SINGAPORE: Despite the rapid growth of other sukuk markets, Malaysia remains the largest and most liquid, with a deep institutional investor base.
This is according to Moody’s Investors Service in its just-released Moody’s analysis report titled “Islamic Finance: 2015 Malaysian Sukuk Volumes Will Be Stable, Driven by Refinancing.”
Moody’s Global Head of Islamic Finance, Khalid Howladar said: “We expect total sukuk bond issuance in Malaysia to be at or slightly lower in 2015, when compared with the US$20bil (RM72bil) seen in 2014.
“This is, given Malaysia’s adherence to its policy of fiscal deficit reduction, against the backdrop of weak commodity prices and foreign exchange volatility.
“Malaysia’s declining share of global issuance reflects the increasing internationalisation and diversity of Islamic capital markets.”
Simon Chen, a Moody’s vice president and senior analyst for the financial institutions group, said for Islamic banks in Malaysia, overall loans growth, including for Islamic financing, will slow slightly to between 8% and 9% in 2015 from 10% in 2014.
“This will reduce the banks’ need for new funding, because asset growth will moderate, due to the country’s slower economic growth,” he added.
Chen pointed out that at the same time, Islamic banks will continue to apply sukuk in addressing the significant maturity mismatches between their assets and liabilities, and to improve liquidity management in the context of Basel III.
Moody’s analysis is co-authored by Howladar, Chen, vice president and senior analyst for the sovereign risk group Christian de Guzman, assistant vice president and analyst Nidhi Dhruv, as well as associate analysts Vincent Tordo and Maisam Hasnain. Dhruv, Tordo and Hasnain are Islamic finance specialists in the corporate finance group.
The report said that in 2015, corporate sukuk issuance would remain dominated by Malaysian government-related issuers, as such issuers continued to tap and further deepen the Malaysian sukuk market.
It also said US$44bil (RM158.6bil) of Malaysian sukuk would mature in 2015-2017, with corporate and sovereign issuers needing to refinance almost 90% of the total amount. Financial institutions account for the remaining US$4.6bil (TM16.6bil).
Of the US$44bil, only about 6% is denominated in US dollars, with the rest in ringgit, highlighting the depth of the domestic market.
As for the Malaysian sukuk market in relation to the overall global sukuk market, the former’s share of volumes is declining. At March 31, 2015, some 58% of the about US$308bil (RM1.11bil) of total sukuk outstanding were issued in Malaysia versus a 40% issuance share in 2014.
The remaining issuance is increasingly fragmented, reflecting increased volumes from other Islamic markets, particularly the Arabian Gulf countries.
Moody’s expects this trend of increased volumes from other Islamic markets to continue.
Moody’s report pointed out while other sovereigns have been keen to support the growth of Islamic finance in their jurisdictions, it is unlikely over at least the next five years that any other market except perhaps Saudi Arabia will match the depth and breadth of Malaysia’s domestic sukuk market.
This is considering the lead gathered from over a decade of sustained issuance, and the extensive and coordinated policy support from Malaysia’s central bank and all other stakeholders in the country.
The report further highlighted that future growth in issuance in Malaysia would be driven by strong demand from local investors, coordinated and supportive policies from the Government for Islamic finance.
Other factors include the large and growing base of syariah-compliant corporates in Malaysia and global investors’ increasing familiarity and comfort with sukuk instruments and increasing appetite for Malaysian credit.