KUALA LUMPUR (April 20): New sukuk issuance hit a record in the first quarter of 2016 (1Q16) in the main markets, including Malaysia, with an issuance total of about US$11.1 billion (RM42.87 billion), a surge of 21% from a year ago.

Fitch Ratings Inc said the data reinforces a trend of gradually increasing use of sharia-compliant borrowing, as more countries create legal frameworks to support issuance and as issuers attempt to attract a broader investor base, including Islamic finance investors.

“Total new sukuk issuance (with a maturity of more than 18 months) in the Gulf Cooperation Council, Malaysia, Indonesia, Turkey, Singapore and Pakistan, was around USD11.1bn in 1Q16.

“Issuance was up 22% from the fourth quarter in 2015 and 21% from a year earlier (1Q15), while non-sukuk bond issuance of USD17.1 billion was down 23% quarter-on-quarter and 45% year-on-year.

“Sukuk represented 39.3% of total bond and sukuk issuance in these countries during the quarter — the highest proportion in the past eight years,” Fitch said in a statement.

It added that issuance in 1Q16 was led by sovereigns and supranationals, including US$2.5 billion by the Indonesian government and US$1.5 billion by the Islamic Development Bank.

“These types of issuers are likely to remain dominant, but there is also the potential for bank and corporate issuance, especially as bank liquidity has become tighter, as oil prices have dropped,” it said.

Fitch expects both overall and a proportion of total sukuk issuance to remain relatively strong in 2Q16, based on the pipeline of deals and the potential for some governments to issue debt to make up for weak oil revenue.

“The third quarter is likely to be quieter, due the combination of the summer break and Ramadan. Overall, our expectation is for 2016 sukuk issuance to at least match 2015 issuance,” it said.

It added that the proportion of sukuk issuance in five of the last six quarters has been above the average, since beginning 2009.

Meanwhile, Fitch said new sukuk laws in some countries should support issuance by helping create a standardised structure and improving transparency.

It further said difficult economic environment issues are likely to favour issuing a mix of bonds and sukuk, or solely sukuk, rather than solely bonds, as they will not want to exclude part of the market.

The Islamic banking sector, for example, is not allowed to invest in traditional bonds, while regional and international investors are increasingly comfortable investing in sukuk.