We think the future is bright for investing in sukuk. We are confident that sukuk can capture more market share in the global fixed income space.
Our more than 10 years of investing in the asset class suggests sukuk could provide the type of resilience and stability that mitigates an uncertain global economy, particularly as more risk management tools, environmental, social and governance analysis and fintech capabilities become increasingly integrated into sukuk products. We are excited for what the next decade will bring.
Despite this, sukuk remains a misunderstood asset class, subject to misconceptions. Sukuk was recently included in JP Morgan’s Asia Credit Index Core and Emerging Market Bond Indexes. We believe that positive reception should spur further growth in sukuk and cement its place as a significant component of global markets. It’s not a foregone conclusion that the sukuk market will hit our estimate of $2.7trillion (R40.30trln) in assets by 2030.
However, we’ve identified a number of developments we think should maintain momentum for the asset class. These primarily relate to growth in issuances from the market, and how we tackle obstacles around standardisation, innovation and governance.
As market participants, we have an important role to play in promoting the industry. Governments and financial institutions are the biggest sukuk issuers globally, so their role in terms of pushing for market growth and development will remain vital.
Asia, which has the biggest domestic sukuk market, has seen the volume of sukuk issuances decline 4percent on average over the past five years. We think this trend should reverse as issuances come from new sources and attract more investors to the asset class.
Already, the number of sukuk issuers is expanding: Nigeria, Pakistan, Hong Kong, Turkey and Indonesia have become more significant sukuk issuers in recent years. One further possibility could be Chinese issuers looking to diversify their sources of funding.
We’d expect the Gulf Co-operation Council, particularly Saudi Arabia and the United Arab Emirates, to remain drivers of sukuk growth, since they make up a third of the market. Those countries also have ambitious economic diversification and capital market development plans. Africa, from Egypt to Nigeria to South Africa, could also potentially emerge as a beneficiary or catalyst for the growth of Shariah-compliant finance, in our view.
Lastly, we believe encouraging providers of indexes to measure the non-dollar sukuk market could be another way to help foster growth. Most sukuk indexes are based in US dollars, that leaves a big portion of the market under represented. The emergence of more non-dollar indexes in vital emerging markets could open up the opportunity set further.
Dino Kronfol is a chief investment officer of Global Sukuk and MENA fixed income at Franklin Templeton Investments.