The first quarter of 2013 has proven to be a busy year for global sukuk markets, with near-record low yields continuing to encourage sovereigns, corporates and banks to increasingly rely on Islamic debt markets to meet their financing needs. According to data from Bloomberg, in the first three months of the year, a total of US$12.9bn in sukuk was issued around the world, marking an increase of 3.0% compared to the same period a year earlier. In the GCC, total Islamic debt issuance grew at a slightly slower pace of 2.0% y-o-y, coming in at US$8.5bn. In terms of sectoral breakdown, financials have accounted for over 33% of total issuance, compared to 24% for oil, gas and electric companies, and 16% and 14% for consumer products and basic material firms respectively. The main surprise so far has been the sharp drop off in government sukuk, which accounted for approximately 20% of total global issuance in 2012, but only 5.4% in Q113. Going forward, we expect to see increased sovereign sukuk issuance out of the Gulf in H213, particularly as governments attempt to build a yield curve for the private sector (Qatar being a case in point).
Islamic debt markets have been particularly active in the Gulf since the start of 2013. Some of the more notable issues since the start of the year have included:
In late January Dubai raised US$750mn through a 10-year sukuk , with the orderbook closing at US$11bn, with demand coming from the Middle East (52%), UK (26%), Europe (12%), and Asia (3%).
In late February, Dubai Electricity and Water Authority (DEWA) raised US$1bn through a sukuk , pricing the bond at 3.0%, compared to initial guidance of 3.1%.
Dubai Islamic Bank raised US$1bn in a perpetual sukuk in mid-March, with an or derbook of over US$14bn . Some reports indicate that this was one of the most demanded sukuk issues in history.
In mid-March, Dubai's Emirates Airlines launched a one-year US$1bn amortising sukuk at 300bps over five-year midswaps.
Oman's Bank Muscat priced a US$500mn five-year Islamic bond at a spread of 170bps over mid-swaps, which was lower than initial guidance of 187bps.
The GCC's largest dairy and food producer, Saudi Arabia's Almarai Co , sold a US$346mn Islamic bond on April 1.
On April 9, Sharjah Islamic Bank issued a five-year US$500mn sukuk with a profit rate of 2.9%, compared to guidance of between 2.9-3.0%.
|Growth To Slow?|
|Global Islamic Bond Issuance|
With top-line growth across the entire Islamic finance industry having remained robust over the past several years, the focus is now turning to whether this momentum can be maintained. Recently released estimates by Ernst & Young (EY) highlight how strong this expansion has been, with the stock of shari'a -compliant assets at GCC commercial banks having reportedly grown 14.1% in 2012 to come in at US$445bn, compared to average growth of 10.1% for conventional lenders (the latter are BMI 's estimates). EY also estimates the global Islamic finance industry to have posted a five-year average annual growth rate of 19%, with total assets at commercial banks now topping US$1.5trn. To be sure, while the Islamic finance industry in general , and the sukuk market in particular , continues to hit new highs, the pace of expansion is undoubtedly slowing.
We have certainly expressed ou r concerns in the past that the rapid growth seen across the global Islamic finance industry could be set to slow over the coming years. A lack of cross-border cooperation between key hubs of Islamic banking in Asia and the Middle East, in addition to policy uncertainty and political risk in several future growth markets, wil l undermine the industry's expansion in 2013 and potentially beyond . Over the past several months, many of these challenges have come to the fore:
Lack of Cross-Border Cooperation: In early April, it was suddenly announced that Saudi Arabia had decided it was withdrawing from the Kuala Lumpur-based International Islamic Liquidity Management Corp (IILM), and that it had sold its shareholding in the organisation to Qatar and Malaysia. The IILM was initially set up in 2010 to help Islamic banks manage their short-term funds by issuing highly rated sukuk, but was only slated to issue its first bond in Q213. The exact reason for the Saudi decision to withdraw from the body is unclear, but likely involved disagreements over policy. Indeed, in some of the more conservative Gulf states, interpretations of what is permissible under Islamic law differs widely from Asia. Without more concrete cooperation between Southeast Asia and the Gulf, it is difficult to envision the Islamic finance industry being able to hit the most ambitious growth targets set out for the industry. A lack of a single harmonised regulatory framework remains a major impediment to cross-border deals, with the Saudi decision to pullout from the IILM only confirming our fears that national governments will continue to prioritise domestic concerns over international cooperation. At this stage, it is becoming increasingly likely that the onus for developing the industry's regulatory framework will be split between Asia and the Middle East. To be sure, we expect Malaysia's Islamic Financial Services Board (IFSB) to remain the most prominent standard-setting body in Asia, while the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) will take on that role in the Gulf.
Policy Uncertainty And Political Risks: Despite hopes that the rise of Islamist governments across the Middle East and North Africa would prove to be a boon for shari'a-compliant finance in the region, it is clear that the industry's development will continue to be constrained by a volatile policy backdrop in many of these states. Egypt is a case in point: Since the start of 2013 draft legislation that would permit the issuance of sukuk has been held up on several occasions due to objections from the country's highest religious authority, al-Azhar, who claim that they need to approve the legislation (they initially voiced opposition due to their fears that sukuk would open up the possibility that foreigners could own key state assets). Egypt's recently passed constitution clearly lays out that al-Azhar should be consulted, however it remains unclear to what extent the government should rely on the body for advice, or if they need their formal approval for the sukuk legislation to be passed. Regardless of the country's dire need to tap international Islamic debt markets to help cover the budget deficit, political wrangling continues to slow the passage of the legislation. This is likely to be a prominent feature in many markets where newly elected Islamist governments have declared their intent on developing shari'a-compliant financing.
|Rank||Country||Shari'a-Compliant Assets (US$bn)||Total Assets (US$bn)||% of assets shari'a-compliant|
|Source: The Banker, Respective Central Banks|
Egypt's experience should provide a cautionary tale for those who believe the global Islamic finance industry will be able to continue growing at the same rapid clip as it has in recent years on the back of further expansions into untapped markets. To be sure, there is still a considerable degree of enthusiasm surrounding the sector's potential in North Africa. The rise of a moderate Islamist government in Morocco in late 2011 appears to hold out particular promise , with the country's parliament approving legislation allowing the government and corporates to issue sukuk in January 2013. In mid-March the central bank reported that it had started talks with Islamic scholars to create a central shari'a board which would help oversee the industry, and which can lead the way in helping to lay the groundwork for the eventual establishment of Islamic banks (which, similar to Turkey, will be known as 'participation banks'). With a relatively unbanked population of approximately 33mn, Morocco will be a key frontier market for shari'a -compliant financial products going forward.
It is not simply politically stable markets with large growing populations which have drawn the interest of investors looking to tap into the potential of Islamic banking in North Africa. Even Libya, which continues to experience sporadic bursts of violent unrest, has started attracting attention. Indeed, according to reports by Bloomberg, Qatar's largest Islamic lender, Masraf Al Rayan , plans to spend as much as US$275mn to buy a 40% stake in a hitherto unnamed Libyan bank. Hussain Al-Abdulla, the chairman of Masraf Al Rayan, stated the "Th e ground is fertile. There's a n eed to develop infrastructure in Libya. There's a need to develop the education sector. There's a need for hospitals. There's a need for banks because there aren't many". Looking at the accompanying table above, it is clear that the entire North African region holds some appeal, if only due to the relatively underdeveloped state of the industry at present.
From our standpoint, one of the most exciting markets to watch over the coming years will be Turkey, where the industry is only just beginning to get off its feet following years of suppression due to political sensitivities. As of early April 2013, the country was in the process of establishing new regulations that would allow for more widespread use of sukuk . At the moment, the government and corporates can only issue ijara , while the new legislation would approve the use of istisna , marabaha , mudaraba , musharaka , and wakala . With Islamic banki ng assets accounting for only 5 % of the total commercial banking sector's assets, there is considerable scope to deepen the country's shari'a -compliant financial markets. Turkey has been, for many years, one of our favourite long-term EM convergence stories, in large part due to its relatively stable banking sector, which saw top-line growth of 14.1%, 21.5% and 21.7% in 2012, 2011 and 2010 respectively.