Last year amid market volatility, green and ESG Sukuk witnessed year-on-year growth of 35 percent. This spurt was powered by an exceptional uptick in sustainable and Africa Sukuk, with these trends expected to be a long-term catalyst for continued growth.
- Last year, green and ESG Sukuk grew faster than market. ESG Sukuk rose from US$6bn in 2021 to US$8.1bn in 2022.
- Africa is now a Sukuk continent. There are now issuances from Nigeria, Tanzania, Senegal, Egypt and South Africa, in addition to Gambia.
- New players are emerging into the Sukuk market. Many have been encouraged by the support they receive from regulations and incentives in countries such as Bangladesh and Uzbekistan.
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What was the story of Sukuk in 2022?
2022 was another good year for Sukuk issuance globally. Despite a slight drop in total issuance according to the Refinitiv Islamic Finance research team, issuance exceeded market expectations reaching $193.9bn in 2022 – the second highest year on record after 2021.
In the Quarterly Sukuk Monitor for Q4 2022, the Refinitiv Islamic Finance Gateway research team discovered only a marginal difference from 2021. This was despite a record number of consecutive rate hikes during 2022.
A further factor in Sukuk issuance was the lower funding requirement for key issuers in key markets such as the Gulf Cooperation Council (GCC), which are expected to report budget surpluses on the back of higher oil prices and stronger profitability for some key corporates, such as Islamic banks.
What were the key trends in 2022?
ESG sukuk is on the rise, with many debut issuances
While the global issuance of Sukuk marginally dropped in 2022, ESG Sukuk grew 35 percent year on year. US$8.1bn of ESG Sukuk were issued in 2022, up from US$6bn in 2021.
Green and sustainability Sukuk have reached a new high, with demand driven by ESG-centric investors according to the Green and Sustainability Sukuk Report 2022: Financing a Sustainable Future by Refinitiv.
Notable issuances include Saudi National Bank, the kingdom’s largest lender, which sold US$750m in debut ‘sustainable’ Sukuk in January. This was followed by Riad Bank, which closed a US$750m Additional Tier 1 sustainability Sukuk, making it the first sustainable AT1 Sukuk globally.
Banks are issuing their debut Sukuk following the publication of their sustainability framework and in line with their respective governments’ visions of how to achieve net zero.
Bahrain’s Infracorp sold a US$900m Sukuk in March, the first-ever green Sukuk issued by a Bahraini entity, which has been listed on the London Stock Exchange.
In October, South Africa’s Agrarius Sustainability Engineered launched Africa’s first JSE listed R10bn Shariah-compliant sustainability-related Sukuk in the agriculture sector value chain and listed it on the Johannesburg Stock Exchange (JSE).
In November, Dubai Islamic Bank issued US$750m in sustainable Sukuk. It is the first bank in the country to print sustainable Sukuk following the launch of its sustainable finance framework a month earlier.
Growth of ESG Sukuk
Africa as a sukuk continent
Africa has become a Sukuk continent and key player with issuances from Nigeria, Tanzania, Senegal, Egypt and South Africa, in addition to Gambia.
Seven out of the 20 countries that witnessed Sukuk issuance are in Africa, 12 in Asia, and two in Europe, making Africa the second biggest issuer of Sukuk after Asia. In total, 32 countries have seen the issuance of Sukuk at least once since the world’s first Sukuk, according to the SukukNow app.
Tanzania made strides towards Islamic finance when Imaan Finance, KCB Bank Limited and Amana Bank all sold Sukuk in 2022, all of which were arranged by FIMCO.
Neighbouring Nigeria continued to witness more Sukuk issuance in 2022, too.
In August, TAJ Bank launched the country’s first ever private Sukuk following a number of issues by the Nigerian government to fund road projects.
In November, Pomegranate Nigeria Limited raised N2.25bn Al-Ijarah Sukuk three-year note through WealthBridge Capital Partners Limited.
Ahmed Lawal, CEO of Wealthbridge, told Refinitiv: “We expect more Sukuk issuances in the Nigerian capital markets as most investors want them in their portfolio. Wealthbridge is currently advising a client on a green/ESG-compliant Sukuk within the renewable energy space.”
In December, Moove, which provides revenue-based vehicle financing, raised US$30 million in a private placement Sukuk debut. Franklin Templeton’s Middle East unit arranged the Sukuk, and it was structured as a Sukuk al-istisna, a Shariah-compliant debt format.
Outstanding Sukuk world map
Evolving Sukuk landscape with new players
Turkey is now the fourth largest issuer of sukuk behind Malaysia, Saudi Arabia, Indonesia and has moved ahead of Kuwait and Pakistan.
While Malaysia remains the world’s largest issuer of Sukuk, Saudi Arabia is also a top scorer in terms of total issuance as well as average issuance size. Seven out of the top 10 issuances in size in 2022 were out of the kingdom.
How does regulatory and policy support help?
In January, the Egyptian Ministry of Finance received the approval of Egypt‘s cabinet to begin the procedures for issuing sovereign sukuk in the international markets.
In February, Bangladesh’s Dhaka Stock Exchange proposed that the government should offer investors exemption from income tax on interest earnings from bond and Sukuk investments in its budget.
In September, Bangladesh Bank approved a policy on issuing and financing green bonds by banks and non-bank financial institutions, saying that banks or NBFIs that hold more than 10 percent defaulted loans are not allowed to issue such bonds.
In June, Uzbekistan issued a concept note to facilitate and enable the development of a legal and regulatory framework for the issuance of plain vanilla Sukuk and green Sukuk, in both the domestic and international markets, as announced by the Ministry of Finance (MoF).
In Pakistan, the Securities Exchange and Commission (SECP) issued the Asset-Backed Securitisation Regulations 2022 in December, which will allow SPVs to issue Sukuk, apart from other debt securities. SECP allowed open-end money market collective investment schemes to take exposure in commercial papers or short-term Sukuk that is corporate.
Commenting on KCB Bank Tanzania’s first Sukuk experience and support received from the regulators, Amour Muro, Head of Islamic Banking at KCB Bank Tanzania, told Refinitiv: “The support received by KCB from regulators [The Bank of Tanzania, Capital Markets & Securities Authority and Dar es Salaam Stock Exchange] was excellent, with constructive open dialogue happening throughout the process, keeping in mind that a comprehensive Islamic banking and finance legal framework still needs to be developed in the country.
“We are seeing a growing appetite to establish a conducive environment for Islamic finance in Tanzania.”
Following the launch of the High-Level Working Group on Green and Sustainable Sukuk in 2021, the Islamic Finance Council UK (UKIFC), along with the Global Ethical Finance Initiative (GEFI), the Islamic Development Bank (IsDB), HM Treasury, Indonesia’s Ministry of Finance and London Stock Exchange, launched the Green and Sustainability Sukuk Report 2022: Financing a Sustainable Future report.
The report suggested that to capitalise on rising demand and to keep pace with the wider ESG bond market, the roadmap for green and sustainability Sukuk should propose a three-pronged approach for the further development of the market:
- Promote common regional and international standards to build a common understanding of the market
- Build capacity with issuers and enhance the wider ecosystem
- Expand the investor base beyond traditional Sukuk investors
The outlook for 2023
Many of the trends we’ve explored are expected to continue well into 2023, namely green and ESG Sukuk, a strong Saudi presence, the rise of Africa and the emergence of new players on the market.
In the GCC, the year started well, with First Abu Dhabi Bank selling US$500m international sukuk.
The Saudi pipeline is very promising with ACWA Power, Al Jouf Mineral Water Bottling Company (Hilwa) and Saudi Real Estate Refinance Company (SRC), as well as Arabian Centres announcing their imminent plans to sell Sukuk. Meanwhile, Saudi Investment Bank increased the size of its Tier 1 capital Sukuk issuance programme from SAR2bn to SAR5bn (US$1.3bn) and started marketing the issuance.
Egypt is yet to sell its first sovereign sukuk, which could fall between US$1.5bn and US$2.5bn according to its finance minister Mohamed Maait. The timing of the issuance will depend on market conditions.
Meanwhile, in the Philippines, the Department of Justice (DOJ) said the Department of Finance (DOF) is legally empowered to issue Shariah-compliant financing instruments called Sukuk, particularly Ijarah and Wakalah structures, to make the country appealing to Islamic investments.
Moving to the West, the UK could see a return to the Sukuk market with Funding for Housing, in cooperation with ZeroWatt Homes, planning to issue the initial tranche of £500m Sukuk for funding for low-cost social housing.
It is expected that bonds and Sukuk with a sustainability mandate will grow in 2023, especially green Sukuk. This is because of the emergence of planned green projects that require funding, as many corporates are putting their decarbonisation plans into action.
Government-related entities and banks in the GCC and other parts of MENA are amplifying their efforts in this area following COP27 in Egypt and ahead of COP28 in the UAE. Indeed, Dubai Islamic Bank announced in early February that it is planning a five-year USD sustainable Sukuk benchmark in what looks like the beginning of a busy ESG-Sukuk calendar in the UAE this year.