Sukuk issuances slow as belt tightens around the world

Reuters/Thilo Schmuelgen

• CAGR projected to be 6.8% over next five years
• Malaysia, KSA and Indonesia largest sukuk issuers
• ESG-linked sukuk is small but growing market

Global sukuk issuance is projected to moderate, settling at $185 billion in 2022, amid a worldwide tightening cycle and a surge in oil prices.

However, sukuk issuance is still projected to grow at an estimated compound annual growth rate (CAGR) of 6.8 percent over the next five years, reaching $257 billion in 2027, according to Refinitiv’s 2022 Sukuk Survey. 

The report indicated that the momentum of international sukuk issuance began to slow in the first half of 2022, despite strong activity from issuers capitalising on high demand from international investors early in the year.

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“Despite a strong start to the year, issuance momentum slowed as the Federal Reserve and other central banks kicked off a global monetary tightening cycle,” Mustafa Adil, head of Islamic finance, Refinitiv, said.

“The surge in oil prices also contributed to the slowdown in issuance, as it reduced government borrowing needs in core sukuk markets.”

Malaysia, Saudi Arabia and Indonesia remained the largest issuers, and together made up 75 percent of sukuk issued in 2021 and the first half of 2022.

In Saudi Arabia, sukuk raised $28.1 billion during H1, although issuance slowed during the second quarter as the kingdom registered a surplus from higher oil revenues. 

Separately, Fitch Ratings said the limited number of ESG-dedicated investors in core Islamic finance countries is holding back the growth.

ESG-linked sukuk is likely to persist as a key issuance theme in core Islamic finance jurisdictions amid government initiatives that promote sustainability and economic diversification. But challenges remain, said Bashar Al-Natoor, global head of Islamic Finance at Fitch, which rates more than 80 percent of the hard-currency ESG-linked sukuk market.

Over 10 percent of all Fitch-rated sukuk is classed as such, with the segment’s growth potential remaining high.

“The global ESG-linked sukuk market has flourished in recent years, and we expect growth to continue in the medium term,” Al-Natoor said.

Outstanding ESG-linked sukuk expanded by 11.2 percent in the second quarter of 2022 compared to Q1, reaching $19.3 billion. About $4.3 billion of that was issued in the first six months of this year. 

The long-term growth potential of the segment remains high, as ESG sukuk make up only 2.6 percent of the total sukuk market.

But there continues to be limited ESG-dedicated investors and issuers in core Islamic finance countries, including in the GCC, Malaysia, Indonesia, Turkey and Pakistan.

Shariah-sensitive investors in these regions largely outnumber those who are ESG-sensitive. 

Other challenges in core Islamic finance markets include a complex issuance process and regulatory constraints, said Fitch.

This is unlike regions such as the US, Europe and China, where the segment is more developed. 

Barriers also remain in the conventional ESG debt markets, including a lack of commonly accepted green and sustainability standards and definitions and scepticism over “greenwashing” – an entity giving a misleading impression about its green performance.

The ESG sukuk segment – including green, sustainable, sustainability-linked and transition sukuk – is emerging as a sizeable part of the global sukuk market. 

This is despite volatilities caused by the Russia-Ukraine war, and by the increasing interest rates, rising oil prices, and inflation. 

Biggest ESG sukuk in 2022

• In February Riyad Bank issued the world’s first sustainability-linked Additional Tier 1 sukuk, raising $750 million. 
• In March Infracorp issued Bahrain’s first green sukuk, raising $900 million. The Saudi National Bank also issued a $750 million sustainable sukuk. 
• Indonesia returned to the market in 2022, raising $3.25 billion in its largest global sukuk sale, including a green tranche. The sovereign has been a repeat green sukuk issuer since 2018.