Sukuk momentum is expected to continue over the medium term supported by intact investor appetite, funding diversification and refinancing needs, Fitch Ratings has said in a report.
“Sukuk supply-demand imbalance will continue to be a key growth factor but not without headwinds,” said Bashar Al-Natoor, Global Head of Islamic Finance, Fitch Ratings.
“These headwinds include additional AAOIFI-compliance complexities for sukuk and reduced borrowing needs and fiscal deficits for some of the sukuk-issuing sovereigns due to higher oil prices,” he added.
Sukuks amounting to $57.3 billion were issued in the GCC region, Malaysia, Indonesia, Turkey and Pakistan in the third quarter of 2021.
Issuance fell, as expected, by 27 percent quarter on quarter primarily due to yearly seasonal patterns and implementation challenges related to Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards.
Global outstanding sukuk reached $775.4 billion in the third quarter, 2.8 percent higher than the previous quarter. Fitch-rated outstanding sukuk volume amounted to 132.2 billion, with 79.2 percent of issues being investment grade.
Fitch said it continues to see revised terms and new clauses added to international sukuk documentation, driven by market calls for compliance with AAOIFI sharia standards and UAE’s Higher Sharia Authority’s resolutions and guidelines.
Most sukuk nonetheless continue to be structured so as to create economic effects similar to conventional bonds, limiting the impact of the changes so far, the ratings agency said.
It added that various government initiatives are underway. In Saudi Arabia, the government now has an Islamic finance (IF) strategy as part of the Financial Sector Development Program, which aims to make the country the IF capital of the world by 2030.
In Egypt the President has approved a law on the issuance of sovereign sukuk, paving the way for the country’s first sovereign sukuk.
In Oman, the Capital Market Authority has issued draft sukuk and bonds regulations and received public feedback. In Bangladesh, the government has provided tax exemptions on the capital gains applicable on transferring property to a special purpose vehicle and vice versa.