Several companies in the GCC region have raised sukuk to meet their funding needs at low interest rates in 2021, according to a latest report published by Institute of International Finance (IIF) said.
Saudi Aramco, the world’s largest oil exporting company, raised $6 billion with a debut sukuk in June, while another Saudi government owned firm Acwa Power raised $746 million.
First Abu Dhabi Bank, the UAE’s biggest bank by assets, as well as Kuwait’s Warba Bank, secured funding through Islamic bonds. They raised $500 million and $250 million respectively.
Even Etihad Airways raised $600 million through the first sustainability-linked sukuk to support its carbon reduction targets in 2020, the report added.
The report further said that global sukuk or Islamic bond issuances surged 39% to reach $250 billion in 2021 and continue to grow this year as economies recover from the coronavirus pandemic, the report said.
Most of the sukuk came from Indonesia, Malaysia, the GCC countries, Turkey and Pakistan, the Institute of International Finance report said.
“Market activity continues to grow, global sukuk issuance was near $40bn in Jan/Feb 2022, over 7 per cent higher than the same period in 2021,” the IIF said.
However, only $5 billion constituting 2% of the total issuances was linked to Environmental, Social and Governance (EG) factors, compared to 6.5% in global bond markets.
Expansion of ESG-linked sukuk was fastest in Indonesia, Malaysia, Saudi Arabia and the UAE, with corporations issuing $6 billion worth of ESG sukuk since 2016. About 80% of the total cumulative issuance has been in US dollars, 15% in Malaysian Ringgit and the rest in euros.
“The investor base for ESG sukuk is fairly diversified as demand remains strong. At present, investment advisers, sovereign wealth funds and banks are the top holders of ESG sukuk, with most of the registered investors based in the US, Luxembourg and Ireland,” the report said.
According to IIF report, Indonesia, the most populous Muslim country in the world, has the largest green sukuk market (proceeds are applied for climate and environmental projects). Since 2017, Indonesia, Malaysia, Saudi Arabia, the UAE and the Jeddah-based Islamic Development Bank have issued $9 billion worth of green sukuk.
Sustainability-linked sukuk issuances too increased last year as the importance for green and social impact projects grows amid efforts by countries to transition to a greener economy. Total sustainability sukuk issuance jumped to $3.7 billion in 2021 from $1.6 billion in the previous year. Malaysia, Saudi Arabia and the Islamic Development Bank have raised more than $6 billion from sustainability sukuk markets since the end of 2016, the report said.
The slow pickup of ESG-linked issuance in global sukuk markets largely reflects the limited project pipeline and challenges in identifying projects and assets that meet relevant ESG criteria, the report said.
High issuance costs are also curbing the potential issuer appetite, according to the report. “Looking forward, foreign investor demand for ESG-linked debt should support issuance activity in ESG-linked sukuk markets. However, higher oil prices, inflated after Russia’s invasion of Ukraine, should reduce Gulf countries’ funding needs and will likely lessen the supply of bond and sukuk issuance this year.”