Tuesday, December 11, 2012

A look at the outlook for sukuk markets

There are a number of interesting pieces of data in the Thomson Reuters Sukuk Survey that was recently released, and one of the 'headline' items is the prospects for growth in the sukuk market from its current level of $121 billion estimated for 2012.  The report estimates that new issuance will grow to $292 billion in 2016, even as captive demand rises from $240 billion in 2012 to $421 billion in 2016. 

For comparison, I found a few charts for the US corporate bond market (and for comparability, the current issuance level is $2.3 billion per week in 2012 rising to $5.6 billion per week in 2016):

The size of the US corporate bond market is much larger than the sukuk market, but the broader financial markets are also much larger.  For comparison, the Islamic banking industry is estimated to reach $1.55 trillion in 2012, while the total assets of banks with more than $300 million in total assets in the US (the top 1,700 banks) is $12.1 trillion, or about 7.8 times as large as the Islamic banking industry (and if Islamic banks reach $2 trillion by . 

The estimated midpoint for total US corporate bond issuance is between about $20 and $25 billion per week now, probably growing to $25 to $30 billion per week by mid-decade.  Here are the comparisons between the US corporate bond market and the volume of sukuk issuance:

2012: 6.5 to 8.7 times larger (midpoint: 7.6 times)
2016: 3.6 to 4.5 times larger (midpoint: 4.1 times)

What this suggests (using a very rough approximation) is that the growth rate of sukuk issuance is likely to continue to exceed the growth rate on conventional bonds, and in the sukuk market at the very least, the status of Islamic finance as a marginal part of the global financial industry will begin to fade, at least as concerns sukuk issuance (primary markets). 

Secondary markets are a whole different story.  They are extremely liquid in the US corporate market, and even in sukuk markets in Malaysia.  For example, here's a chart of the US corporate bond market volume for the past few years:

I don't know if there are good data kept on secondary market volume in sukuk, particularly since many are traded in private, OTC transactions, but the trading volumes on, for example, Tadawul, are nearly zero (10,000 face value in sukuk were exchanged during the past 30 days for a total value of 9,700, which I'm not sure if it is reported in SAR '000 or not, but regardless is a small amount of trading activity). 

Perhaps this is a function more of a better developed reporting regime in the US compared with Tadawul which only introduced the bond and sukuk market a few years ago.  Even still, the point remains that even as primary market issuance of sukuk has risen in importance during the past few years as a part of the global bond market, it is still far less developed in the secondary markets. 

And the statistic mentioned at the top of the post about the 'captive demand' may explain both the strong growth in primary market issuance, as well as the weak development in secondary markets, at least outside of Malaysia.  If these figures are accurate, then demand for sukuk will continue to outstrip supply even four years from now.  A lot of the sukuk issued will be picked up by investors wary of selling it because it will not be as easy for them to replace a sold sukuk with one they acquire in the secondary market or a new issue.  The growth in the size of the market should help that, as should the faster growth of supply (25% per year) over demand (15% per year) but it might not be enough for the industry to stand aside and wait for a secondary market to develop. 

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