One of the most important Islamic investments, sukuk has seen rapid issuance recently â and rewarded investors with good returns. We asked Mohieddine Kronfol of Franklin Templeton Investments about the prospects for this asset class.
What are your expectations for growth in the sukuk market?
Four main factors will drive innovation and growth of the sukuk market:
1. Capital market development and increased spending on infrastructure in the GCC.
2. New market participants from Africa, Asia and Europe.
3. Innovation that provides a wide array of structures to meet issuers varied needs (perpetuals, amortising issues, project financing, convertibles, etc.)
4. Sustained robust issuance from Malaysia.
One of the challenges for the sukuk market is insufficient supply given the strong build-up of Islamic assets at banks, asset managers and institutions, both Islamic and conventional. High demand results in oversubscriptions on primary sukuk issues. This demand, however, promotes the market for issuers seeking to diversify their sources of funding.
Annual issuance of investable sukuk, with maturity of over two years and at least $200 million issued and outstanding, is above $40 billion annually.
This continues to grow 20% a year, as has been the case over the past two decades. Issuance remains concentrated in the GCC and South East Asia. Malaysia is the largest issuing country with almost exclusive local currency issuance and Turkey has emerged recently and quickly as a significant participant.
In 2014, we are on pace to cross $50 billion, with a lot of funding aimed at capital expenditure and growth financing. In the past refinancing and capital requirements drove transactions.
Most exciting is the tangible progress being made to support further sukuk issuance. Hong Kong and Singapore in Asia; South Africa, Nigeria, and Morocco in Africa; Luxembourg and the UK are expected to issue in the next year or two, helping to diversify the primary market and improve secondary market liquidity.
How does the market for sukuk in Malaysia differ from that in the Gulf?
The difference is principally in the amount of dollar-denominated transactions and the average issue size, which are both much smaller than GCC issuances and which serve to limit liquidity and tradability. This may be a function of the local demand but for a $300 billion economy, there are only five instruments from Malaysia that are in US dollars and above $500 million in size.
This could be improved.
What changes to regulation would assist the growth of Islamic finance in a more general sense?
Demand could be unlocked by a competitive pension framework, particularly in the GCC; by regulations, policies and tariffs to support retail and institutional/exempt funds; and by policies that go towards supporting takaful and re-takaful activities.
On the supply side, more needs to be done to promote the development of the region’s capital markets, especially the domestic money, debt and sukuk markets. This should include standardised and transparent sovereign issuance programmes in local currency, of multiple tenors and supported by a network of primary dealers.
We also need more sophisticated bank services. Islamic banks are some distance away from providing the platforms, products and services that can compete with their conventional counterparts.
Malaysia’s sharia-compliant infrastructure is a good model for the GCC to consider and prime minister Najib Razak’s recent goal of creating a global Islamic bank in Malaysia is one example of the country’s leadership support for the industry.
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