Who Is Buying Sukuk?

Sukuk is the basis for the global Islamic financial market. However, as the appeal of Islamic financial instruments grow, buyers from all around the world have flocked to sukuk.

In fact, this has prompted apprehension about sukuk possibly threatening Western markets rather than existing alongside them. Initial sukuk offerings were met with disbelief. Avoiding industries that are traditional money makers such as weapons and entertainment and eschewing the entire concept of interest, there were plenty of analysts that considered sukuk impossible. However, on the foundation of centuries of Middle Eastern culture and sound economic principles which do away with speculation and uncertainty, sukuk has thrived. In this article we take a look at who are the main investors in sukuk today.

There is no doubt that the principal investors in Islamic finance are backed by revenue from oil, mostly based in GCC nations. However, the percentage of investors from outside the Middle east, particularly from the United Kingdom has increased enormously in the last five years. Before 2009, it was common to see sukuk issued in GCC nations with more than eighty percent of backing from banks in GCC nations. Today, GCC investment is still highest, but at a much lower percentage.

Generally, most sukuk today include investment in a proportion of about 60:40 between Middle East and Non Middle East investors. Although some United States offshore investment is often involved, most of the Non Middle East investors come from Europe. Within Europe, the United Kingdom leads the way, with sukuk investments that equal the rest of Europe combined, in most cases. Although there is Asian investment in sukuk, the capital invested by Asian sources outside of the Middle East is generally below that invested by European sources, despite the fact that Southeast Asia is the undisputed leader in sukuk issuance when compared to Europe, both in corporate and sovereign sukuk.

Banks are still the main investors in sukuk, with a vast majority of funding coming from these financial institutions. Corporate sources may account for ten to twenty percent of investment, with hedge funds and asset managers accounting for another twenty to thirty percent. Most banks involved in financing sukuk are still backed by governments, mostly in the GCC region. Private banks, especially outside of countries traditionally involved in Islamic finance are increasing their involvement in sukuk, but are still far from reaching the investment levels of established Islamic financial institutions.

The year 2015 may represent a turning point in Non Middle East involvement in sukuk financing. About 49 percent of a recent sukuk issued in Dubai was bought by European investors. However, private European investors generally still cannot match the liquidity among private Islamic investors. This year has seen a general outreach by financial institutions in Europe to invest money in sukuk around the world. Turkey and Slovenia, for example, were involved in two successful sukuk deals recently. In the case of the Dubai issue, fund managers accounted for about 65 percent of the transaction.