According to some estimates, the Islamic finance industry accounts for US$2 trillion of assets worldwide, and yet only 1% of global financial assets. IMRAN MUFTI anticipates that the total volume of Sukuk issuance in 2016 is expected to come in under the amount issued in both of the previous two years.
The mismatch between the huge number of potential investors (approximately 1.6 billion Muslims worldwide) and the small amount of investments actually realized has historically led practitioners to predict a surge in growth. While the market continues to grow, the anticipated spike has yet to materialize. The generally precarious situation for capital markets globally has hampered growth in Islamic capital markets too this year.
Review of 2016
While 2016 saw a number of high-value Islamic corporate financings, sovereign Sukuk issuances have really taken centre stage. Pakistan returned to the market after an absence of almost two years, Qatar issued Sukuk with a total value of over US$400 million and Bahrain completed a dual tranche transaction that was heavily oversubscribed.
West Africa has seen a particular uptick in the use of Sukuk, with sophomore issuances by the governments of Cote d’Ivoire and Senegal, and a debut issuance by the Republic of Togo, all of which listed on the Bourse Régionale des Valeurs Mobilières with a combined issuance of CFA766 billion (US$1.24 billion). We expect to see increased Islamic financing activity in the region as the West African market continues to focus on infrastructure sectors like telecommunications, education and health, all of which are well suited to Shariah compliant financing because of their link to the real economy.
Elsewhere, other sovereigns have taken a strong top-down approach to accelerate growth. In August, Indonesia launched a 10-year Islamic finance master plan which includes initiatives touching on capital adequacy, human resources development, governance and consumer protection, together with a flagship policy of increasing the use of Sukuk of up to 50% of total debt issuance in 10 years’ time.
The figure currently stands at around 13% of outstanding government debt. Similar policies have yielded impressive results for Oman. Despite only allowing Islamic finance services in late 2012, in June this year Oman’s Islamic banking sector accounted for around 10% of the country’s assets. By contrast, it took Turkey and Indonesia over 20 years each to reach a figure of 5%.
Other GCC countries have not shown the same enthusiasm for Islamic finance this year, however, with many preferring to issue conventional debt over Sukuk due to its perceived ability to attract global investors. Qatar’s recent Sukuk issuance was overshadowed by an earlier conventional bond of more than double the value, and while Saudi Arabia’s US$17.5 billion bond sale made history, there was a surprising absence of a Shariah compliant instrument. Meanwhile, progress toward the creation of a new UAE wide national regulator to set standards for Islamic finance products is slow.
Preview of 2017
There are a number of high-profile Islamic finance transactions on the horizon as we look to the year ahead. It is widely anticipated that Nigeria will issue a sovereign Sukuk facility in the first quarter after unforeseen circumstances delayed its planned issuance this year. Similarly, Djibouti is expected to use Sukuk to fund infrastructure development in 2017, and has been working with the IDB to create a framework which will allow government and state-owned enterprises to issue.
In October, the finance minister of Saudi Arabia, Ibrahim al Assaf, publicly stated that the Kingdom is contemplating issuing Sukuk in the future. He did not state, however, whether any further sale would be local or global. In addition, any further market participation by Saudi Arabia will be heavily influenced by the changing price of oil, a market trend that is hard to predict.
Elsewhere in the Gulf, we can expect the government of Dubai to look to the Islamic finance markets for a US$3 billion financing intended to support the expansion of Al Maktoum International Airport.
Although the Islamic finance markets have been relatively flat in 2016, particularly in jurisdictions where Islamic finance is more established, there is good reason to be optimistic about the year ahead.
While practitioners would welcome increased regulation to allow for easier cross-border transactions, a growing awareness of the potential of Islamic finance has led to some regulatory changes, such as Nigeria’s recent ruling that grants liquidity status to Sukuk. In addition, the aforementioned transactions point to continued interest in, and the buoyancy of, the Islamic capital markets.