Aug 14 2012
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Global sukuk market to sustain growth in H2
The report said the volume of sukuk issuance during the first half of the year reached $66.4 billion, triggered by large sums of money pumped by sovereign authorities and central banks to absorb excess liquidity.
The GCC countries used to be a main market for Sukuk during H1, despite the absence of Kuwait and Qatar, it noted.
Global sukuk currently represents a dynamic part of the Islamic financial system that continues to grow at a remarkable pace.
Sovereigns are expected to continue the market lead as the likes of Bank Negara Malaysia, the Indonesian government and the Central Bank of Gambia upscale market issuances. The introduction of inaugural sovereign issuances from South Africa, Nigeria, Turkey and Kazakhstan is set to further strengthen the sovereign market in 2H12. Meanwhile countries such as Libya, Egypt and Tunisia are hard at work in creating a regulatory environment for future sukuk issuances for 2013 and beyond.
After the largest quarterly issuance witnessed to date in the 1Q12, the global sukuk market has continued its growth trend throughout the 2Q12 on both primary and secondary market fronts. The first half of 2012 witnessed a diverse range of new issuances which round up at $66.4 billion for the period, while the secondary market grew to $210.8 billion, representing a y-o-y growth of 40.1 percent and 30.5 percent, respectively.
The growth of sukuk issuances this year can be attributed to a number of factors, including the declining yields for both corporate and sovereign issuances given significant demand, the rarity of high quality high yielding papers and the flight to fixed income safety amid more concerns emerging from Europe. The primary sukuk market has been driven by the increasing number of funds raised by sovereigns and central banks to soak up excess liquidity and provide short-term investments, while new jurisdictions continue to enter the fray.
Malaysia has continued its dominance in the market issuing $18.5 billion in the second quarter to total $46.8 billion for the first half period. The market share of Malaysian issuances has consistently been around 70.0 percent over the past five years and shows no signs of slowing down.
The UAE was the second largest domicile of issuances over the quarter with $2.4 billion worth, closely followed by Saudi Arabia with a pinch lower than $2.4 billion.
Pakistan registered 1.5 percent growth at $1.0 billion, Bahrain (0.9 percent, $597.2 million), Yemen (0.4 percent, $233.3 million), Brunei Darussalam (0.2 percent, $156.3 million) and Gambia (0.03 percent, $21.0 million).
Around $30 billion worth of sukuk papers matured as of end-2Q12 and corporates will be eager to raise and refinance long-term facilities and improve financing efficiencies.
By region, South Asia accounts for the majority of sukuk issuances in 1H12 (79.3 percent), Indonesia maintaining the regions second spot outside of Malaysia. Indonesian issuances have grown significantly of late with the nation launching its "project sukuk" program as well as issue an encouraging number of sovereign certificates, mostly via auction or private placement, for fiscal financing. Year-on-year Indonesia's primary sukuk market has grown by 221.1 percent until end-1H12.
The MENA region, and more specifically the GCC region, has been a key market for issuances this year, growing by 6.1 percent despite no Qatari or Kuwaiti issuances thus far. On a quarterly basis, GCC sukuk issuances have grown by 112.3 percent y-o-y in the 2Q12, although 39.5 percent lower than the 1Q12.
During the 2Q12 there have been a number of notable sukuk. Among them are the Islamic Development Bank's $800 million, issued with a return of 1.357 percent over its five-year tenure, significantly lower than the $750 million issued at 2.350 percent during the 2Q11. The Emirate of Dubai issued its dual tranche sovereign sukuk Ijarah during April with a return of 4.900 percent for the five-year tenure ($600 million) and 6.450 percent for a 10-year tenure ($650 million). Subsequently Dubai Islamic Bank entered the market in May with a five-year $500 million paper, managing to set a return at 4.752 percent, almost 15 basis points lower than its sovereign counterpart.
The second quarter has bolstered projections for the sukuk market moving forward given the higher uptake in sukuk issuances as well as the continued lower funding costs. Significant demand for high quality papers means that issuers continue to benefit from better credit terms.
KFH-Research said in an earlier report that sukuk issuance in 2012 will increase by 25-30 percent to break the $200 billion barrier, despite challenges that face prosperity of this industry, such as the financial struggles of some European countries and their effect on the rest of the world.
The report noted that several positive indicators forecast a brighter future for sukuk during this year, such as the increasing role of governmental issuance that will form the backbone of the market to boost the private sector and finance major developmental projects; the economic growth that the region and emerging markets are witnessing; having new parties and the increase in popularity of sukuk outside Islamic markets, after sukuk successfully substituted conventional bonds.
In addition, the report said sukuk market witnessed unprecedented growth during 2011 that reached 88 percent compared to last year.
Of the total issuances in 2011, corporate issuers made up 22.4 percent of the US dollar amount, an increase from 2010 which saw corporates only market a share of 15.7 percent.
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