The global sukuk market is predicted to benefit from record-low interest rates and abundant liquidity throughout 2021 and beyond. Global sukuk issuance is estimated to increase to between $135 billion–$155 billion in 2021, compared to a decrease in issuance to about $140 billion in 2020 from the $168 billion or so recorded in 2019.
A contributory factor to the rise is Qatar re-joining the Gulf Cooperation Council (GCC), which reopened the country's access to GCC-based Islamic financial institutions. GDP growth in GCC countries, Malaysia, Indonesia, and Turkey will also likely move to a recovery phase from 2020's sharp recession. Aiding this, is the assumption that oil prices will stabilise at $50 per barrel in 2021.
Issuance from first-time sovereign issuers, financial institutions and corporates set to increase as issuers seek to refinance existing sukuk maturities, and new debts are issued to manage budget deficits or for capex. Adding to this volume is the fact that an estimated $65 billion of sukuk mature in 2021.
Furthermore, the market is expected to recover this year amid growing confidence in the global economy with the rollout of COVID-19 vaccines.
Legal & Regulatory Framework
Progress on a global legislative framework has been ongoing, which should help reduce regional differences in product offerings and practices, provide legal protection to all parties involved, and develop an international dispute resolution framework. This could create new growth opportunities and reduce risks, making the industry more attractive to all stakeholders.
Varied and unique financial instruments to fund the economic recovery and manage social issues have emerged. These instruments targeting social needs may appeal to investors with Environment, Social and Governance (ESG) objectives. One such example is the Prihatin sukuk issued by the Malaysian government. This sukuk has a low periodic distribution rate payable to the investors, and the government will use the proceeds to help restart the economy.
Rising interest in green or sustainable sukuk will also play a significant role in the expansion of the global sukuk market, with issuers looking to diversify their investor base or benefit by adopting sustainable practices. Examples of these issuances in 2020 include Malaysia-based Cagamas' US$112 million Sustainable and Responsible (SRI) sukuk which is aimed at providing affordable housing in the country and The Saudi Electricity Company's US$1.3 billion green sukuk.
However, such issuances' contribution to overall sukuk volumes will remain limited due to the complexity involved in issuing these instruments, and the lack of a global framework for doing so.
Malaysia has not really been active in the global sukuk market, preferring instead to focus on its domestic sukuk market, which has remained the biggest in East Asia. Its local Islamic bond market has continued to expand over Q42020, despite trade conflicts and shrinking/negative global growth due to the COVID-19 pandemic.
The outstanding amount of Malaysia's local currency bonds totalled USD409 billion (RM1,609 billion) at end-December 2020, registering a 10.1% (8.0% in MYR) y-o-y growth from 4Q2020. Of these, 63.3% of total currency bonds outstanding comprised sukuk, as at end-December 2020.
In Malaysia, 47.9% of all government bonds are structured following Islamic principles, while 80.7% of corporate bonds are sukuk, as at end-December 2020.