Articles on Islamic Finance

Future Sukuk Growth Depends on Overcoming Challenges

Salman Ahmed Shaikh

In the last few years, the growth in Sukuk market has been subdued. Sukuk market is mainly led by Malaysia now. It is important to have stable growth in the Middle East for the global Sukuk issuance to grow. In recent years, the governments in non-Muslim majority countries have also ventured in issuing Sukuk. It is important to have this trend continuing for the globalization of Sukuk market.

Sukuk issuance needs to be used in providing finance for diverse needs. Corporate issuances follow the trends in business cycles. Sovereign Sukuk for development finance can provide impetus to the Sukuk issuance in cyclical downturns. In addition to that, it can also provide long-term macroeconomic support to the governments and enterprises by building the infrastructure for tomorrow.

The development infrastructure related to meeting sustainable development goals needs to be prioritized. By default, the developing countries have to push towards achieving the sustainable development goals. Sukuk can be used to provide necessary funding which is required to purchase tangible fixed assets, technological infrastructure and real estate.

Standardization and sound corporate governance are vital in building and retaining investors’ confidence. Lack of standardization across various global jurisdictions can act as an impediment for the Sukuk market to grow as impressively in other parts of the world as it has in Malaysia. Going forward, tax neutrality is vital for the increased penetration in the global Sukuk issuance.

Sukuk has the potential to be used in conducting monetary policy operations by replacing the T-bills. However, the Sovereign Sukuk market is still insignificant to realize that vision. Liquidity is immensely important for Sukuk to replace or be a viable substitute for T-bills. There is significant demand for more liquid Shari’ah compliant investment structures like Sukuk among banks and asset management companies for their treasury and portfolio management operations.

Innovation is also important to tap diverse markets and industries. In recent years, companies in the services sector including telecommunication, power and airline have also issued Sukuk where the underlying subject matter is a service which is made non-rival through coding and numbers, such as mobile cards and airline tickets, for instance. It is important to have such innovations in structures so that Sukuk market targets other sectors beyond just the manufacturing sector.

Sukuk can also help in developing infrastructure in Africa to meet the existing infrastructure deficit. Africa has abundant land and natural resources. This makes Africa and such developing regions a lucrative market for Sukuk issuance which can be backed up by real estate. Agriculture remains the mainstay in economic structures of many African economies. Thus, Sukuk can be used in financing new technologies and modernizing agriculture.

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