Most retail investors and news channels primarily pay attention to equities markets, while largely ignoring the behemoth that is the global bond market. In the U.S alone, bond markets make up almost $40 trillion in value, compared to less than $20 trillion for the domestic stock market. Trading volume in bonds also dramatically exceeds stock market volume, with nearly $700 billion in bonds traded on a daily basis, compared to about $200 billion per day in volume for stocks. The relative size of the bond market shows how important it is in the financial industry, even if it doesn’t come as a top priority for most investors. While global enterprises and institutions have been utilizing these markets for decades, until very recently, those in the Islamic world did not have access to this.
A New World of Islamic Debt
Government bonds have been issued at the Emirate level by Abu Dhabi for more than 10 years. The Emirate of Abu Dhabi issued its first $1 billion five-year conventional bond in 2007, prior to the global financial crisis. Liquidity concerns prompted Dubai to do the same in the wake of the crisis with a $20 billion bond issuance in early 2009, half of which was taken up by the UAE Central Bank in a bailout of the Emirate.
Recently, a new Public Debt Law has taken effect which provides a legal framework for such issuances by the UAE federal government. With the new regulations in place, both, conventional and Sharia compliant bonds can be issued as the country gains access to a diverse pool of global investors. The Public Debt Law permits the federal government of the UAE to issue sovereign debt for the first time through the sale of bonds or other debt instruments.
This law carries the potential to support the establishment of a primary and secondary market for government securities, tradable in the UAE financial markets and provide a means for long-term bonds to be issued to contribute to alternative sources of funding for federal government projects. The majority of the allocation of the funds will flow into social development, benefits and education programs.
A federal lender, the Emirates Development Bank, will be the first to do so with a $750 million bond sale. This will be its first debt issuance since the institution started operating in 2015. Proceeds will be passed onto the UAE economy through loans to SMEs and other entities.
The Expansion of the Sukuk
Jibrel’s recent partnership with Abu Dhabi Global Market (ADGM) and Al Hilal Bank to build the next generation of compliant Sukuk bond transactions was the first step in the vision of putting financial assets on the Ethereum blockchain. Total international Sukuk issuances hit an all time high in 2017 at $37.6 billion, which was the highest value recorded since the inception of the Sukuk market. This was bolstered by Saudi Arabia’s entry as a sovereign Sukuk issuer. The country’s first issuance was a sizable $9 billion, which has largely contributed to the 32% increase in the global Sukuk issuance volume between 2016 and 2017.
From the chart above, it is clear that the 2009 trend of fixed rate Sukuk issuances has continued through 2017. The trend of fixed rate issuances is expected to continue over the next few years as a gradual increase in the benchmark rate is expected. While the attitudes and laws surrounding debt in the Abu Dhabi market were not too favorable, recent developments are expanding the potential of what could be for the market and Jibrel as well.
Looking outside of the UAE, Malaysia represents one of the key markets driving the overall growth of the global Sukuk market. Malaysia has evolved into a multi-currency Sukuk issuance marketplace with issuances in the US Dollar, the Chinese Renminbi, the Singapore Dollar and the Japanese Yen. So far, Malaysia has sustained its position as the leading issuer of Sukuk. Issuances from Malaysia accounted for 62.53% of total issuances, followed by Saudi Arabia (9.72%), the United Arab Emirates (7.34%) and Indonesia (6.41%), respectively.
What’s Next for the Islamic Credit Markets?
While 2018 was a tough year for credit markets globally, the GCC (Gulf Cooperation Council) bonds weathered the storm pretty well. Inclusion of GCC nations in JP Morgan’s Emerging Markets Bond Index should act as an additional catalyst during 2019. US denominated bonds from five GCC states (Saudi Arabia, the UAE, Qatar, Bahrain & Kuwait) are due for the inclusion in JP Morgan’s flagship Emerging Markets Bond Index (EMBI) from the beginning of 2019. Ultimately, the lack of legacy systems that usually brings with it the complacency of “this is how we’ve always done it” mindset is not present in this market. This may drive issuers to look for new innovative and automated solutions in regards to issuance, management and compliance in an effort to dominate the market like never before.
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