KUALA LUMPUR -- The total global issuance of Islamic bonds, known as sukuk, dropped 5.2% on the year to $50.3 billion during the January to June period due to declines in Middle Eastern countries, according to a Malaysian ratings agency.
RAM Ratings said the decrease was largely attributable to Qatar, Saudi Arabia and Turkey, some of which were weighed down by budget tightening that affected sovereign sukuk issuance.
Malaysia continued to lead the issuing countries, logging a 4.7% rise to $19.4 billion over the six months, accounting for 38.7% of the total market share. Issuance from the private sector represented 72% of the securities with the balance made up of sovereign sukuk.
But the country's leading position has been declining as other emerging countries developed their sukuk markets, RAM said in a half-year report released on Tuesday. It added that this position might be further impacted by Malaysia's new government, which is reviewing infrastructure projects approved by the previous government.
Malaysia has led the promotion of Islamic finance, encouraging its public and private sectors via incentives to issue sukuk as an alternative fundraising method.
But other Islamic countries are catching up. Indonesian sukuk issuance has risen 52.6% to $6.6 billion, backed by a 10-year Islamic finance masterplan unveiled in 2016. But unlike Malaysia, 95% of Indonesian issuance came from the public sector. RAM attributed the gap between the two countries partly to a negligible cost difference compared to fundraising through bank loans and a lack of knowledge about sukuk issuance in the corporate sector.
Indonesia also became the first country to issue green sukuk worth $1.25 billion in February to finance projects including renewable energy and waste management.
Green bond issuance is set to pick up pace as governments seek to promote sustainable policy agendas by encouraging private capital into low-carbon and climate-resilient infrastructure projects, Moody's Investors Service said in a statement last week.
In Malaysia, five companies issued green sukuk worth 3.735 billion ringgit ($924 million) since last July to fund energy projects, according to RAM. One of these -- Tadau Energy, a unit of China-owned Edra Power Holdings -- issued the first green sukuk of 250 million ringgit for a solar project in Sabah in East Malaysia.
Malaysia, Indonesia and the six Middle Eastern countries that form the Gulf Cooperation Council account for 94% of global sukuk issuance. Lower issuance by Saudi and Qatar caused total issuance by the GCC to drop by 19.1% to $21.3 billion in the first six months of the year.
RAM projects that global sukuk issuance for 2018 will reach between $75 billion and $85 billion, lower than the $97.3 billion achieved in 2017.
The sukuk market in 2018 will depend on the performance of the global economy and the state of the investment recovery in key Islamic finance countries, said Ruslena Ramli, RAM's head of Islamic finance.
Sukuk bond is a type of debt that complies with Shariah, or Islamic law that among others bans the charging of interest and speculation. Islamic bond replaces coupons with payouts derived from profit-generating tangible assets, such as leases or a joint venture.