S&P global head of Islamic finance Dr Mohamed Damak

KUALA LUMPUR: The global sukuk or Islamic bond market is expected to undergo correction for the next six to 18 months, said Standard & Poor’s (S&P).

The total issuance of sukuk fell in the first half of the year by 12.5 per cent in contrast with the booming conventional debt as the oil exporting countries tapped the market to raise funding for spending.

“The complexity and amount of time taken to make it fly, low oil prices and that 20 to 40 per cent of sukuk investors are from the United States and European Union are among the main reasons for the correction,” said its global head of Islamic finance Dr Mohamed Damak in a webcast on “Asia-Pacific Sector Insights: Outlook On Islamic Finance”, yesterday.

Policy response by the Gulf Cooperation Council countries, which are the top players in the sukuk space also mattered.

“Some 20-40 per cent comes from the government and since it depends on the oil price, will also affect the demand for sukuk and other investible products which could lead to high cost of funding for sukuk issuers.”

There was a 148.2 per cent increase in bond issuance in the Gulf Cooperation Council countries in the first half versus a drop by 15.2 per cent of sukuk issuance.

The correction in the sukuk space started with Bank Negara Malaysia’s decision last year to stop the issue of short-term sukuk and switch to other instruments for liquidity management for Islamic financial institutions.

Mohamed Damak does not expect Bank Negara to change its strategy this year.

“The positive news for sukuk is that the European Central Bank is opening its liquidity tap and with yields low, that could push investors to look at the sukuk market.”

With sanctions lifted on Iran, investment needs can be financed through sukuk.

He also pointed to new issuers entering the market, like Indonesia while the looming Basel III deadline could trigger additional issuances.

The sukuk industry, he added, needs more standardisation otherwise volumes will likely remain low.

With the involvement of “heavyweights” like the International Monetary Fund, there could be some progress in this direction.

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