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Considered amongst leading, highly-demanded financing tools for government economic development plans

Islamic Sukuk comes on top of key enablers for investment growth

The Sharia-compliant financing options have become the most useful financial solutions capable of leading the world economy at a time other traditional financing options are waning and not anymore able to meet the growing demands of developmental drives and requirements of the new global investment landscape. This competitive edge enjoyed by Sukuk, the Islamic bond, is attributable to the buoyancy and flexibility enjoyed by this investment vehicle to provide the liquidity levels needed by mega-sized enterprises launched by the private sector, and to meet the needs of government spending requirements. Over the past period, it has been noticed that the growing issuance of Sukuk has had its positive impact to keep the required momentum on capital markets in a way that has reflected positively on all essential economic sectors, atop of which come the investment and real estate platforms.

Al Mazaya Weekly Real Estate Report said that Islamic Sukuk has been gaining noticeable momentum over the past period, outperforming conventional bonds in attracting the largest possible segments of investors in light of the growing appeal it is now enjoying among investors across the world due to its relatively reduced risk, and distinctive fundamentals as a means to monetize assets once cash is needed by its issuer.

Comparing Sukuk and conventional bonds, the report said, Sukuk are financial certificates structured to comply with Islam’s prohibition on charging or paying of interest that grant an undivided interest or share in an underlying asset along with the profits, cash flows and risk commensurate with such ownership. Sukuk are often referred to as the Islamic equivalent of bonds. But Sukuk represent ownership of real assets, whereas conventional bondholders own debt. Sukuk is an attractive Sharia-compliant option for investors seeking to diversify their investment portfolios. They tend to be more insulated from market fluctuations and have lower correlations to other asset classes, including global conventional bonds and global equity.

Financial institutions around the world are now vying for securing the largest possible share of Islamic finance and capital by developing banking mechanisms compliant with Islamic Sharia principles and launching new financial products on financial markets and stock exchanges that cater to the needs of Muslim investors and businessmen.

Despite surrounding headwinds, the Islamic finance industry has been posting strong growth rates over the past years, with Sukuk becoming amongst the key financing options sought after by world governments to attract Islamic capital and Sharia-compliant financial services. With countries effectively seeking to develop their financial legislation and investment vehicles in alignment with Islamic finance, Sukuk have taken on different forms and types, including Sukuk Al Ijara, Sukuk Al Musharaka,  Sukuk Al Murabaha,  and Sukuk Al Istisna, etc.

The report indicates that Sukuk cover a wide spectrum of economic activities including production platforms like agriculture and industry as well as financial and investment domains such as Al Murabaha, highlighting in this regard the Islamic concept of sustainability and durability ensured by Sukuk where the owners invest their money in real projects. Sukuk are well suited for smart management of risk. Uncertainty is a big part of the investment. Islamic securities can be issued with varying degrees of risk and yield, allowing investors to choose a portfolio best suited for their risk management profiles.

The value of Sukuk is reportedly expected to surge to $60 billion by the end of 2017, which is below original forecasts, said the report, noting that the fall in global oil prices which started in the second half of 2014 has accelerated the issuance of Sukuk specially by oil-producing companies which tried to utilize the Sukuk market to maintain spending level at normal rates and keep developmental efforts unaffected.

The report said that the volume of Sukuk, according to current indicators and statistical data, is expected to surge to $3.4 trillion by the end of 2018, with the Islamic finance market projected to grow by 13-15 per cent during 2017.

This comes at a time when the Islamic finance sector is considered among the highest growing sectors thanks to the advantages offered by Sukuk and their important role in providing feasible opportunities and savings to different investment platforms as well as their contributions to diversify investment tools, given that large-scale economic developmental plans require accelerated issuance of Sukuk in order to maximize savings and expand investment pools.

Within this context, the 9th Forum for Listed Companies and Analysts, held recently in Kuwait, included for the first time a discussion panel themed “Sukuk and Future Outlook” to demonstrate Sukuk growth opportunities as a financing instrument, not to mention the legal, regulatory and supervisory requirements for sovereign and corporate Sukuk issues.

The forum discussed the key growth drivers for the Sukuk industry and potential growth markets. The participants underlined the critical role of supervisory authorities in areas of Sukuk, noting that any Islamic legislation-related headwinds in the Sukuk market might trigger a negative impact on the entire Islamic financial sector. The forum reiterated the growing trend towards issuing Sukuk across the markets of the Gulf region in specific in light of the ability of this kind of investment to survive risks related to the budget deficit, foreign loans, privatisation and monetization.

The report noted that Islamic Sukuk provide good opportunities for getting suitable and powerful financing options at a time other financing options wane and fail to provide the needed financing for infrastructure and developmental enterprises, which are subject to market volatility, ultimately reflecting negatively on spending priorities. It added that the flexibility and resilience provided by Sharia-compliant financial products have enabled many countries to launch infrastructure projects and state-run income-generating enterprises.

The report concluded that the Sukuk market is a strong enabler for investment growth in the capital markets both at present and in the future thanks to its potential to facilitate synergy, safeguard markets against volatility and generate cash inflows besides its ability to develop innovative financial products.