Sukuk momentum to continue over medium term amid high demand: Fitch Ratings

Doaa A.Moneim , Thursday 14 Oct 2021

Fitch Ratings expects sukuk momentum to go on over the medium term fuelled by investor appetite, funding diversification and refinancing needs.

Fitch Ratings

A report Fitch released on Wednesday highlighted Egypt’s ongoing efforts to issue its first sovereign sukuk (Islamic bonds) per a law ratified by the President Abdel-Fattah El-Sisi in August.

Last week, Egypt started to obtain financial facilities to issue sukuk (Islamic sovereign bonds) and green bonds to the tune of $2 billion, paving the way to tap into the $2.7 trillion Islamic financing system. Egypt's public treasury needs these financial facilities, which mature in three years, to fund the FY2021/2022 budget deficit. 

Meanwhile, sukuk issuance from the Gulf Cooperation Council (GCC) region’s countries; including Malaysia, Indonesia, Turkey and Pakistan reached $57.3 billion in the third quarter (3Q) of 2021, according to the report.

On the other hand, the report pointed out that issuance dropped by 27 percent quarter-over-quarter, as expected, 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 3Q of 2021, which is 2.8 percent higher than 2Q of 2021, the report’s data showed.

Meanwhile, Fitch-rated outstanding sukuk volume amounted to $132.2 billion, with 79.2 percent of issues being investment grade, according to the report.

“Fitch 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 report said.

On his side, Global Head of Islamic Finance at Fitch Ratings Bashar Al-Natoor explained that sukuk supply-demand imbalance will continue to be a key growth factor but not without headwinds, which 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.

Globally, $162.1 billion of sukuk were issued in 2019 compared to $124.8 billion in 2018, representing market growth of 30 percent and consistent with growth over the past five years with a robust demand on sukuk in 2020, according to recent data published by the Islamic Finance Foundation

The Foundation expected market momentum to continue into 2021, as issuers lock in long-term funding at historically low rates.

Short link: