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In Charts: Sustainable sukuk market growing rapidly

Jakarta’s central business district. The Indonesian government has issued $9.6bn-worth of sustainable sukuk, accounting for 22 per cent of all-time issuance and making it the largest issuer of these types of instruments (Photo: Nyimas Laula/Bloomberg)
Jakarta’s central business district. The Indonesian government has issued $9.6bn-worth of sustainable sukuk, accounting for 22 per cent of all-time issuance and making it the largest issuer of these types of instruments (Photo: Nyimas Laula/Bloomberg)

Issuance volumes of the Islamic finance instruments remain comparatively small, but are fast ramping up

Annual sustainable sukuk issuance has increased by more than 3,000 per cent since the first instrument was printed seven years ago, shows London Stock Exchange Group data. In 2017, $0.4bn of green, social, sustainability or sustainability-linked sukuk were issued, compared with $13.4bn last year.

Sukuk are bond-like financial instruments that are compliant with Islamic law, which prohibits the receipt or payment of interest. Where conventional bonds pay coupons, sukuk pay an income stream that is more comparable with profits on an investment.

Green, social, sustainability and sustainability-linked sukuk are all classed as sustainable within the LSEG data.

Though the sustainable sukuk market is growing fast, volumes are still small compared to its bond counterpart. For instance, global issuance of sustainable bonds hit $235.4bn in the first quarter of this year, compared to just $4bn of sustainable sukuk issuance during the same period.

Issuance guidance published

The International Capital Market Association, the Islamic Development Bank and London Stock Exchange Group recently published guidance on issuing green, social and sustainability sukuk, which it is hoped will support further growth in the market.

ICMA chief executive Bryan Pascoe described it as “a critical step in establishing and maintaining globally consistent standards in the key growth segments of sustainable finance and Islamic finance”.

At this stage, the guidance focuses on supporting issuers to issue sukuk that align with ICMA’s Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines — so-called use of proceeds instruments. However, it says the general principles may also be used to support sustainability-linked issuances.

Analysis from the guidance document suggests that last year, sustainable sukuk accounted for “1.6 per cent of the total sustainable bond issuance and 6.2 per cent of the total sukuk issuance”.

Bashar Al Natoor, global head of Islamic finance at Fitch Ratings — which recently published its quarterly update on “ESG sukuk” — says there is “significant growth potential” for these instruments.

Besides the recently published issuance guidance, he pointed to the UAE Securities and Commodities Authority’s extension of the waiver on registration fees for green or sustainability-linked sukuk and bonds, and green financing frameworks published by Saudi Arabia and Oman, as “key regulatory initiatives” from the first half of this year.

These could, he says, “support standardisation [and] ecosystem development, and aid transparency” and boost market growth.

Concentrated issuer pool

So far, these markets have been dominated by activity in a handful of countries and a relatively small number of issuers.

Last year, issuers from just four countries — Indonesia, Malaysia, Saudi Arabia and the UAE — printed sustainable sukuk. As of the first quarter of 2024, they had raised 83.3 per cent of all sustainable sukuk by volume, according to LSEG data.

According to the Pew Research Center, there are around 50 countries in the world with Muslim-majority populations. This figure suggests there is considerable potential for both the issuer universe and the overall market to grow.

Meanwhile, entities outside of Muslim-majority countries, such as the UK government, have also issued non-sustainable sukuk.

While sovereigns account for the largest share of sustainable sukuk issuance — followed by financial institutions — only Indonesia and Malaysia have issued them so far.

The Indonesian government has issued $9.6bn worth of sustainable sukuk, accounting for 22 per cent of all-time issuance and making it the largest issuer of these types of instruments. The second-biggest issuer is the Islamic Development Bank, with $5.1bn of total issuance, accounting for 11.6 per cent of all-time market share.

A service from the Financial Times