by TMR / pic by TMR FILE 

SUKUK momentum is expected to continue over the medium term supported by intact investor appetite, funding diversification and refinancing needs, Fitch Ratings says in a new report today.

Bashar Al-Natoor, Global Head of Islamic Finance, Fitch Ratings said sukuk supply-demand imbalance will continue to be a key growth factor but not without headwinds.

“These headwinds include additional Accounting and Auditing Organization for Islamic Financial (AAOIFI) compliance complexities for sukuk, and reduced borrowing needs and fiscal deficits for some of the sukuk-issuing sovereigns due to higher oil prices,” he added.

Sukuk issuance from GCC region, Malaysia, Indonesia, Turkey and Pakistan reached US$57.3 billion in 3Q21.

“Issuance fell, as expected, by 27% qoq, primarily due to yearly seasonal patterns and implementation challenges related to AAOIFI standards,” he added.

Global outstanding sukuk reached US$775.4 billion in 3Q21, 2.8% higher than 2Q21. Fitch-rated outstanding sukuk volume amounted to US$132.2 billion, with 79.2% of issues being investment grade.

“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 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,” said Bashar.

He added various government initiatives are underway to make sukuk attractive.

This includes the Saudi Arabia government introducing an Islamic finance (IF) strategy as part of the Financial Sector Development Program which aims to make the country the IF capital of the world by 2030.

In Egypt the President has approved a law on the issuance of sovereign sukuk, paving the way for the country’s first sovereign sukuk.

“In Oman the Capital Market Authority has issued draft sukuk and bonds regulations and received public feedback.

In Bangladesh the government has provided tax exemptions on the capital gains applicable on transferring property to a special purpose vehicle, and vice versa,” said Bashar.