Global sukuk volume to fall this year

Corporate borrowers, banks and sovereigns have pulled back from vigorous issuance this year due to economic uncertainties


THE global Islamic finance industry is expected to contract this year as sukuk issuance due to significant disruption in corporate sukuk issuance in the first half of 2020 (1H20), said Moody’s Investors Service VP senior credit officer Nitish Bhojnagarwala.

“We only expect a modest decline in issuance from US$179 billion (RM737.48 billion) to US$170 billion which is 5% below the 2019 levels,” said Nitesh in a Moody’s media roundtable session on Growth and Development of Islamic Finance Across Core Markets yesterday.

Corporate borrowers, banks and sovereigns have pulled back from vigorous issuance this year due to economic uncertainties triggered by the Covid-19 pandemic.

The Malaysian government and central bank have channelled monetary resources to support the economy and cope with the pandemic, and lower oil prices earlier this year and thus further limited government issuance, said Christian de Guzman, VP senior credit officer sovereign risk group Moody’s Investors Service.

“Government fiscal position has been stretched by the pandemic and with many of the Islamic jurisdictions exposed to lower oil prices which had a knock on effect on revenues.

“At the same time, there are Covid-19 spending in-terms of curtailment, increased healthcare cost and assistance to households and businesses by pushing expenditure,” said de Guzman.

He added that although private sukuk issuers command a large share of outstanding Shariah-compliant securities in the Malaysian capital market, any pullback on government issuance leaves a meaningful impact on overall volume.

Moody’s said long term expectations for both Islamic finance and the sukuk market remains under-represented.

“The sukuk market growth potential is on the green sukuk side where the issuance activities have been growing over the years. The world sukuk issuance is US$180 billion versus green sukuk of only US$4.5 billion. So, overall issuance activity has been fairly low,” added Nitish.

He added that sustainability-focused issuance within the Gulf Cooperation Council region, Asia Pacific and Turkey are expected to drive green sukuk volume.

In September, RAM Ratings Services Bhd reported global sukuk issuance fell 9.1% year-on-year in 1H20, bringing the total issuance value to US$65.6 billion (1H19: US$72.1 billion).

It added that despite the general contraction, the spike in sovereign sukuk issuance by Turkey (+56.2%) and Indonesia (+46.0%) helped cushion the declines in other key sovereign sukuk markets such as Malaysia (-69.3%) and Saudi Arabia (-46.5%).

“The slower time-to-market in sukuk issuance may have prompted some key sukuk markets to choose conventional bonds to fund their fight against Covid-19. That said, additional funding for stimulus packages may keep setting the pace for sukuk issuance in 2H20,” it said in a note last September.

Commenting on the prospect of Malaysia’s Islamic finance growth, Moody’s analyst Li Tengfu said the burgeoning middle class striving for a better lifestyle will continue to give a visible growth for Islamic banks in the country.

“The seven largest Islamic banks in Malaysia are concentrated on retail financing as a result of strong demand from the consumer to finance assets such as properties.

“There is a huge consumer financing demand that is coming from a young population and middle class that spurred demand for Islamic or Shariah-compliant Islamic products and services in Malaysia,” said Li.

He added that the continued demand for Islamic loans is the reason local banks are still largely leaning heavily on the consumer segment and limit exposure to corporate loans.

“I think this is partly because banks too want to focus on growing their Islamic banking franchise because essentially that is where the demand is for Malaysia,” he added.