The exponential rise is primarily a result of double-digit growth of the Islamic banking industry, and the increasing appetite for credible, Shari’a compliant, liquid securities, according to estimates by Ernst & Young’s Global Islamic Banking Centre of Excellence.
The demand comes from Islamic financial institutions as well as fund managers and high net worth individuals. Conventional institutions are also showing renewed interest in investing in sukuk after the eurozone debt crisis primarily as these Islamic products are backed by real assets.
“Sukuk continues to be in the spotlight, especially after the global economic meltdown, where we learnt that carrying excessively risky debt on the books can lead to financial collapse during black swan events,” said Ashar Nazim, Mena Islamic Finance Services Leader, Ernst & Young.
The intended differentiation is that sukuk securities are backed by real assets and projects, Nazim said, adding: “Major South East Asian and Middle Eastern companies are tapping into the international sukuk market to raise Shariah-compliant funds. Global financial firms are also in the fray to raise money through sukuk instruments and to offer Shariah-compliant products.”
The fastest growing segment is the Ringgit denominated sukuk, which accounts for more than two thirds of the total global issuance. Malaysia has successfully and regularly tapped into the sukuk market to support its infrastructure development programme, a model that other markets are keen to replicate.
“However, one of the foremost challenges faced by the sukuk market is the supply side constraint as demand continues to outpace new issuance coming into the market. An absence of a global standardised sukuk trading platform open for all Islamic and conventional financial institutions is a major factor hindering growth,” Nazim said.
The unprecedented growth in demand is good news for governments and corporates seeking new avenues of funding. In 2011, approximately 86 per cent of total sukuk issuances were from sovereign linked entities. In Saudi Arabia, the recent passage of mortgage law will drive billions of dollars of mortgage financing, and sukuk capital market will be a primary beneficiary. Similarly large natural markets like Malaysia, Indonesia and Turkey are set to benefit from the rising demand for Shariah-compliant securities backed by quality, real assets.
“There is an urgent need for a new direction in the market to be led by leading Islamic financial institutions and multilateral institutions in a collaborative manner. Globally, at least 14 Islamic banks today have the financial muscles to venture into international sukuk capital market. Pre-requisites are international connectivity, sukuk structuring and trading expertise and balance sheet strength,” he said.
Post global financial crisis, there was an upsurge in interest and eagerness amongst international conglomerates to explore avenues into the vastly liquid Islamic debt market.
(Khaleej Times / 09 Sept 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com