IT is unprecedented in four decades of the contemporary Islamic finance industry. Last year, in a six-month period from July to December, Saudi Arabia issued a staggering US$24.59 billion (RM99.83 billion) of sovereign sukuk through one international and six consecutive local currency offerings.
This does not include quasi-sovereign issuances, such as the US$3 billion sukuk issued by state oil company Saudi Aramco in April, or the spate of issuances by Saudi corporations.
In contrast, according to the Securities Commission Malaysia (SC), the value of sukuk (both government and corporate) issued in Malaysia for the first 11 months of last year (January to November) totalled RM136.2 billion (US$33.54 billion), which is 53.3 per cent of the total volume of bonds and sukuk issued in Malaysia. This figure is higher than the RM129.45 billion of sukuk issued in 2016 and the RM117.7 billion issued in 2015, which suggests that sukuk issuance in Malaysia is back on an upward trajectory.
These market developments, however, do not tell the whole story about sukuk and its prospects for this year.
Saudi Arabia and Malaysia are by far the two largest sukuk markets, followed by Dubai in the United Arab Emirates (UAE). They are pioneering innovations in the sukuk market, which only a few months ago, would have been unthinkable. Sukuk is now firmly also on the radar of the International Monetary Fund, World Bank, Basle Committee for Banking Regulation & Supervision and G20 (Group of 20 Advanced Economies).
This time last year, I predicted that the primary sukuk market would top US$100 billion. Moody’s Investor Services recently projected that sukuk issuances last year would total US$95 billion.
This compares with the US$60.693 billion in 2015 and US$88.279 billion in 2016. The figures up till 2016 do not include Saudi sovereign sukuk because Riyadh only started issuing sukuk in April last year.
The entry of Saudi Arabia is a game-changer. This, together with developments in Malaysia and elsewhere, is why I project primary sukuk issuances this year to edge more towards US$150 billion to US$200 billion.
A driver of the Saudi sukuk market is the huge appetite for Saudi sovereign risk from local investors. The volume of the six Saudi riyal sukuk, for instance, amounted to SR58.455 billion (US$15.59 billion), but the over-subscription to these issuances was a staggering SR175.125 billion, thus giving an average coverage ratio of 264.1 per cent.
But it is Malaysia that is driving innovation, which has opened up exciting new windows for sukuk origination.
Not that the Malaysian market is modest. The size of the Islamic Capital Market at the end of November last year, according to SC data, totalled RM1,854.16 billion, which is 59.49 per cent of the total capital market, while total government and corporate bond and sukuk outstanding amounted to RM1,282.30 billion, of which sukuk alone accounted for RM751.32 billion, or 58.84 per cent.
The Malaysian market is more advanced than the Saudi market in terms of public policy, regulatory framework, infrastructure, diversity of structures, asset classes, secondary trading and so on.
Malaysia is leading the world in Socially Responsible Investment (SRI) Sukuk and Green Sukuk, with Khazanah Nasional Bhd, the government investment company, and Malaysian subsidiaries of Chinese renewable energy companies showing the way.
Prime Minister Datuk Seri Najib Razak, in his 2018 Budget, unveiled a series of tax incentives, including an income tax exemption on Green SRI Sukuk Grant, aimed at encouraging the issuance of Green SRI Sukuk in Malaysia.
The SC, through the Capital Market Development Fund, will provide a Green SRI Sukuk Grant amounting to RM6 million to finance, inter alia, external review expenditure incurred by a Green SRI Sukuk issuer.
Khazanah pioneered a new corporate social responsibility (CSR) sukuk, with three issuances to date, that allows the private sector to give back to society using a unique “pay-for-success” structure, and whose proceeds have been used to fund schools under the Yayasan Amir Trust School Programme to improve the accessibility of quality education in government schools through a public-private partnership with the Education Ministry.
In July, Chinese-owned Tadau Energy Bhd issued “the world’s first” Green Sukuk amounting to RM250 million. Tadau’s parent, Edra Power Holdings, is also poised to issue a RM5.28 billion sukuk to fund a gas-powered plant in Melaka.
This was followed in October by a RM1 billion Green SRI Sukuk by Quantum Solar Park Malaysia Bhd — the largest such sukuk to be issued to date to fund the largest solar power project of its kind in Southeast Asia.
In December, Malaysian city developer, SkyWorld Development Bhd pioneered a RM50 million Sukuk Musharakah, which is the first securitisation of progress billings and the first to involve affordable housing.
Another Chinese-owned company, BEWG Malaysia Bhd, issued a debut RM400 million Sukuk Wakalah, which is the first-ever ringgit-denominated sukuk issued by a Chinese conglomerate for a water infrastructure project.
These developments must be seen in tandem with sukuk activity in other markets, such as Indonesia, Turkey, Pakistan, Hong Kong, Bahrain, UAE, Qatar and Oman, whose contribution to the sukuk market in aggregate and market diversification terms is just as important.
With the right public policy, cross-border cooperation, innovation and market leaders, the future of sukuk is indeed bright!
Mushtak Parker is an independent London-based economist and writer. He can be reached via [email protected]
