more critical but with record fiscal stimulus packages and monetary interventions introduced to counter the impact of the pandemic, there is very little room for governments to expand their spending on the SDG agenda. Therefore, it is vital that Islamic financing steps up to bridge the financing gap and support the achievement of the SDGs.
On a positive note, the pandemic has led to an increase in awareness among both the public and private sectors to push for sustainable development. The emphasis on environment, social and governance (ESG) investment has helped to drive demand for green Sukuk. According to a report published by the United Nations Development Programme and the Islamic Finance Council UK, an estimated US$50 billion in fresh financing can be unleashed through green Sukuk to meet the UN SDGs.
Review of 2021
Global Sukuk issuance reached US$147 billion in the first nine months of 2021 and Refinitiv’s 2021 Sukuk Perception and Forecast study projected that global Sukuk issuance will hit US$180 billion by the end of 2021. Malaysia maintained its leadership in the Sukuk market, followed by Saudi Arabia, Indonesia, Turkey and Kuwait, which together accounted for 90% of total issuance in the third quarter of 2021.
The issuance of Sukuk in core markets such as Malaysia, Indonesia and some GCC countries continued its momentum into this year as part of the governments’ continued measure to finance economic recovery in the post-COVID-19 world.
During this time, there was also a rise in the issuance of sustainable and responsible investment (SRI) Sukuk. In 2021 alone, there was almost an issuance of US$5 billion of SRI Sukuk, which surpassed the previous year’s total of US$4.6 billion.
The largest was the US$2.5 billion sustainability Sukuk issued by the IsDB. The funding under the issuance of the sustainability Sukuk was mostly allocated toward financing social development projects while part of it will also be used for green projects that are eligible under the IsDB’s Sustainability Finance Framework.
The second-largest sustainability Sukuk facility for 2021 was issued by the Malaysian government and marked the first return of Malaysia into the global market since 2016. The Sukuk facility was intended to finance green and social projects, in line with the SDGs such as renewable energy development and building schools and healthcare facilities. The demand for the Sukuk was so strong that it was oversubscribed by 6.4 times, resulting in the lowest-ever yield and spread for a Malaysian US dollar Sukuk issuance. A total of US$1.3 billion was raised from an initial US$1 billion.
Preview of 2022
What we noticed in 2021 was the surge in demand for SRI Sukuk, in line with the growing interest in ESG investing. The demand from western global investors for ESG investments puts green Sukuk in a strategic position to attract major new investors. This is because the principles of Islamic finance are underpinned by the objectives of Islamic law and match the aims and objectives of the agendas for the UN SDGs adopted by the UN.
Aside from that, fintech innovation will play an important role in accelerating the growth of SRI Sukuk. The pandemic has amplified the need for digital solutions amid the recurring lockdowns to curb the spread of COVID-19 infections. This will reduce the costs of payment and access to capital domestically and internationally, which will drive financial inclusion.
This development will also open doors for retail investors in Sukuk with the offering through online channels. With fintech innovation, availability of data and online channels, there is easier access to a new class of investors in SRI Sukuk.
Another interesting area to watch out for is the development of blockchain and how Islamic finance can leverage on these technologies for a more level-playing field that will encourage long-term impact investors. UAE-based Wethaq has partnered with enterprise blockchain software firm R3 to pilot its own blockchain-based Sukuk under the supervision of the Dubai Financial Services Authority.
The COVID-19 pandemic has put a renewed emphasis on inclusive and sustainable growth. Despite the strong momentum that we saw in SRI Sukuk and Islamic financing over the last decade, it is still a far cry from their potential. The rise of ESG investing will add pressure and expectations on the social and economic impact from SRI and Islamic financing.
I believe that the expanding demand for long-impact investment will drive the pace of growth for SRI and Islamic financing in the near future. 2022 could be the beginning of it as the world seeks sustainable investment and financing alternatives to drive a post-COVID-19 recovery.
Billy Toh is the investment coach at ProsperUs, CGS-CIMB. He can be contacted at [email protected]