Sukuk market to lag 2019 performance on lower corporate issuance

Standardisation, alignment with ESG and issuance of social and green financing instruments may boost growth after the pandemic subsides, according to S&P Global's head of Islamic Finance

The rate of sales growth in Dubai was at its strongest in 10 months. Getty Images

The Islamic bond market has seen some improvement in recent months but its overall performance in 2020 will remain weaker than last year, pulled back by a lack of issuance from corporate borrowers and central banks, the global head of Islamic Finance at S&P Global Ratings said.

“More recently, we have observed that there's a window of opportunity that opened in the market, with investors’ risk appetite improving again,” Mohamed Damak told S&P’s Islamic finance conference held online on Tuesday. “Yet overall, I think the market will be down compared to 2019.”

Although sovereigns, banks and multilateral lenders may issue more sukuk in foreign currencies, corporate borrowers have remained on the sidelines as they try to hold onto cash and reduce capital expenditure to ride out the economic downturn triggered by Covid-19, Mr Damak said.

“Central banks are not issuing either as they are injecting money into the system rather than taking it out,” he added.

The ratings agency in July said sukuk issuance volumes had fallen 27 per cent on an annual basis in the first six months of this year. It expects overall issuance of Islamic bonds to reach around $100 billion (Dh367bn) for 2020, which will be about 40 per cent lower than the $162bn recorded in 2019.

The $2.4 trillion Sharia-compliant finance industry, which grew an annual 11.4 per cent in 2019, will also struggle to maintain the pace of growth in 2020, as core markets grapple with the impact of Covid-19 on their economies, he said.

“The macro picture has shifted with economies going into deep negative territories in core Islamic finance [markets], with the exception of Indonesia,” Mr Damak said. “Central banks have asked banks and financial institutions to support their corporate customers [and at the same time] opened up their [own] liquidity taps … and that has changed the picture completely [for the industry].”

Governments and central banks have poured more than $11tn into the global economy in monetary and fiscal packages to support financial markets and minimise the impact of the pandemic. Nine months after the outbreak, the global economy is showing green shoots of recovery, but the infection rate is still on the rise in Europe, Africa, Asia and the Americas.

However, despite economic headwinds, the long term prospects for the global Islamic finance market are still bright.

Leveraging the sukuk market’s alignment to environment, social and corporate governance (ESG) standards and the development of FinTech could provide catalysts for growth in the post Covid-19 world, Mr Damak said.  Fellow panellists Ali Adnan Ibrahim, global head sustainability at Al Baraka Banking Group and Abdul Kadir Hussain, head of fixed income and asset management at Arqaam Capital, agreed.

Sukuk will increase in attractiveness as an investment through standardisation and could satisfy the greater demand for social and green financing instruments, they said.

“The current environment is creating a unique opportunity for the Islamic finance industry to transform itself,” Mr Damak said.

Abdulla Al Awar, chief executive of Dubai Islamic Economy Development Centre, a body tasked with developing Dubai as a global hub of the Islamic economy, said there is huge potential for the growth of the sukuk market in the emirate.

In June, the Islamic Development Bank listed its $1.5bn sukuk on Nasdaq Dubai, and a month later ports operator DP World listed an instrument of the same size, indicating the potential for further growth of the sector.

DIEDC, which is developing a unified legal framework for the standardisation of Islamic finance in cooperation with IDB, is making progress on putting together a code that will create a “reference point for all jurisdictions”.

“We are not reinventing the wheel” he said, adding that the intention is to take Islamic finance standards and develop them into something that can be “adopted by different markets and jurisdictions”.