The global market for sukuk will remain at below – peak levels in 2016, Standard & Poor's Rating Services forcast, predicting issuance to reach $50 billion – $55 billion in 2016, compared with $63.5 billion in 2015 and $116.4 billion in 2014. The correction started last year, mainly because the central bank of Malaysia (Bank Negara Malaysia; BNM) – the largest issuers of sukuk worldwide – stopped issuing. Excluding the BNM effect, sukuk issuance dropped by around 5% in 2015 from 2014. According to S&P, three main factors will shape the performance of the sukuk market in 2016: monetary policy developments in the US and Europe, the drop in oil prices, and the possible lifting of sanctions on Iran. The first two factors are likely to drain liquidity from global and local markets. "We think that if oil prices remain weak, some governments of oil – exporting countries in the Gulf Cooperation Council (GCC) and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances (conventional and Islamic). In addition, we think that several issuing countries might decide to go the conventional route, rather the Islamic route, because it is less complex," S&P noted. However, the market could benefit from the European Central Bank's program of quantitative easing (QE) in a yield – hunting environment pushing some European investors to the sukuk market. Also, if sanctions against Iran are lifted, and the country starts spending more on infrastructure projects, some new growth opportunities there for the sukuk market is expected. Over the next few years, S&P believes the market will benefit from the greater involvement of traditional stakeholders – such as the Islamic Development Bank Group, the Islamic Financial Services Board (IFSB), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the International Islamic Financial Market (IIFM) – as – well as new ones like the International Monetary Fund (IMF). These institutions are now working on several projects to strengthen the foundations of the Islamic finance industry and prepare it for greater innovation and accelerated growth. BNM's pullback in 2015 saw total sukuk issuance shrink by 45% compared with the same period a year earlier. In 2014, BNM alone issued about $50 billion out of total sukuk issuance of $116.4 billion. BNM withdrew from issuing sukuk as they were attracting significant interest from investors across the board and not only the Malaysian Islamic financial institutions that BNM sukuk were primarily targeting, S&P said. BNM has decided to switch to shorter – term instruments reserved to banks. Excluding the BNM effect, global sukuk issuance in 2015 performed in line with our expectations, dropping by about 5%. The moderate decline confirmed our belief that falling oil prices would only moderately reduce recurring government spending and spending on infrastructure projects in the GCC and Malaysia. Oil prices will continue to take their toll this year, but we also see two other factors at work, US and European central bank policies and the complexity of sukuk issuance: . Oil prices could dampen the market further if they continue to slide and push some GCC countries and Malaysia to reduce their investment spending. The drop in oil prices is also reducing deposits and therefore liquidity at banks (including Islamic banks). Governments and their related entities are among the top depositors in some of the core markets for Islamic finance, with a share of 15% to 40% for GCC banks. "We expect that lower liquidity will lead investors to become more prudent about risk and more selective, which will push up prices. . Rate increases by the Fed will also bring a drop in global liquidity that will ineluctably reduce global investor appetite for sukuk and push up prices. Positively, the market could benefit from the European Central Bank's QE that might prompt some European investors to take positions on higher – yielding but riskier emerging – markets assets such as sukuk." The complexity of structuring sukuk issues and the ensuing longer time to market is deterring some issuers. Some market participants believe that the weaker economic outlook due to lower oil prices could boost sukuk issuance as governments seek to finance their funding needs. However, S&P thinks conventional issuance could be the first to benefit from such a trend. In 2015, conventional issuance in the GCC was up by about 140% versus a 22.4% drop in sukuk issuance. "While Saudi Arabia's issuance explains this trend to a large extent, we think several issuers were dissuaded from issuing sukuk because of its complexity. Major stakeholders now understand the need to standardize contracts and documentation, or at least some clauses in sukuk documentation," it said. In this less supportive environment, the potential lifting of sanctions against Iran appears as good news for the industry, as it could create some growth opportunities. Iran's investment needs are reportedly significant and we think that the Iranian banking system and government reserves alone cannot plug the needs. Therefore, we think that some investment will find its way to the sukuk market, assuming that Iran makes the necessary regulatory adjustments. Besides Iran, we also expect to see a couple returning issuers and a few new issuers, for example, Tunisia. The last quarter of 2015 saw a ramping up of cooperation among some traditional and new stakeholders to create a stronger foundation for growth of the Islamic finance industry in general, and the sukuk market in particular. Compared with conventional bonds, the market perceives sukuk as a more complex product, involving higher costs and time to issuance. This partly explained the disparity between sukuk and bond issuance in the GCC last year. Stakeholders have now understood that standardization could be the key to the market's future success. The IMF is taking on a stronger role in surveying the industry, in countries where it is deemed as systemically important. The IMF has also encouraged governments in the GCC and Southeast Asia to increase their issuance of sukuk with various maturities and incorporate them in their debt management strategies. "We expect the IFSB to speed up work on new standards (such as for retakaful and stress testing), the AAOIFI is working on new sukuk issuance standards, the IIFM is working on standard legal documentation for sukuk, and finally, the Islamic Development Bank – through its Islamic Corporation for the Development of the Private Sector – is helping some new issuers, mainly in Africa, to tap the market. We believe standardization could help the market by reducing costs and time needed to go to market, and free up capacity for innovation. This would make sukuk more appealing for first – time issuers. Several countries looked at the sukuk market in the past as an alternative way to raise money, but some walked away due to the complexity of the exercise and others perceived the time between the first declaration of intention and issuance as too long," S&P further said. Efforts by the Islamic Development Bank Group and the Islamic Corporation for the Development of the Private Sector are helping some new potential issuers navigate this journey. Thanks to this help, in 2015 Cote d'Ivoire was able to tap the market. Standardization of the most widely used sukuk structures could allow stakeholders to start working on the next generation of Islamic finance products. Islamic finance is by design a good match for infrastructure financing and investing in the real economy. Developing new tools in these areas could give the industry a big boost and increase its global attractiveness as a tool for achieving sustainable development goals. Moreover, S&P said as the deadline for Basel III implementation gets closer, the lack of liquidity management instruments in Islamic finance is pushing this issue to the forefront. In 2015, the market saw $11.3 billion in sukuk issuance for liquidity management purposes (17.8% of the total). The International Islamic Liquidity Management Corp. alone issued $6.4 billion 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 billion issued in form of capital – boosting sukuk by financial institutions in the GCC and Malaysia. "We think this trend will continue in 2016," S&P remarked.
