The Islamic structured finance segment internationally, like any other segment of the global financial system, is undergoing a change not only in the context of the COVID-19 pandemic but in the backdrop of the 4th Industrial Revolution as well that may bring about some fundamental shift in the way finances are dealt with at sovereign, corporate and cross-border levels. 2022 is going to provide more clarity and direction to the roadmap about the technology-driven international financial architectural design, etc.
Review of 2021
S&P Global Ratings as part of its report stated that new issuance volume increased by 30% in the first half of 2021 compared with the same period in 2019, a robust growth that reflects ongoing recovery from the COVID-19 pandemic. It indicated that the European investor-placed new issue securitizations could end the year close to EUR100 billion (US$112.81 billion) after bouncing back from the market disruption caused by the COVID-19 pandemic.
The volumes have increased more than 60% year-on-year to EUR52 billion (US$58.66 billion) in the first half of the year on the one hand whereas the global structured finance issuances can reach over US$1.4 trillion on the other. The issuance through the middle of the year was also almost on par with the post-financial crisis record set in 2018.
As per a Moody’s Investors Service report, some US$102 billion in Sukuk was issued in the first half of 2021, up 3% on a year-on-year basis, driven mainly by issuances in Malaysia and Indonesia. It further projects Sukuk issuances to be between US$190 billion and US$200 billion this year.
Besides the foregoing, there were a few debut Sukuk issuances that included Saudi Arabian Oil Company (Saudi Aramco) with an issue amount of US$6 billion in US dollar-denominated Sukuk and the Maldives government Sukuk issue that raised US$200 million.
However, Islamic structured finance went beyond this traditional line of financing and investment avenues by moving into the digital assets and technological innovations arena by developing an innovative investment scheme.
Here is an example of it. Aqarchain is a utility token issuance platform that will allow white-labeled hybrid self-tokenization of real estate assets. It claims that it has developed a crowdfunding self-tokenization platform for properties which allows the fractional ownership of properties, where property owners and developers will have open access to bringing their properties on this platform and use the hybrid self-tokenization platform to mint non-fungible tokens (NFT) of the real estate asset and conduct a public sale of the fractional tokens of the NFT.
Preview of 2022
The oil-rich GCC countries are expected to earn high revenue due to rising oil prices and the Sukuk or other structured options may be relied on in lesser volumes to raise funding in these countries though growth is expected to be there at a relatively lower rate.
However, Malaysia will continue to dominate sales, with activity primarily denominated in the local currency, together with the government of Indonesia as per a Moody’s report. It is expected that fresh issuance may come from a diverse base of cross-country issuers including corporates, sovereigns and supranationals.
Further to this, investors globally are now more open to structured investment options as the Islamic finance industry is scaling up to the international level by adopting the best industry practices and disclosure requirements.
UN Sustainable Development Goals (SDGs)-oriented green Sukuk should continue to have more attention from international investors whereas issuers from the GCC and other countries are likely to take the lead to mobilize the funding for their climate-friendly, renewable energy and climate-resilient infrastructure projects.
Another interesting dimension would be the possible introduction of stable-coins, digital assets and central bank digital currencies that may reshape treasury management and financial management practices all across the industry and can help to create more liquid, investable, tradeable and innovatively structured financial options for Islamic financial institutions and investors globally.
The most challenging development for the traditional financial system that has been taking place in the recent past is the emergence of fintech platforms which may connect counterparties for investing and fundraising activities purely as matching-making platforms without having any funds or balance sheet support; the same is expected to gather more momentum going forward.
As far as the global Islamic financial industry is concerned, global Islamic structured finance can be divided into:
a) Ongoing deal flows and transactions related to traditional structured finance products and investment vehicles
b) SDGs-related climate financing and Sukuk issuances to fund climate-friendly initiatives all across the globe
c) Blockchain technology-based financing and investment vehicles such as fractional ownership-based investments in financial or real assets-backed funds/investment schemes, and
d) The impact of central bank digital currencies, stable coins and digital assets such as NFTs on the financial and economic landscape of the world.
It will be very important to see how the foregoing all play their role in shaping up the international Islamic financial system to achieve the anticipated benefits.