Investor demand, funding diversification and refinancing needs are to push corporates and governments to continue tapping the Sukuk market, although some hiccups may potentially throw the trajectory off, according to Fitch Ratings. VINEETA TAN writes.
“Sukuk supply–demand imbalance will continue to be a key growth factor but not without headwinds,” explained Bashar Al-Natoor, Fitch’s global head of Islamic finance. “These headwinds include additional AAOIFI-compliance complexities for Sukuk, and reduced borrowing needs and fiscal deficits for some of the Sukuk-issuing sovereigns due to higher oil prices.”
On a quarterly basis, Sukuk volumes from the GCC, Malaysia, Indonesia, Turkey and Pakistan fell 27% to US$57.3 billion in the July–September 2021 period. Fitch attributes the expected drop to yearly seasonal patterns and implementation challenges related to AAOIFI standards.
Globally, outstanding Sukuk are 2.8% higher at US$775.4 billion in the third quarter of 2021.
“Fitch continues to see revised terms and new clauses added to international Sukuk documentation, driven by market calls for compliance with AAOIFI Shariah standards and the UAE’s Higher Sharia Authority’s resolutions and guidelines. Most Sukuk nonetheless continue to be structured so as to create economic effects similar to conventional bonds, limiting the impact of the changes so far,” the rating agency noted.
The industry also stands to benefit from governments’ push including: Saudi Arabia making Islamic finance a key priority in its Financial Sector Development Program to elevate itself to become the Islamic finance capital by 2030; Egypt approving its long-awaited Sukuk law paving the way for the nation’s first sovereign Sukuk; Oman’s Capital Market Authority releasing a draft on Sukuk and bonds regulations; and Bangladesh providing certain tax exemptions on SPV-related activities.