Sukuk & Islamic Banking - World Bankpubdocs.worldbank.org/en/45691448479781452/pdf/... · LT Sukuk...

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Sukuk & Islamic Banking Tapping a Growing Pool of Islamic Liquidity November 2015, Istanbul KHALID FERDOUS HOWLADAR, GLOBAL HEAD – ISLAMIC FINANCE This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Transcript of Sukuk & Islamic Banking - World Bankpubdocs.worldbank.org/en/45691448479781452/pdf/... · LT Sukuk...

Sukuk & Islamic BankingTapping a Growing Pool of Islamic Liquidity

November 2015, IstanbulKHALID FERDOUS HOWLADAR, GLOBAL HEAD – ISLAMIC FINANCE

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

2Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Agenda

1 - Islamic Banks

A Growing Pool of Islamic Liquidity

2 - Sukuk Market

Growing and Diversifying

3Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Islamic Banks

A Fast Growing Pool of Islamic Liquidity1

4Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Islamic BanksAssets of Islamic finance institutions continue to grow at a faster rate than conventional banks assets

Sources:

Central Banks data - Qatar, Bahrain, Malaysia and Turkey banking systems.

Annual reports and Moody's BFM data for rated banks - UAE, KSA and Kuwait.

Annual reports for non rated banks in UAE and KSA.

Islamic windows assumptions for UAE, KSA and Bahrain.

Data as of December 2008 and December 2013 for all banking systems.

0% 5% 10% 15% 20% 25% 30% 35%

UAE

KSA

Kuwait

Qatar

Bahrain

Malaysia

Turkey

Financing of Islamic banks CAGR (2008-13)

Financing of conventional banks CAGR (2008-13), excluding Islamic windows for UAE, KSA & Bahraincountries

5Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Islamic BanksIslamic finance enjoys strong penetration in many markets but still has room to grow

Sources:

* Total Assets data used for Oman banking system.

Central Bank data - UAE, KSA, Kuwait, Qatar, Bahrain, Malaysia and Turkey.

Annual reports and Moody's BFM data for rated banks- UAE, KSA, Kuwait/ Annual reports for non rated banks – UAE and KSA

Islamic windows assumptions included in Islamic financing for UAE, KSA and Bahrain.

** Oman data from Thomson Reuters study, dated June 2014/ Data as of YE2013 for all banking systems except Oman

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

20

40

60

80

100

120

140

160

Oman ** UAE KSA Kuwait Qatar Bahrain Malaysia Turkey

US

D b

illio

nTotal Islamic Financing Market share of Islamic financing

6Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Sukuk Markets

Growing, Extending & Diversifying2

7Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Global Short-Term & Long-Term Sukuk IssuancesVolumes falling in line with fixed income trends in the GCC & Emerging Markets

2012 was an outlier year due to strong EM inflows and 2014 saw Malaysian issuance reductions offset by new volumes from entrants such as UK, Luxembourg, South Africa, and Hong Kong.

-

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jun-15

$ B

illio

n

Sovereign Government-related entity Other Corporate Financial Institution < 1 Year Sukuk Paper

Sources: Islamic Finance Information Service, Moody’s estimates

8Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Sukuk Issuance TrendsMaturities are extending with five and ten year buckets the most common

9Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Sukuk Issuance TrendsLonger Maturities are becoming more common

1 - 5 yrs 30%

5 - 10 yrs 43%

10 - 20 yrs 20%

> 20 yrs 7%

LT Sukuk Paper Outstanding (H1 2015) - By

1 - 5 yrs48%

5 - 10 yrs 34%

10 - 20yrs 13%

> 20 yrs 5%

LT Sukuk Paper Issued by Tenor 2001- 2014

10Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Infrastructure Financing Drives Longer MaturitiesInfrastructure Sukuk concentrated in Malaysia

10

Infrastructure Sukuk Outstanding by Obligor’s Country

Huge infrastructure needs in the GCC, Asia and Africa will boost infrastructure Sukukissuance going forward

Source: IFIS, Moody’s estimates

Malaysia69%

Saudi Arabia19%

U.A.E8%

Others4%

0

5000

10000

15000

20000

25000

30000

35000

2007 2008 2009 2010 2011 2012 2013 2014

Malaysia Saudi Arabia United Arab Emirates Others

Infrastructure Sukuk Issuance per Year / Obligor’s Country ($ million)

11Dynamics of Demand for Islamic Finance to fund Long-Term Investments

MYR54%USD 25%

SAR 7%

IDR 3%

QAR 3%

AED 2%

LT Sukuk Issuance by Currency 2001-2014

- 5,000 10,000 15,000 20,000 25,000 30,000

United Arab Emirates

Saudi Arabia

Qatar

Turkey

Malaysia

Indonesia

Hong Kong

Bahrain

Kuwait

Pakistan

Others

International Sukuk Issuance by Country

Issued in 2014

Total Outstanding

International Sukuk Issuances are IncreasingGCC states’ US dollar issuances are driving sukuk globalisation

MYR42%

USD 34%

SAR 8%

QAR 7%

IDR 6%Others 3%

LT Sukuk Issuance by Currency in 2014

12Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Sukuk Market: Drivers of Growth

The drivers of this continued growth include

– global investors’ increasing familiarity with sukuk instruments

– increasing ‘Islamic’ investment liquidity looking for sukuk

– increasing retail & corporate demand for Islamic financial services

– increasing standardisation of unsecured sukuk structures

– increased policy support from governments of Muslim and now non-Muslim countries

2015/2016 Sukuk issuance trends & drivers

– Major reductions in 2015 Malaysian Sukuk paper market on the back of lower short term issuance from Bank Negara and some fiscal consolidation

– Uncertainty regarding US rate rise and difficult conditions in the GCC have hit regional issuance for 2015

– Declining liquidity in the GCC (due to low oil prices) coupled with modest/strong growth is forcing GCC banks to tap longer term funding

– Sovereign deficits compounded by high social spending and investment needs are pushing GCC governments to issue bonds/sukuk

Drivers are strong and market is globalizing

13Dynamics of Demand for Islamic Finance to fund Long-Term Investments

Quick Note - Asset Backed Sukuk

Shari’ah strongly encourages asset-backed finance. Principles of Tangibility, Asset ownership, risk/profit sharing are inherent in such structures

However the failures of conventional securitisation (e.g. sub-prime) in the global crisis and regional preferences for name-lending has meant little appetite for asset-backed instruments despite the fact that (rated) asset-backed sukuk performed much better than their asset-based (unsecured) counterparts

Islamic securitisation is well suited for longer-term assets and project finance. Assets and liabilities are perfectly match funded with genuine risk transfer. It provides lower funding costs plus a market-based valuation for securitised assets.

However Islamic banks not keen to support longer term projects given their own heavy short-term funding bias and regional institutional investor base is weak.

Better suited for long term financing

15Dynamics of Demand for Islamic Finance to fund Long-Term Investments

BANKING

Khalid HowladarGlobal [email protected]

Olivier PanisNorth Africa & [email protected]

Nitish Bhojnagarwala Middle [email protected]

Mik Kabeya Sub-Saharan Africa [email protected]

BANKING

Arif Bekiroglu [email protected]

Simon Chen Asia [email protected]

Eugene Tarzimov Asia [email protected]

David Fanger North [email protected]

INSURANCE

Antonello AquinoEurope, Middle East and [email protected]

Mohammed Ali Riyazuddin Londe Europe, Middle East & North [email protected]

Graeme KnowdAsia [email protected]

Sally YimAsia [email protected]

CORPORATE

Rehan AkbarMiddle East & North [email protected]

Nidhi DhruvAsia Pacific+ [email protected]

Vincent TordoAsia [email protected]

Maisam HasnainAsia [email protected]

SOVEREIGN

Gabriel [email protected]

Aurelien MaliAfrica [email protected]

Mathias AngoninMiddle East & North [email protected]

Christian de GuzmanAsia [email protected]

Islamic Finance Group Contacts

16Dynamics of Demand for Islamic Finance to fund Long-Term Investments

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