COVID-19 pandemic will transform and grow the global sukuk market

Recent oversubscriptions show that despite the widespread economic malaise during the Covid pandemic, there is a sizeable appetite still for new issuance

COVID-19 pandemic will transform and grow the global sukuk market

Sukuk have emerged as an increasingly popular means of raising finance in the second half of 2020, particularly for governments needing to plug budget deficits following the deployment of economic stimulus packages as Covid-19 spread around the world.

Earlier in 2020 it had looked like sukuk issuance would end the year sharply down on 2019, as new sukuk were either postponed or cancelled as the pandemic took hold. But once markets stabilized after the crash of March and April, sovereigns began to look again at sukuk as a means of raising the financing they would need to tie over their economies. The upshot is that issuance looks set to be higher than last year.

A first nine month total of US$130.5 billion was up 2.5% from the same period in 2019, and issuance for the full year is now expected to surpass the 2019 total of US$162 billion, with Refinitiv estimating an eventual total of US$170 billion.

Green and sustainability sukuk as well as digital issuance boosted by pandemic

The catastrophic impact the pandemic has had on people’s health and livelihoods has brought the social aspects of finance to the fore, and as a result there has been an increase in issuance of green and sustainability sukuk. Saudi Electricity Co. issued a US$1.3 billion green sukuk in September to raise capital for its smart meter rollout scheme and to facilitate the kingdom’s shift to a low-carbon future. In addition, the Islamic Development Bank issued a US$1.5 billion sustainability sukuk in June, the first from a multilateral institution, while Indonesia issued a US$750 million green sukuk earmarked for sustainable development projects.

The other notable impact of the coronavirus pandemic is that because so many millions of people have been in lockdown there has been a rapid shift towards all sorts of online services, and this includes Islamic financial products such as sukuk. The Malaysian government introduced its first digital sukuk in September: a RM500 million (US$120 million) ‘sukuk prihatin’ (care sukuk) launched on the retail market to provide Malaysian citizens with the opportunity to contribute to the nation’s economic recovery. Subscriptions to the sukuk were made through digital banking platforms and the issue was heavily oversubscribed, so much so that the government raised the total to RM666 million (US$160 million) to meet the demand.

Oversubscriptions demonstrate depth of investor demand for sukuk

Recent oversubscriptions show that despite the widespread economic malaise during the Covid pandemic, there is a sizeable appetite still for new issuance, particularly as sukuk’s ethical and social nature appeal during these difficult times. Other large issuances in recent months include a US$3.5 billion sukuk from the Saudi government, a US$1.7 billion issue from the Indonesian government, and a US$1.5 billion perpetual sukuk from Dubai-based ports operator DP World.

DP World’s issue size was also increased from its original intention due to strong investor demand. ADIB was co-manager of the issue, having significant experience in this market including playing a significant role on Dubai developer and shopping malls operator Majid al Futtaim’s two US$600 million green sukuk issues in 2019 – the first green corporate sukuk from a GCC corporate – as well as US$500 million sukuk issuances from Warba Bank, Sharjah Islamic Bank, and Aldar Investment Properties.

More recently, Etihad Airways launched the world’s first ‘transition sukuk’ linking the terms of the US$600 million sukuk to the airline’s carbon reduction targets. ADIB served as joint lead manager and bookrunner for the issue, which received a huge amount of interest from international and domestic investors.

Optimism for future of sukuk

Ratings agencies are talking up the potential for sukuk in the near future even as the coronavirus pandemic shows no signs of abating. S&P Global Ratings believes that Covid-19 could even unlock the long-term potential of the market as it provides “an opportunity for more integrated and transformative growth with a higher degree of standardization, stronger focus on the industry's social role and meaningful adoption of financial technology”.

This is likely to be accelerated as governments increasingly turn to sukuk to help plug their widening deficits. The industry is undoubtedly in a healthy state and looks set to expand for some time to come, providing considerable opportunities for leading Islamic banks such as ADIB.

© Sponsored Content 2020