• 10 Dec 2012

Thomson Reuters Announces Findings of its Annual Sukuk Perceptions and Forecast Study

Global captive sukuk demand is expected to almost double from $240 billion in 2012 to reach $421 billion by 2016

Bahrain - Thomson Reuters today released the findings of a Sukuk Perceptions and Forecast Study conducted by Thomson Reuters and Zawya in November 2012. The study centres around a survey of sukuk lead arrangers and investors conducted in August and September 2012. The primary empirical data gathered from the survey was subsequently developed to provide forward-looking analytics on the appetites and preferences of sukuk investors for 2013 and beyond.

According to the study, global captive sukuk demand is expected to double from $240 billion in 2012 to reach $421 billion by 2016. Supply is also forecasted to grow but the spread between demand and supply is expected to widen even further to more than $280 billion within the next four years.

On the demand side, investors expect 50 percent of their portfolios to be allocated to Islamic finance investments, out of which between $200 million and $800 million, or an average of 35 percent to 40 percent, would be allocated to sukuk.

Notably, real estate is the least preferred sector for investors, while arrangers least expect issuances from the oil and gas sector.

On preferred currencies, GCC investors overwhelmingly prefer USD sukuk, while Asian investors are split between USD, Malaysian ringgit and other currencies. Asia Pacific investors voted overwhelmingly for domestic local currency issuances.

“2012 was officially the Year of the Sukuk with more than $121 billion worth of issuances and the sukuk market officially achieving parity in pricing with conventional bonds. Yet, both demand and supply side factors suggest it will grow even further to reach $292 billion in issuances by 2016,” commented Dr Sayd Farook, Global Head Islamic Capital Markets at Thomson Reuters.

“The sukuk market is witnessing extensive growth and the sukuk is finally breaking out from its shell of being a niche market instrument to enter a new era as a global alternative to conventional bonds. However, beyond rose-tinted spectacles, the sukuk market faces challenges that may slow or even clog growth channels. Deficiencies persist in the areas of sukuk structures and their associated documentation, investor rights, transparency, and illiquidity in the secondary market due to the shortage of dedicated market makers and the lack of an Islamic mega bank,” Dr. Farook said.

He added: “To free the arteries of the Islamic capital market and subsequently enrich its tributaries and downstreams, there is a need for practical studies that address its challenges, and that will provide a clearer picture of its current and forecasted status.”

The study suggests a wide gap between the expectations of the sell and buy sides. For example, the wakala structure is most expected by lead arrangers outside the GCC and Asia Pacific, but the majority of investors in all regions prefer the ijara. Asia Pacific investors also show a taste for hybrid structures, with their sell side counterparts overwhelmingly expecting the hybrid structure as well.

Another notable mismatch was found in sukuk tenors - the majority of lead arrangers expect tenors to be between five and 10 years while the majority of investors prefer their tenors to be within the three to five year range.

Further, on emerging markets, the study found that arrangers are more in favour of the Central Asian countries of Kazakhstan and Azerbaijan than investors, who lean more towards the North African countries of Morocco and Tunisia.

Focusing on the supply side, most lead arrangers consider the additional cost of issuing sukuk (over issuing conventional bonds) to be from less than $50,000 to $199,000. On average, two percent is the additional cost of a single sukuk issue as a percentage of its total size.

This study follows the launch of the Thomson Reuters Global Sukuk Index in September 2012. The Index is an independent benchmark for investors seeking exposure to sharia-compliant fixed-income investments, to be used to monitor the performance of the sukuk market.

Thomson Reuters
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