Standard & Poor’s Ratings Services has published a report examining why sukuk issuance is gaining acceptance in markets beyond its established stronghold such as Malaysia, Indonesia and the Gulf Cooperation Council (GCC) region.
European banks are reducing their overseas exposure as their capital requirements have increased and their domestic economies faltered. Governments in the Middle East and Asia have therefore turned instead to local investors to back their infrastructure projects. Banks in the Middle East and Asia that comply with Sharia law have also demonstrated a strong appetite for new assets that meet their requirements.
Until the global credit crisis of 2008, most sukuk issuances came from corporate issuers; now, most comes from governments and GREs. In our view, many sovereign issuers hope that Islamic finance will provide them with an alternative means of supporting their economies by tapping into the excess liquidity available in regions that were less hard hit by the economic downturn, such as the GCC region and Asia. Given the slowdown in global economic growth, we expect this trend to continue in the short term.
“Until the Islamic finance industry overcomes its long-term problems, we do not expect sukuk to become a mainstream asset class. The huge variety of sukuk structures continues to deter some investors, in our view. The process for resolving defaults and restructuring sukuk also remains uncertain; although an increase in the number of issues that have been listed has increased pricing transparency. Sukuk instruments are, however, increasingly attracting attention as a source of funding and diversification,” S&P report added.