Sukuk issuance climbs to a record $22b

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Amwaj Islands: In the backdrop of strong demand for the Islamic bonds of Sukuk among the sovereigns and the private sector, the year 2017 saw $22 billion sukuk in the first 11 months.

The volume and level of sophistication in the Capital Markets arena deserves some recognition and mention. In 2017 year to date there has been a Global issuance of Sukuks of $22 billion, which is a record for Islamic banking, Rasheed Al Maraj, Governor at the Central Bank of Bahrain (CBB) told the participants of the 24th World Islamic Banking Conference 2017 (WIBC) opened on Tuesday.

“Not only has demand remained strong but the geographic investor base has also become wider with a surge in demand from U.S investors in the case of a recent sovereign issue. The other interesting feature to emerge in this region has been pricing for Sukuks, which has been tighter than Bonds. This is unlike pricing for Sukuks, which we have seen coming from other regions where it has been the opposite. This underscores pockets of liquidity in the region among Islamic Investors against a dearth of quality assets,” the Governor said.

The 24th edition of WIBC, also the world’s longest running Islamic banking conference, over the three days is offering a rare opportunity to discuss the most pressing issues affecting the global financial landscape.

The event has attracted over 1300 delegates and large number of bankers, experts and regulators show the significance of this event globally.

Against this backdrop, the Grover added, it should come as no surprise that new sovereign issuers like Egypt and Jordan are reportedly also looking to tap the International Market through Sukuk issuances.

“Hence 2018 promises to be another record year with almost $40 Billion of Sukuks maturing next year and almost a fourth of this maturing in the first quarter of 2018.

This year’s conference brought together some interesting themes and leading personalities, the combination of which I am sure will serve as a useful discussion forum for all of us.

“Themed ‘Strengthening and Developing the Islamic Economy’ the size and scale of the Islamic Bank market. In line with subdued economic activity in the region, Islamic Bank asset growth has also slowed from the 14-15% historical levels and projected, to grow at around 5% per annum for the next couple of years. The number of Islamic Banks however has grown to around 172 with another 83 or so Islamic Windows within conventional banks. According to the IFSB, the industry now employs more than 380,000 people worldwide, which reflects a significant level of economic activity by any measure,” he said.

“The primary concentration of the Commodity Morabaha as the workhorse for all Islamic banking transactions. As we all know, this product has caught the attention of Sharia Scholars and critics alike who question the veracity and true nature of this time-tested product. This would be a good time to explore alternatives and develop them further.

“The Wakala product has found a lot of popularity and acceptance among Islamic market players for liability products, but it also has its share of challenges, which need to be analyzed and assessed.

“As far as transferability and secondary market activity is concerned, there is no other asset class, which ranks above Sukuks in the market place. As we all know Sukuks are considered a commodity class, which can provide the foundation for quite a few commodity morabaha products. The only constraint to this is the attendant price-risk, one would face using Sukuks as an inventory of alternative commodities. This price risk can be mitigated using top credit quality issuances in the Investment Grade arena and relying on shorter maturities.”

“While I accept that there are not too many Triple “A” issuers in the Islamic banking arena, and shorter maturities of their Sukuks are hard to come by, the industry has the right capital market tools and derivative hedging products available to mitigate these risks. This undoubtedly would not only reduce the reliance on commodities for morabahas but it would also go a long way in addressing the Basel liquidity requirements,” he added.

“The recent issuance by AAOIFI of FAS 30, which is the Islamic equivalent of IFSR 9 and the publication of the Sharia Governance Module by the CBB for implementation by middle of next year. These two important developments, we hope will provide a solid foundation for strengthening and developing the Islamic banking industry going forward.”

“Given the faith-based nature of Islamic banking, it is critical for Islamic banks to adopt a robust Shari’ah governance framework. The responsibility falls on the Board of Directors and senior management of Islamic banks to comply with the letter and spirit of Shari’ah and build an unmatched reputation for ethical banking.”

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