Global sukuk market to slump in 2016 as oil prices stay low – S&P

Global sukuk market will remain below ‘peak levels’ in 2016 after being pressured by low oil prices, a new report from ratings agency Standard & Poor showed.

Sukuk issuances are expected to fall by up to 20.6 per cent to reach between $50bn and $55bn this year. That’s down from $63bn in 2015 and $116.4bn in 2014.

“The correction started last year, mainly because the central bank of Malaysia (Bank Negara Malaysia) – the largest issuers of sukuk worldwide – stopped issuing,” S&P said.

“Excluding the BNM effect, sukuk issuance dropped by around 5 per cent in 2015 from 2014.”

S&P predicted that factors such as monetary policy developments in the United States and Europe, falling oil prices and sanctions being lifted on Iran could also impact the global sukuk market this year. It added that the monetary policies and a continuous spell of low oil prices could dry up liquidity in the local and international markets, in turn affecting issuances.

“We think that if oil prices remain weak, some governments of oil-exporting countries in the Gulf Cooperation Council and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances (conventional and Islamic),’ the report said.

“In addition, we think that several issuing countries might decide to go the conventional route, rather the Islamic route, because it is less complex.”

However the sukuk market could be boosted slightly by the European Central Bank’s programme of quantitative easing which could prompt some European investors to enter the sukuk market, the report said.

In addition, the global sukuk market could grow further if Iran ramps up spending on infrastructure projects after sanctions lift, S&P forecasted.

The industry could also gain strength from increasing interest from global financial institutions.

“Over the next few years, we believe the market will benefit from the greater involvement of traditional stakeholders such as the Islamic Development Bank Group, the Islamic Financial Services Board, the Accounting and Auditing Organization for Islamic Financial Institutions, and the International Islamic Financial Market as well as new ones like the International Monetary Fund.

“These institutions are now working on several projects to strengthen the foundations of the Islamic finance industry and prepare it for greater innovation and accelerated growth,” the report added.