News Column

A local affair

June 1, 2014

Mohamed Damak

The Sukuk market remains a collection of regional/ local markets. International issuances represented only 16 per cent of total issuances in 2013 of which few originated outside the biggest Sukuk markets of Malaysia and the Gulf Cooperation Council (GCC) member states.

When entities domiciled outside these countries have issued Sukuk, around 60 per cent of the investors have been from the Middle East and Asia.

Sukuk are usually issued at a premium compared with conventional bonds, but higher standardisation and liquidity may cause yields to align.

In a report released in April, Standard & Poor's Ratings Services sees that the Sukuk market operates as a collection of local markets, of which the strongest by far is Malaysia's (see A Local Affair). Over 40 per cent of worldwide issuance in 2013 was short-term Sukuk issued in ringgit by just one issuer - the Central Bank of Malaysia. Moreover, issuance in domestic currencies continued to significantly outpace issuance in "hard" currencies such as US dollars.

Over the past 10 years, local Sukuk issuance in Malaysia and the countries in the GCC region has helped fuel impressive growth in domestic Sukuk. But of the $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 $10 billion.

However, interest from issuers outside these traditional markets has increased, chiefly because Shari'ah compliance attracts deep-pocketed Middle Eastern and Asian investors. We understand that about half of Sukuk investors, invest in such instruments for religious reasons. We also estimate 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, we expect this premium to reduce as Sukuk documentation becomes more standardised and liquidity stronger.

*Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

We understand that about half of Sukuk investors, invest in such instruments for religious reasons

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Source: Banker Middle East

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