Need to further internationalise Sukuk market

There is a need to further internationalise the sukuk market by making issuances in hard currencies such as the US dollar and not just confine it to the domestic currencies.

This follows the observation by a Standard & Poor’s Ratings Services (S&P) report that the lack of integration has kept sukuk a local affair.

The report, “Despite Players’ Global Aspirations, Lack Of Integration Keeps Sukuk Issuance A Local Affair”, also says the sukuk market operates as a collection of local markets, of which the strongest by far is Malaysia.

It also highlights that over 40 per cent of the worldwide issuance in 2013 was short-term sukuk issued in ringgit by just one issuer, Bank Negara Malaysia.

Moreover, it said issuance in domestic currencies continued to significantly outpace issuance in “hard” currencies such as the US dollar.

Over the past 10 years, local sukuk issuance in Malaysia and the countries in the Gulf Cooperation Council (GCC) region comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, has helped fuel impressive growth in domestic sukuk.

But of the US$117 billion in sukuk issued in 2013, only 16 per cent was truly “international”, that is, listed on major exchanges and generally issued in hard currencies.

Most international issuances to date have originated in Malaysia or the GCC. Since 2001, Standard & Poor’s has seen only about 20 international sukuk from issuers domiciled outside these countries, for a total amount of around US$10 billion.

However, interest from issuers outside these traditional markets has increased, chiefly because Sharia-compliance attracts deep-pocketed Middle Eastern and Asian investors.

S&P said it understands that about half of sukuk investors invest in such instruments for religious reasons.

It also estimates that about 60 per cent of investors in sukuk issued by entities domiciled outside the GCC and Malaysia were from the Middle East and Asia.

The structured nature and lower liquidity of sukuk means that they are generally priced with a premium compared with conventional bonds, so attracting these investors comes at a cost.

In future, S&P said it expects this premium to reduce as sukuk documentation becomes more standardised and liquidity stronger.

(BERNAMA)

http://www.amilin.tv/news/need-to-further-internationalise-sukuk-market/