Monday, May 25, 2015
Dubai: Malaysia, the largest and most liquid sukuk market in the world, is expected maintain sukuk issuance growth momentum this year, although a small decline is anticipated because of potential fiscal tightening, according to rating agency Moody’s.
“We expect total sukuk bond issuance in Malaysia to be at or slightly lower in 2015 when compared with the $20 billion (Dh73.64 billion) seen in 2014, given Malaysia’s adherence to its policy of fiscal deficit reduction, against the backdrop of weak commodity prices and foreign exchange volatility,” said Khalid Howladar, Moody’s global head of Islamic Finance.
A growing number of entities from outside the country have issued ringgit-denominated sukuk as they attempt to diversify their funding sources. In addition, the government has built an extensive domestic yield curve, particularly in the longer tenors. This yield curve supports Malaysian corporate and bank issuers in securing funding across all maturities. As such, Malaysia is likely to remain the broadest and deepest domestic sukuk market for at least the next few years.
Corporate and sovereign refinancing of maturing bonds are expected to drive stable sukuk issuance volumes in Malaysia in 2015, but the decline in overall loan demand in the banking sector is likely to impact the funding requirement of Islamic banks.
“As for Islamic banks in Malaysia, overall loan growth, including for Islamic financing, will slow slightly to 8 per cent to 9 per cent in 2015 from 10 per cent in 2014, reducing the banks’ need for new funding, because asset growth will moderate, due to the country’s slower economic growth,” said Simon Chen, a Moody’s vice-president and senior analyst for the Financial Institutions Group.
Despite the possibility of such a slowdown, analysts expect Islamic banks to continue to use sukuk in addressing the significant maturity mismatches between their assets and liabilities, and to improve liquidity management in the context of Basel III capital adequacy norms.
Analysts say that in 2015, corporate sukuk issuance will remain dominated by Malaysian government-related issuers. Around $44 billion of Malaysian sukuk will mature in 2015-17, with corporate and sovereign issuers needing to refinance almost 90 per cent of the total amount.
Financial institutions account for the remaining $4.6 billion. Of the $44 billion, only about 6 per cent are denominated in US dollars, with the rest in ringgit; highlighting the depth of the domestic market.
Despite the rapid growth of other sukuk markets, Malaysia remains the largest and most liquid sukuk market with a deep investor base. As such a growing number of entities from outside the country — particularly in the GCC region — are issuing sukuk bonds denominated in Malaysian ringgit as they attempt to diversify their funding sources.
Since 2006, foreign issuers have raised about $5.8 billion through cross-border sukuk issuance in Malaysia.
Moody’s expects increased volume of issuance from other Islamic markets to continue. While other countries have been keen to support the growth of Islamic finance in their jurisdictions, it is unlikely over at least the next five years that any other market except Saudi Arabia will match the depth and breadth of Malaysia’s domestic sukuk market.
By Babu Das Augustine Banking Editor
Gulf News 2015. All rights reserved.
