Islamic finance: going global

Ahsan Ali — Thu, 11 Feb 2016 14:41:33 +0000

Islamic finance has come a long way in recent years, with the range of products and structures widening, and markets across Europe, North America and Africa looking to play a bigger role.

Globally, Islamic finance assets are expected to skyrocket to opens in a new windowUSD 1.8 trillion by 2020, with issuance of Sukuk (Islamic bonds) continuing to increase sharply across a widening geographic footprint.

Not bad for a market that only four years ago was more or less confined to its traditional stronghold of Malaysia and the Gulf Cooperation Council (GCC) states.

Innovation is creating more choice

Whereas in the past, the product range was limited, aimed mainly at governments and corporates, and relying on asset-based structures such as Ijara (sale and leaseback), there’s now a growing array of innovative Islamic financing instruments available on the market.

Hong Kong, UK, Luxembourg and South Africa are among a growing list of non-Muslim markets that have issued sovereign Sukuk, amending their legal, regulatory and taxation frameworks to accommodate Islamic finance structures.

Cross-border issuance has grown rapidly, too. Issuers from around the world have flocked to issue in Malaysian ringgit, with Malaysia being the largest local-currency Sukuk market in the world. Last year Türkiye Finans, the Turkish participation bank, issued the largest senior single ringgit Sukuk tranche by a foreign financial institution.

"Burgeoning product innovation is opening up much-needed new sources of capital"

Up until 2012, most of the Sukuk issued around the world mirrored the senior, unsecured debt structure of ‘plain vanilla’ conventional bonds. Now, however, issuers and investors can access project-finance Sukuk, amortising Sukuk, export-credit-agency-based Sukuk, hybrid capital Sukuk, and a range of other financing instruments.

This burgeoning product innovation is opening up much-needed new sources of capital. Project-finance Sukuk, for example, gives emerging economies around the world another pool of capital to tap into for crucial infrastructure projects. Likewise, export-credit-agency-backed Sukuk means governments and companies can target a new investor base. Emirates Airlines became first to issue this type of Sukuk last year, fully guaranteed by the Export Credits Guarantee Department of the UK Government.

Ethical investing is taking off

Sukuk are also making their mark in ethical investing. In 2014, the International Finance Facility for Immunisation became the first to issue socially responsible Sukuk, to support NGO Gavi’s immunisation programmes in the world’s poorest countries. Don’t be surprised to see the first green Sukuk enter the market soon. Just like other green bonds, they’d be financing projects that benefit the environment.

Traditionally, market practitioners used mainly 100 per cent asset-based structures to create Sukuk. However, over the past few years, we have seen increasing acceptance of asset-light structures, such as those based on the wakala concept, which reduces the proportion of fixed assets required. The governments of both Malaysia and Indonesia have recently issued Sukuk with asset-light structures, setting a new direction for the market.

Expansion bodes well for long-term growth

This trend for innovation is expected to continue, as Sharia scholars, rating agencies and investors become more familiar with new Islamic financing structures.

Though the first international Sukuk was issued as far back as 2002, the Islamic finance market was initially relatively slow to take off globally. However, the past four years have more than made up for this. The recent expansion of geographies, cross-border issuance, products and structures bodes well for the long-term growth of Sukuk and, more widely, for the world of Islamic finance.

The rise and rise of sukuk

Ahsan Ali — Sun, 11 Aug 2013 23:00:38 +0000

The market for sukuk (Islamic bonds) in the region of the Gulf Corporation Council (GCC) saw exceptional growth in 2012, and this has been continuing into 2013 – building on the strongest year of the decade.

Islamic issuance rose in 2012, both in an absolute sense and as a percentage of total bond issuance. Issuance from the GCC region amounted to USD24 billion in 2012 from USD19 billion in 2011, an increase of 26 per cent.

Overall sukuk issuance grew by 62 per cent to USD138 billion in 2012 from USD85 billion in 2011. Much of this growth has been driven by cost factors.

Sukuk overtook Islamic syndicated lending as the most popular form of financing in 2012, with increased liquidity and growing interest from investors.

"Investors have been keen to support issuance"

With credit spreads having tightened considerably, both from a regional and an international perspective, investors have been keen to support issuance from the GCC. There is also a relatively strong economic backdrop, which continues to support stronger credit fundamentals in the region.

Dubai especially has been the outperformer in terms of credit performance. This has led to exceptionally high investor interest, with some of the recent issuances an indication of demand.

In the first quarter of 2013, Standard Chartered closed a number of successful sukuk deals, including Government of Dubai, Dubai Electricity & Water Authority, Dubai Islamic Bank and Emirates Airline.

Shortage of supply

Based on the current market, it would appear that there is much confidence around the region regarding Islamic finance and sukuk.
The major issue currently facing the sukuk market is a shortage of supply, with certain factors driving this imbalance. Not all entities can raise Islamic financing because there are structuring considerations, and it also requires the relevant underlying assets to be available. This can, at times, constrain supply.

For example, sukuk issuers need to have underlying Shariah-compliant assets to structure sukuk and, therefore, the size of issuance is somewhat limited, whereas conventional issuers can access the market more easily.

As sukuk outpaces conventional bond growth, it is worth considering why the market is currently so attractive. One reason issuers are favouring the Islamic format is that they have seen cost savings versus conventional bonds. And from the perspective of issuers, they can kill two birds with one stone, since sukuk allows them to access a wider investor base as well.

So, with an Islamic format, issuers can get additional demand from Islamic accounts that would not be able to participate in a conventional bond; and because of the increased demand and liquidity in the system, sukuk currently has a pricing advantage over conventional bonds.

Bright future for the sukuk market

Given these drivers, the Islamic market is likely going to continue to see year-over-year growth.

Overall, the future of the sukuk market looks bright. As the market develops, the private sector will become increasingly interested. The market is expected to maintain high levels of liquidity. This will continue to drive interest, especially for regional sovereign issuances and GCC financial institutions.

We also expect many corporates currently sitting on the sidelines to venture into this market, as they start to seek a more diverse investor base, beyond the traditional bank lending market.

"Cross-border issuance is a key trend to watch in 2013"

Cross-border issuance is also a key trend to watch in 2013. Standard Chartered is taking many issuers from the Middle East into the Malaysian market and has already completed a few deals last year.

Issuers are increasingly looking at opportunities to tap into other local currency markets, and the cross-border flows between Asia and the Middle East will also grow going forward.

As one of the largest market makers in the sukuk space, Standard Chartered remains extremely focused on the whole Islamic market, and especially on the Islamic bond market. There is reason to be positive about its development and its transformation into an exciting area of finance in the coming years.

Henrik Raber, Global Head of Debt Capital Markets, Financial Markets, Standard Chartered, contributed to this article

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