Arab and Malaysian markets will continue to dominate sukuk issuance, though Turkey and Indonesia have the potential to become key sukuk markets in the long term, according to Moody’s. However, sector representatives say Turkey still has a long way to go in developing its Islamic finance market
Islamic banking in Turkey has displayed rapid annual growth rates of 28 percent in Islamic or 'participation' banking, versus the 18 percent of conventional banks. In late 2012, the Turkish government issued its first sukuk, which was a key milestone for the sector.
Arab and Malaysian markets will continue to dominate sukuk issuance, though Turkey and Indonesia have the potential to become key sukuk markets in the long term, according to the latest Moody’s report on global Islamic banking. However, sector representatives believe Turkey still has a long way to go in developing its Islamic finance market.
Issuance volumes will remain concentrated in regions that have a natural cultural affinity with the sector, such as the Gulf Cooperation Council (GCC) markets, where Islamic banking asset estimates range from 10 percent in the UAE to 50 percent in Saudi Arabia, according to the Moody’s report, titled Global Sukuk Market: Positive Long-Term Growth Trends Set to Continue.
“We believe that Turkey and Indonesia also have the long-term potential to become strong domestic sukuk markets,” the report noted.
Annual global issuance of sukuk has grown at a compound annual growth rate of 38 percent to $81 billion in 2012, up from $3.3 billion in 2002.
Huge potential but still a long way to go
The drivers of this continued growth include the increasing demand for Islamic financial assets and services, global investors’ increasing familiarity and comfort with sukuk instruments, the increased support from governments of Muslim countries, and the increasing standardization of unsecured sukuk structures, the report added. In late 2012, the Turkish government issued its first sukuk, which was a key milestone in promoting corporate and financial institutions to seek international capital and diversify away from local lenders, according to Moody’s. Islamic banking in Turkey has displayed rapid annual growth rates of 28 percent in Islamic or “participation” banking, versus the 18 percent of conventional banks, although from a much lower base.
The government is also highly supportive with specific legislation for the sector and benchmark sovereign issuances. Turkey issued revenue-indexed bonds in 2009 and its first sovereign sukuk in 2012, the report noted.
In early October 2013, the government issued its second international sukuk, which was seven times oversubscribed. Turkey has made good progress in the Islamic finance system in the participation banking field, but there is still a long way to go for Islamic capital markets, Ashar Nazım, partner at Global Islamic Banking at Ernst&Young told the Hürriyet Daily News
The first priority is regulation, said Nazım. “Regulatory clarity is extremely important, because investors like a predictable, well-articulated and distinct framework,” he added.
There isn’t currently a special regulation for participation banks in Turkey, Nazım also said, adding that the second priority was the supply side. “To achieve 2023 targets, between seven and 10 participation banks are needed. Also, they should be created in 18-24 months,” he said, adding that the final priority was “creating talent.