Sukuk ‘too complex’ as tool to raise funds

The sukuk market is likely to be depressed in 2017 because of difficulties in issuing them and higher rates, S&P says.

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Sukuk issuance growth in the Arabian Gulf is likely to remain subdued this year even as ­countries in the region need to raise more debt to plug budget deficits.

That is mainly because of the complexity of selling Sharia-compliant bonds, according to the latest research from S&P Global Ratings.

Sales of Islamic bonds fell in 2015 and last year over previous years in the GCC as the issuance of conventional bonds soared. Globally, the market for sukuk is also expected to remain stable this year at between US$60 billion and $65bn, the ratings agency said.

“One of the reasons why issuance is dropping relates to the difficulties inherent to launching sukuk,” said Mohamed Damak, a Dubai-based analyst at S&P.

“It is still more time-consuming and complex to tap the sukuk market than to issue a conventional bond, even though the time and cost gap has reduced over the years.

“Although several heavyweights in the financial industry are pushing the market toward greater standardisation, little was achieved in 2016 and we believe the level of standardisation is still some way off.”

After many years of rapid growth, Islamic finance is slowing down in tandem with the price of oil as demand from the Gulf wanes.

The slowdown comes at a time when Gulf nations are looking for ways to finance budgetary shortfalls and many sovereigns have tapped international dollar bond markets.

Despite the recent rebound in oil prices, the GCC will need about $275bn of financing between this year and 2019, of which half is expected to come from bonds and sukuk, according to S&P.

Those governments, as well as related entities and companies, have been increasing bond sales in international markets over the past year.

The UAE accounted for $14.4bn issued in the second quarter, Qatar $9bn and Oman $5bn, according to a report in September from the Bank for International Settlements.

And in October, Saudi Arabia sold $17.5bn in bonds to ­international investors, its first ever sale.

Last year, all types of Gulf issuers sold about $70bn in bonds and sukuk, of which governments represent 60 per cent of the total.

Complexity of sukuk issuance is not the only headwind facing Islamic financing.

Rising interest rates in the US following a seven-year stretch of record low rates will also dampen appetite for sukuk this year, according to S&P.

The prospect of higher interest rates after Donald Trump’s US election victory could prompt Gulf governments that have already tapped a record $40bn in bonds and sukuk this year to gently step on the issuance brakes.

Even if those increases remain piecemeal, they will still have an effect, Mr Damak said, adding that S&P economists are forecasting a 50 basis point increase this year after a 25 ­basis point hike last month.

“Although the increase is minimal, it might squeeze global liquidity and make funding more expensive,” he said. “This will inevitably dampen investors’ appetite for sukuk, which are part of the global capital market and therefore subject to changes in general financing conditions.”

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