The market for sukuk, or Islamic bonds, is struggling to recover from last year's dip in issuance and it could take years for supply to return and even longer to address pent up demand, a report released on Tuesday showed.
Sukuk have become an important funding tool for both banks and corporates across the Middle East and Southeast Asia, but a reliance on sovereign issuance and an economic slowdown due to lower oil prices have taken their toll.
Issuance of sukuk is down 18 percent for the first nine months this year compared with the same period last year, while the year-end figure could exceed $50 billion, according to a report by Thomson Reuters.
Issuance is estimated to gradually recover over the next few years to $54 billion in 2017 and $59 billion in 2018, but this is well below the record $134 billion seen in 2012.
This is largely due to the lasting effects of Malaysia's central bank decision to stop issuing short-term sukuk in 2015, opting instead for targeted Islamic treasury bills reserved for domestic Islamic banks, the report said.
Several Gulf countries including Saudi Arabia have also opted to fund their budget deficits with conventional bonds, amid lack of new names such as Britain and Hong Kong, which tapped the market in 2014.
Despite this, there has been a shift in the structures used to design sukuk, which could appeal to new issuers.
Sukuk are Islamic investment certificates that pay returns on money invested, instead of interest, to obey Islam's ban on interest, with over a dozen different structures in use.
An agency-based structure known as wakala had the highest value of sukuk issued in 2016 at $12.1 billion, a hybrid format that allows issuers to use a smaller level of tangible assets to underlie a sukuk transaction.
This has displaced sukuk based on ijara, a sale and lease-back contract popular among Gulf issuers, which saw $7.3 billion worth of issuance this year.
Ijara requires tangible assets for the full amount raised via sukuk, restricting its use by firms with fewer eligible assets on hand.
Diversification of funding sources remains the most appealing reason to issue sukuk, according to the report's survey of investors and sukuk arrangers conducted during August.
Sukuk still lack active secondary markets while governments have yet to incorporate them into their debt management strategies, steps which could increase their appeal, the survey found.
SOURCE: Reuters/6 Dec 2016
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