Malaysia remains most active sovereign issuer of sukuk

BY D KANYAKUMARI / Pic By TMR

Despite a falling market share of sovereign sukuk issuance, Malaysia remained the largest issuer with an estimated 43% of total sovereign Islamic bonds outstanding in 2016.

Moody’s Investor Service noted in a recent report that Malaysia has long been the most active sovereign issuer of sukuk, underpinned by an advanced regulatory framework that has been continuously developed since 1983.

“Islamic instruments have become an important pillar of the government’s funding programme and the share of sukuk in the government’s total outstanding debt has increased to close to 40% in June 2017 from 25% in 2011,” the report read.

Throughout August 2017, Malaysia issued long-term sovereign sukuk worth US$7.7 billion (RM31.26 billion), compared to the US$9.5 billion recorded in the the first eight months of last year.

Nevertheless, as other sovereigns’ issuance increase and Malaysia’s own borrowing needs narrow, the country’s share in global sovereign sukuk issuance is unlikely to return to the levels seen earlier this decade.

“In 2016, its share fell to about 30% in 2016, from an average close to 50% between 2010 and 2015, including government-related entities and multilateral developments banks,” the report stated.

Malaysia’s gradual fiscal consolidation is expected to continue driving the needs for sukuk lower.

The report stated that sukuk issuance volumes are expected to grow in 2018 as governments worldwide look to diversify their financing mix and satisfy the liquidity needs of Islamic retail banks.

Apart from Malaysia, Indonesia’s market share in annual sukuk issuance has also increased to 30% in 2016 from just under 10% in 2010. The percentage will likely grow with Indonesian government’s efforts to develop the Islamic finance sector.

“Although only a few countries like Malaysia and, increasingly, Indonesia use sukuk as a material component of their borrowing programmes, we expect a larger number of countries to increase their reliance on Islamic instruments in order to diversify their longer-term financing mix,” the report read.

The Moody’s report also stated that the world’s first green sukuk was structured in Malaysia in July by Tadau Energy Sdn Bhd to fund a large solar project in the Kudat district of Sabah.

That was followed by another issuance in October, and this Malaysian precedent could encourage other issuers to enter the green sukuk market, including sovereigns and, in particular, the Gulf Cooperation Council governments in their ambitions to diversify their economies away from the oil industry.

“The combination of Islamic instruments with other asset classes like green finance has the potential to further boost the Islamic debt market.

“In recent years, the market for green papers has flourished on a global scale where green bond issuance is expected to exceed US$120 billion in 2017 after it reached a total volume of US$93.4 billion in 2016,” the report added.

The report primarily highlighted new players entering the sukuk market and stated that Islamic banking assets in Malaysia have continuously grown at higher rates compared to conventional assets.

The new players include Nigeria, Turkey, Jordan and Pakistan among others.

According to the report, sovereign issuances have also increased 50% in the first eight months of 2017, compared to the same period in 2016, hence exceeding the US$38.6 billion recorded in full-year 2016.

“As a result, sovereigns comprised 70% of total sukuk issuance in 2017. We estimate that total sovereign sukuk volumes exceeded US$50 billion in 2017 as a whole,” the report added.

The report also highlighted that future growth in issuance in Malaysia will be driven by strong demand from local investors, as well as coordinated and supportive policies from the government for Islamic finance.

Other factors include the large and growing base of Shariah-compliant corporates in Malaysia, as well as global investors’ increasing familiarity and comfort with sukuk instruments and increasing appetite for Malaysian credit.

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