KUALA LUMPUR (Oct 14): The global sukuk momentum is expected to continue over the medium term, supported by intact investor appetite, funding diversification and refinancing needs, said Fitch Ratings.

In a report released on Wednesday, Fitch global head of Islamic finance Bashar Al-Natoor said sukuk supply-demand imbalance will continue to be a key growth factor but not without headwinds.

“These headwinds include additional AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions)-compliance complexities for sukuk, and reduced borrowing needs and fiscal deficits for some of the sukuk-issuing sovereigns due to higher oil prices,” he said.

Fitch said sukuk issuance from the Gulf Cooperation Council region, Malaysia, Indonesia, Turkey and Pakistan reached US$57.3 billion in the third quarter of 2021 (3Q21).

It said that issuance fell, as expected, by 27% quarter-on-quarter, primarily due to yearly seasonal patterns and implementation challenges related to AAOIFI standards.

Fitch said global outstanding sukuk reached US$775.4 billion in 3Q21, 2.8% higher than 2Q21.

Fitch-rated outstanding sukuk volume amounted to US$132.2 billion, with 79.2% of issues being investment grade.

Fitch said it continues to see revised terms and new clauses added to international sukuk documentation, driven by market calls for compliance with AAOIFI shariah standards and UAE’s Higher Sharia Authority’s resolutions and guidelines.

It said most sukuk nonetheless continue to be structured so as to create economic effects similar to conventional bonds, limiting the impact of the changes so far.

The rating agency added that various government initiatives are underway.

It said that in Saudi Arabia, the government now has an Islamic finance (IF) strategy as part of the Financial Sector Development Program which aims to make the country the IF capital of the world by 2030.

In Egypt, the president has approved a law on the issuance of sovereign sukuk, paving the way for the country’s first sovereign sukuk.

In Oman, the Capital Market Authority has issued draft sukuk and bonds regulations and received public feedback, while in Bangladesh, the government has provided tax exemptions on the capital gains applicable on transferring property to a special purpose vehicle, and vice versa.