Lower liquidity not driving drop in GCC sukuk volumes

Complexity related to the sukuk issuance process is a major hindrance, says S&P



Lower liquidity levels in the GCC is not the main reason for a drop in the region’s sukuk issuances in recent years, a report by S&P Global Ratings has found.

The volume of sukuk (Islamic bonds) issued was muted last year, particularly compared with conventional bond issuance in GCC countries.

“Some market participants believe that the liquidity drop in Gulf countries, where the majority of sukuk investors are based, explains the lower issuances volumes,” said S&P Global Ratings’ global head of Islamic Finance Mohamed Damak.

“While S&P Global Ratings has observed this drop in liquidity, we still believe that, compared with global peers, Gulf banks still carry a hefty part of their assets in liquid forms,” the report stated.

GCC Islamic banks are among the main investors in sukuk and over the past two years, there has been a reduction in liquidity in the region’s banking systems.

“We believe that the less supportive economic environment is translating into fewer lending opportunities and might encourage banks to reallocate some assets to the bond and sukuk market,” the report explained.

The decision to issue sukuk depends on many factors, the report said.

They include the cost of issuance, the capacity of the market to absorb the transaction, the issuer’s target investor base, how ready the issuer’s regulatory and legal environment is for sukuk issuance, and the complexity of structuring sukuk.

“We think that the latter factor is one of the main reasons behind muted sukuk issuance in 2016 and believe it will continue to weigh on volumes in 2017,” said Damak.

While about one-half of sukuk investors were based in GCC in 2014-2016, a large portion is based outside, mainly in Asia and Europe.

“We believe that market education on sukuk in Western countries and higher standardisation of legal documentation and Sharia interpretation, or at least the establishment of large issuance programmes, will be key in broadening the sukuk issuer base and volumes,” said S&P.

S&P also estimates GCC sovereigns financing needs at around $275bn over the next three years, the majority of which pertains to Saudi Arabia.

“We expect these countries will predominantly use debt financing, albeit narrowly over assets, to plug the needs,” the report said.

While sukuk comprise only a small amount of total outstanding issuance, work has been carried out by various governments over the past few years, particularly by Kuwait and Saudi,
to establish the necessary legal frameworks for their issuance.

“With the backdrop of weakening global liquidity, this potential source of financing could become a more attractive financing prospect for GCC governments and is an additional source of external liquidity,” the report added.

Comments

comments