The relatively moderate growth in sukuk volumes in the first quarter of 2018 highlights continued interest in the asset class, but also the structural constraints on faster expansion, according to Fitch Ratings.
Issuer funding needs and investor appetite for the remainder of the year will be determined by various factors including oil prices, tighter global financing conditions, and investor sentiment in the light of regional tensions in the Middle East, the ratings agency said in a research note.
The total volume of sukuk rated by Fitch stood at $80 billion at the end of the first quarter, a net increase of 6 percent from end-2017.
New sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan was $14.9 billion in Q1, a 1 percent increase compared to a year earlier.
"Seasonal patterns will affect quarterly issuance, which may pick up in the second half of the year following Ramadan and the summer break. But if the first quarter rates of growth are broadly maintained over the course of 2018, the annual increase in outstanding volumes would be broadly consistent with that seen in recent years," said Fitch.
It added that Q1 issuance was driven predominantly by the GCC, whose funding needs are likely to fall if oil prices stay high, although they may choose to issue as part of their efforts to deepen local debt markets and diversify funding sources for themselves and corporate borrowers in the region.
Fitch added: "We think that structural constraints mean growth may be steady but unspectacular. Standardisation remains a significant challenge. Variations in product structure and documentation, financial and accounting reporting, supervisory and regulatory frameworks, sharia codification, and law and dispute resolution persist.
"Greater standardisation in these areas would help sukuk gain wider acceptance among international investors, especially if it helped set out rights and obligations in all circumstances. A key constraint remains the lack of a track record of legally enforcing creditor rights in many key Islamic finance jurisdictions."For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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