GCC is expected to account for about 31% of sovereign bond issuances from emerging markets this year. The expected 2017 sovereign issues will be distributed among GCC, Eastern Europe Middle East Africa and Latin America, according to forecasts by Bank of America Merrill Lynch.
Issues from the GCC has been increasing rapidly mainly due to low oil prices, with some new issuers in 2016, and analysts expect the 2017 issuance to continue to be high. Among those, Kuwait inaugurated the external sovereign debt market with $8 billion (Dh29.3 billion) to finance a budget deficit resulting from low oil prices. Sovereign issuance for 2017 is forecast to be 6% higher compared to the previous year. In 2016, sovereigns issued $135 billion, mainly from Latin America, while corporates issued about $300 billion, mainly from Asia. Analysts expect gross sovereign external issuance to come in at $144bn in 2017.
Standard & Poor’s believes that in view of the fast growth of the Islamic finance industry robust Sharia governance structures are very important. While this model has provided an additional layer of control, actions requested by internal auditors are typically not disclosed to the public. So far only the authorities in Oman and Pakistan have asked Islamic banks to submit themselves to an external Sharia audit. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have already made significant strides in this area. However, S&P believes the current governance framework shows room for improvement. Only a handful of Islamic banks disclose their profit and loss sharing formulas, profit equalisation reserves, or investment risk reserves.
According to rating agency Standard & Poor’s, due to the fast growth of the Islamic finance industry a robust Sharia governance structure is very important. While the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have already made strides in this area, S&P believes the current governance framework shows room for improvement. S&P's Global Head of Islamic Finance Mohammad Damak said the industry would benefit from increased disclosure, as well as clear standardised Sharia principles and interpretation. Analysts say as Islamic finance industry expands, enhanced Sharia governance framework could address risks related to conflicts of interest. Only a handful of Islamic banks disclose their profit and loss sharing formulas, profit equalisation reserves, or investment risk reserves. Actions requested by internal auditors are typically not disclosed to the public. So far only the authorities in Oman and Pakistan have asked Islamic banks to submit themselves to an external Sharia audit.
The overall profitability of Takaful industry is under strain largely because the industry has yet to break into some of the most profitable lines of business that are dominated by conventional payers, according to rating agency Standard & Poor’s.
“In our view, the takaful sector is underperforming, especially in the UAE, because it lacks the advantages of conventional insurers, which are often larger and benefit from better economies of scale. They have more-established distribution mechanisms and so their revenue generation is less dependent on intermediaries,” said Emir Mujkic, Associate Director, Finance Services of Standard & Poor’s.
The crowded UAE and other Gulf Cooperation Council insurance markets often suffer from overcapacity, which can often trigger aggressive price wars. “In our opinion, Islamic insurance companies require considerable capital investment to become established, yet relatively new companies often come under pressure to generate profits and deliver healthy returns to their investors,” said Mujkic.
According to Standard & Poor’s, profitability of the GCC takaful industry is expected to remain relatively weak during the current year and the year ahead despite an impressive 20% year-on-year growth gross premiums in 2014 and 2015. Most takaful players are still relatively small compared with their conventional peers. Their shorter track records and less-diverse books of business put them at a disadvantage now that the falling oil price and stricter regulation are hitting GCC insurance markets. Including Saudi Arabia, the GCC’s Islamic insurance market generated an estimated pretax surplus of more than $260 million in 2015. But the takaful sector in the remaining GCC states generated a combined net loss of about $5 million in 2015 and net losses surged to about $11 million during the first six months in 2016.
According to Standard & Poor’s Africa’s extensive infrastructure development needs to create a fertile environment for the growth of sukuk issuance over the next decade. S&P analyst Samira Mensah said African sukuk could provide diversification benefits for Islamic investors as well as additional financing opportunities. So far the African market comprises only $2 billion (Dh7.35 billion) of sukuk from a handful of issuers. By contrast, 17 Sub-Saharan African (SSA) governments issued $46 billion of conventional debt in 2015 alone. Despite sukuk’s appeal, analysts expect that only a few African countries will tap the sukuk market over the next 12 months. There is a general lack of clear legal regimes and in many cases the complexity of structuring sukuk could deter issuance. Multilateral institutions could be the key to unlock the full potential of Africa's sukuk market.
According to Standard & Poor’s the global sukuk market is expected to undergo correction for the next 6 to 18 months. The total issuance of sukuk fell in the first half of the year by 12.5% in contrast with the booming conventional debt as the oil exporting countries tapped the market to raise funding. 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. S&P global head of Islamic finance Mohamed Damak said 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. He added that the sukuk industry needs more standardisation otherwise volumes will likely remain low.
On the demand side, the institutional demand for high quality liquid assets are expected to keep sukuk demand high. As we get closer to the deadline of Basel III implementation, the lack of liquidity management instruments in Islamic finance is pushing this issue to the forefront.
Among the global economic developments, one positive driver for sukuk issuance could be the European Central Bank’s quantitative easing that might prompt some European investors to take positions on higher-yielding but riskier emerging-markets assets such as sukuk. Negative interest rates in Europe and Japan also are likely to attract investor of Gulf sukuk issues.
In 2015, the market saw $11.3 bn (17% to the total) in sukuk issuance for liquidity management purposes. The International Islamic Liquidity Management Corp. alone issued $6.4 bn and is actively working on providing solutions to the market. Other stakeholders such as sovereign and central banks are now conscious of the role they have to play. In 2015, the market also saw another $4.9 bn issued in form of capital-boosting sukuk by financial institutions in the GCC and Malaysia.
According to Standard & Poor’s the profitability of Islamic banks in the Arabian Gulf is likely to deteriorate this year due to the fallout from the price of oil. The 70 per cent drop in oil over the past two years has put pressure on growth prospects and widened deficits across the region. Yet S&P predicts that Sharia-compliant lenders will weather the storm without too much damage because they have capital buffers that include quality assets. Islamic banking assets are continuing to grow at a rate of 16 per cent per year and by 2020, the global Islamic banking industry profit pool is expected to reach $30.3bn.
Maybank Islamic, is one of the leading arrangers of sukuk in the world, has viewed Gulf Cooperation Council, including Qatar, as its priority region in mobilising funds through Shariah-principled bonds.
“The GCC is definitely on our radar. It all depends on what kind of opportunities are available,” said Nor Shahrizan Sulaiman, deputy chief executive of Maybank Islamic, which is wholly-owned by Maybank Group with strong credit ratings from Standard & Poor’s and Moody’s.
The lender, a leading Islamic bank in the Asean region with assets to the tune of $42.65bn as on June 30, 2015, has a branch in Bahrain and a 30% stake in Anfaal Capital in Saudi Arabia.
Maybank is exploring opportunities in the Middle East through its stake in the Saudi Arabia’s Anfaal Capital. Almost 90% of the Maybank Islamic’s balance sheet is domestic and the remaining 10% is from overseas operations, according to Sulaiman.
Legislation gaps are really challenging African countries’ intent to effectively issue the sukuk, which could help fund the continent’s huge infrastructure needs, Standard & Poor’s credit rating agency said on Thursday, in a new report. To date, African sovereigns have issued just about $1 billion of sukuk instruments, compared with global sukuk issuance of an average $100 billion per year over the past five years, says S&P. In Nigeria, Osun State has issued a N10 billion ($51m) sukuk yielding 14.75 percent, the first and currently the only Islamic bond from the Africa’s largest economy. S&P believes that regulations and fiscal incentives could speed Islamic Finance Development on the continent.
Malaysia is dominating global sales of sukuk in 2013 and Standard & Poor’s forecasts the trend will continue this year. Issuance in the Southeast Asian currency may account for more than 74 per cent of worldwide offerings, compared with 49 per cent in 2008. Global sales of Shariah-compliant notes, including government securities, may exceed US$100 billion in 2013 after rising 64 per cent to US$138 billion last year. Malaysia’s Islamic banking assets climbed 14 per cent last year to a record RM494.6 billion. Moreover, Shariah insurers, or takaful operators, saw assets rise 12 per cent to RM19 billion.
Abu Dhabi National Insurance Company’s financial strength rating and credit rating were reaffirmed by A.M. Best’s rating agency and Standard & Poor’s rating agency as A and A-, respectively. Thus, ADNIC is placed among an elite group of financial services institutions to have their financial rating maintained in the A category across the Middle East and North Africa region.
Standard & Poor’s talkes about how Sharia-compliance affects the analysis of the creditworthiness of insurance companies that follow Islamic religious principles. Sharia-compliant takaful and cooperative providers have lately started to battle aggressively with traditional insurers and reinsurers.
The rapid growth and multiplication of these new entrants has been influential, but has more than once brought into question the stability of their business model.
The reason for the fact that rate of return on Islamic Development Bank’s Shariah-compliant bonds sold last month was triple that of Gulf sukuk is that investors looking to own the highest rated debt sold this year.
Islamic Development is rated AAA, the highest investment grade, at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.
The Organization of the Islamic Conference based in Jeddah hired Standard & Poor’s to start an index of about 50 of the most-traded stocks in the first quarter of 2011.
The index, which will track listed equities that comply with Islam’s ban on alcohol, gaming and tobacco, aims to target exchange-traded funds.
Until recently the issuance of Islamic bonds, or sukuk, was confined to the Muslim world. But now a number of international borrowers are tapping the markets, including Nomura Holdings in Japan and Europe's first corporate borrower, International Innovative Technologies.
The ratings agencies Moody’s and Standard & Poor’s say they expect to see a rise in the number of sukuk issues by new players over the next 12 months, including issues by borrowers in Singapore, Australia, Luxembourg, Thailand, Hong Kong, France and Russia.
While the Islamic Financial Service Board and the accounting and auditing organization have defined standards for sukuk, defaults over the past year have shown that new guidelines must be set as problems arise, particularly as sukuk start to generate global attention.
Kuveyt Turk Katilim Bankasi AS is planning a second sale of Shariah-compliant debt for 2012. Kuveyt Turk, the Istanbul-based bank owned by Kuwait Finance House KSC, may sell more than $100 million of five-year sukuk. Islamic bond offerings may accelerate in the next 18 months, led by countries new to the market, Mohamed Damak, a Paris-based credit analyst at Standard & Poor’s. Policies to promote assets that follow Islamic law are spreading to Europe from Asia.
The new yearbook includes Standard & Poor’s latest analysis and rating methodologies on almost 40 rated Islamic debt issues and issuers, and an overview of its suite of global benchmark and investable Sharia indices.
While total global sukuk issuance more than halved to $14.9 billion in 2008 from $34 billion in the previous year, Standard & Poor’s believes the outlook for Islamic finance remains strong. Sharia-compliant assets now total about $700 billion after growth exceeding 10% annually during the past decade.
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