After a strong performance last year, it's unclear whether the global sukuk market can stage a repeat performance in 2018, according to a report published today titled "Global Sukuk Market Outlook: Another Strong Performance In 2018?"
Sukuk issuance in 2017 increased by 45.3%, reaching $97.9 billion, up from $67.4 billion in 2016, underpinned primarily by the jumbo issuances of some Gulf Cooperation Council (GCC) countries.
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"Driving this performance were good liquidity conditions in the GCC and, more generally, globally, as well as activity by some countries with the goal of further developing their Islamic finance industries," said S&P Global Ratings Head of Islamic Finance, Dr. Mohamed Damak.
What's more, some issuers (particularly in Saudi Arabia), in our view, were able to choose sukuk over bonds because they were less pressed for time to raise funds.
By comparison, the outlook for sukuk in 2018 looks uncertain. While we still foresee significant financing needs for core Islamic finance countries, tighter global liquidity conditions, mounting geopolitical risks, and slow progress on the standardization of Islamic finance products will continue to hold the market back from its full potential.
We see a couple of interesting trends in the market that are likely to shape its performance in 2018 and onward. These include a more stringent application of the profit-and-loss sharing principle and a broadening of the investor base to include retail and Waqf money.
"While we do not opine on Shariah-compliance, we are of the view that a more stringent application of the profit and loss sharing principle could deprive the market of an important class of investors (fixed-income investors) and ultimately lead to higher pricing," added Dr. Damak.
From a rating perspective, we can rate sukuk issued by financial institutions with loss-absorption features. However, it is unlikely that such sukuk would receive the same rating as their sponsors, since the risks are very likely to be higher.
Although it is not our role to advise waqf investors about asset allocation, we observe they are generally not after profit maximization but rather the fulfillment of certain social objectives. In addition, in light of the significant oversubscription of most sukuk issued, we think softness in the market is due to a lack of supply rather than demand.
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Regarding retail sukuk, we believe that development of this part of the market necessitates a specific regulatory framework to protect investors and ensure proper access to information about risks. Retail sukuk issuance has been successful in some countries where, for example, authorities provided a tax incentive to drain a portion of the savings toward this market.
In the GCC, there is currently no income tax, so no opportunity for tax relief; local capital markets remain narrow; and the significant amount of unremunerated deposits on banks' balance sheets suggests that remuneration is not the primary motive for some retail depositors.
Only a rating committee may determine a rating action and this report does not constitute a rating action. The report is available to subscribers of RatingsDirect at www.capitaliq.com.
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