Malaysia expected to ride Islamic finance boom

Sukuk issuance amongst banks may grow as much as 13% in 2018.

Malaysia is set to benefit from positive growth prospects in Islamic finance as assets in the segment continue to grow faster than conventional banking assets, according to Moody’s.

The country is expected to continue its dominance over global sukuk issuance volumes in both the short- and long-term markets as issuances by corporates, financial institutions and sovereign represented over a third (34%) of total global sukuk issuances.

However, Saudi Arabia remains the largest market for Islamic finance with assets worth US$292b in 2017 and accounts for almost three quarters of the sector’s total loan portfolio.

“Within Malaysia, we expect that sukuk issuance among Islamic financial institutions will grow 10%-13% year-on-year in 2018. The bulk of such issuance will be denominated in ringgit, similarly to previous years,” the report added.

Despite low penetration levels of Islamic banking (5-10%) in Indonesia, banks in the country may soon have reason to celebrate as the government is fast-tracking reforms to drive growth in the sector with the launch of the 10-year national Islamic finance master plan released last year following the formation of the National Committee for Islamic Finance in July.

“For Indonesia, sukuk issuance among Islamic financial institutions will remain fairly weak, but will recover somewhat from low levels in 2017, against the backdrop of a stabilisation in the domestic operating environment,” Moody’s added. 

Here's more from Moody's:  

Malaysia and Indonesia also remain key issuers [of sovereign issuance]. Although Malaysia’s share of annual sovereign sukuk issuance has fallen to 22% in 2017 from 58% in 2010, it remains the largest Islamic issuer with an estimated 44% of total sovereign sukuk outstanding in 2017. Indonesia’s share in annual sukuk issuance increased to 30% in 2016 (from just under 10% in 2010) and will likely grow with the government's efforts to develop the Islamic finance sector. At the time of publication, Indonesia had already launched its annual drawdown from its foreign currency-denominated sukuk MTN program

Corporate sukuk issuance continues to be driven by Malaysia, Indonesia and the GCC countries. Malaysia has a deep domestic market that dominates local currency issuances while international dollar issuances is dominated by corporates from the GCC countries as their currencies are pegged to the dollar.

Corporate issuances of international sukuk have generally been low, with about eight corporates tapping US$4.8 billion from the capital markets in 2017, all of which were domiciled in the GCC. Of this, more than half was raised by real estate companies. Unlike some governments that have a policy agenda to promote Islamic finance and Islamic banks that can only issue in the sukuk format, most corporates tend to be opportunistic in their approach to sukuk issuances leading to slow growth in corporate volumes. For GCC corporates, the low sukuk volume growth is also a function of the limited new supply of corporates accessing the capital markets.

Among rated Malaysian corporates, the last international dollar issuance was a US$500 million sukuk by regional telecommunications operator, Axiata Group Berhad (Baa2 stable) in March 2016. We expect international sukuk issuance volumes among these corporates to remain low, but be driven by government-related issuers (GRIs) as the Malaysian government uses GRIs as vehicles to expand the country’s sukuk market. A majority of the rated Malaysian corporates have solid credit profiles, and thus benefit from strong access to the bank and domestic bond markets. This reduces the need to issue international sukuk, which could entail an added level of complexity to bank loans or conventional bonds issued to international investors.

Looking forward, we believe that issuance and investor demand for corporate sukuk will likely remain regional in nature and dominated by the same countries as in the past. Corporates have issued Islamic finance instruments as a means to diversify their funding channels, and the Islamic finance industry has steadily evolved to accommodate the needs of these issuers.

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