The global data provider Refinitiv says that Sukuk issues will witness a surge from $162 billion in 2019 to $174 billion in 2020 as governments are planning to use them for meeting the funding requirements post COVID-19.
A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia.
Redha Al Ansari, Head of Islamic Finance Research at Refinitiv, states that the third quarter of 2020 had the second-highest occurrence of Sukuk issuance at $48 billion, after the 2019 first quarter, which saw $55 billion.
“We believe that it will increase, if Sukuk keeps the same pace as it has in the past three quarters, given increased funding requirements by governments, we suggest that Sukuk may reach $174 billion by the end of the year,” said Al Ansari.
In an online survey, 40.7 percent of participants opinionated that they believe Sukuk issuances will increase in 2020. Another 13 percent said it will stay the same, 23.1 percent said it will decline to $145 billion whereas 23.1 percent were undecided.
As per the data from Refinitiv, by the end of third-quarter in 2020 $131 billion worth Sukuk had already been issued, which exceeds the total value of issuances in 2018, 2017 and 2012.
A total of $1.35 trillion worth of Sukuk have been issued since the first issuance of Sukuk in 1990. However, considering the current economic condition Islamic finance will be more heavily impacted when compared to conventional finance, Al Ansari said.
“COVID-19 is expected to have a more severe and deeper impact on Islamic finance, which may be because, the nature and the structure of Islamic finance, compared to conventional bonds. They are more aligned to and have higher exposure to SMEs, microfinance and retail lending, especially if we look at countries like Pakistan and Indonesia.”
Currently, the outstanding Sukuk is more than $600 billion, which offers adequate liquidity and investments for investors, said Al Ansari.
The largest category when considering the length of term for outstanding Sukuk is the 5 to 10-year bracket, accounting for $152.4 billion, Refinitiv data showed.
In the past four years, Green Sukuk has grown fast when compared to others, with issuance worth $7.6 billion, since 2017. Green sukuk are financial instruments that comply with Shariʽa and are used to finance environmental projects.
The largest issuer of green Sukuk in the world is Indonesia with 37 percent, followed by Saudi Arabia with 32 percent, the UAE with 16 percent and Malaysia with 15 percent.
Al Ansari says that the biggest challenge is “the investor appetite, a lot of it is about educating the investor that the return from green Sukuk has been even better than some general Sukuk.”
Green Sukuk seems to be way ahead as COVID-19 has forced governments to depend on them to meet the increasing requirements and awareness of environmental and social responsibility.