Why Fast-Tracking Corporate Sukuk Growth Could Be Done in 4X4 Strides

The sukuk market has the potential to grow considerably in the near to medium term as key Islamic capital markets develop.

Bashar Al Natoor
May 7 · 4 min read
  1. Incentives
  2. De-sophistication and standardisation
  3. Education

Processes and execution costs need to be optimised

Shifting corporate funding in the Gulf Cooperation Council (GCC) region from bank loans to sukuk and bonds is seen as more costly and time consuming. Banks in region are also primarily funded by deposits from customers and governments rather than capital markets, and we do not expect this to change significantly in in the short to medium term. This is because many potential issuers see the economics for issuing sukuk or even bonds as less advantageous than taking out a loan from a bank. Therefore, the regulations, processes and costs for sukuk and debt capital markets in general need to be optimised so that they can compete with traditional loans.

Issuers need incentives to enter the debt capital markets

Issuers must be given monetary and technical incentives (apart from tax-neutral policies) to make sukuk an attractive alternative for them. Such incentives are already implemented by Indonesia, for example, where it provides lower registration fees for corporate sukuk issuances.

Sukuk must be de-sophisticated

Sukuk standardisation remains elusive on local, regional and global level due to its complexity, as can be seen in the chart below. Therefore, reducing the sophistication of sukuk, which is currently a key obstacle preventing or limiting the desire for capital users, is critical.

Issuers need to be educated about sukuk’s benefits and risks

Capital market education may seem like a low priority, but it is actually key to removing an important barrier to growth in the corporate issuing sukuk market. This can be done by conducting robust public awareness and education programmes that inform issuers about the benefits and risks of funding from capital markets, sukuk and other sharia-compliant products as an alternative to bank loans.

  1. Establish greater confidence in the regulatory/legal framework, as it is currently yet untested and under developed. The adoption and implementation of effective and efficient regulatory and legal structures are key catalysts to bolstering the Islamic finance industry, and are crucial to creating reliable investor protection.
  2. Addressing the fact that sukuk in many countries still lacks the scale and mass of issuances to meet some of the international investors’ prerequisites, like the limited secondary market liquidity, either due to sukuk structure tradability issues or buy and hold inventories, or the under-developed diversification of products.
  3. Build a strong regional track record in economic sukuk performance and then increase investor confidence in key areas, such as risk levels, ease of access, cost and transparency, to attract international investors.

Conclusion

As capital markets in the10 largest sukuk countries become more efficient, sukuk could become an attractive alternative of funding for corporates. Total Islamic finance assets are projected to grow by 58% to USD3.8 trillion in 2023 from USD2.4 trillion in 2018. By adequately addressing the 4 x 4 keys to unlocking growth — cost optimisation, incentives, de-sophistication and education — the global corporate sukuk market should be able to reach its full potential.

This article was originally published in Global Investor in April 2019. It will also be published in the print version of their magazine.

Why? Forum

Commentary from Fitch on why we think what we think.

Bashar Al Natoor

Written by

Global Head of Islamic Finance at Fitch Ratings

Why? Forum

Commentary from Fitch on why we think what we think.