The Islamic Development Bank is planning to launch its first green sukuk this month, having finalised a Sustainable Finance Framework to help issue such bonds.
The bank will look to raise around $500 million from its debut green sukuk, according to its president, Bandar Hajjar, making it the first AAA-rated institution to issue such an instrument.
“As we march ahead in our pursuit of the SDGs, the framework allows us to leverage on innovative Islamic financing instruments such as the green sukuk in order to mobilise resources for green projects in our member countries,” he said.
The development bank has 57 shareholding member states, with the largest being Saudi Arabia, where the financier is headquartered. It holds a 26.57 per cent stake. The UAE holds 7.54 per cent of the bank, making it the sixth-largest investor in the bank after Saudi Arabia, Algeria, Iran, Egypt and Turkey.
Mr Hajjar is confident about the prospects for the global market for sukuk, or Islamic bonds, stating that it expects cumulative global issuance to grow five-fold $2.5 trillion (Dh9.5tn), up from about $500 billion currently.
In August, ratings agency Moody’s Investors Service predicted that the amount of sukuk to be issued this year will increase to $130bn from $123.2bn last year, after hitting $87.4bn in the first six months.
“There has been a rise in domestic sukuk because there is a need to finance infrastructure projects, which require a huge amount of money and budget in each country, especially our member countries,” Mr Hajjar said.
IsDB’s member countries need about $700 billion to finance infrastructure projects in the next 50 years, he added.
“For this reason, it is pretty important to be issuing sukuk to finance these projects. Sukuk financing is also contributing to social and economic development in our member countries,” he said.
Funds raised via sukuk issuance are used by IsDB for its general corporate purposes, which include financing for medium and long-term projects in its member countries. Financing is provided in various sectors such as agriculture, infrastructure, energy, health and others.
GCC countries, particularly Saudi Arabia, and south-east Asian nations like Malaysia are expected to continue to be the leading issuers of sukuk in the coming years. But he added that there had been some recent interest in the asset class from Hong Kong, Luxembourg, South Africa and the United Kingdom.
Despite this, he said that there were still many constraints to sukuk issuance, such as liquidity issues due to a limited supply of Islamic bonds.
“A buy and hold strategy by major investors is a challenge. The market is so weak here in this case, partly due to a lack of regulatory and enabling environment in some countries. This will not encourage issuers of sukuk.”
Other issues affecting the sukuk market are the tax treatment of Islamic bonds, high transactional costs in trading them and a lack of transparency in certain markets, with a lack of standardisation over the form which Islamic bonds take.