Sukuk issuers are flocking to the market at a record rate, and volatile Treasury rates may drive even more borrowers toward the asset class this year.
Global borrowers have issued more than $23 billion of Sharia-compliant debt in 2021, the fastest start to a year on record, according to data compiled by Bloomberg. Financial institutions sold more than two-thirds of the debt, Malayan Banking Berhad managed the most deals and the Saudi-based Islamic Development Bank was the biggest issuer.
The global bond-market selloff in early 2021 prompted some corporate and sovereign issuers to tap the Islamic finance market, where most of the buyers are long-term investors, according to Sergey Dergachev, senior portfolio manager for emerging-market debt at Union Investment in Frankfurt.
“Some refinancing of 2022-maturing debt and general financing of budget expenditures on sovereign sides could lead to some diversification of funding sources,” Dergachev said via email. “Overall lower sensitivity to U.S. rates, which will remain a concern this year, will make” sukuk “very attractive investments in emerging-market portfolios,” he said.
There are $31.8 billion worth of Sharia-compliant debt securities due next year, 17% more than in 2021, according to data compiled by Bloomberg.
The amount issued by sukuk borrowers is still dwarfed by the $2.8 trillion of conventional bonds sold during the same period, implying the sukuk market may have room to grow.
“The pick-up in sukuk issuance in 2021 is certainly welcome, but the number and value of outstanding sukuk is paltry compared to demand,” Akber Khan, senior director of asset management at Al Rayan Investment in Doha, said in an email. Islamic banks and insurance companies and investors seeking lower-volatility securities are driving demand for sukuk, he said. “Unfortunately, issuance has been virtually stagnant.”
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