The Sukuk Market: Global Versus Local

Critics of the sukuk market have noted that the sukuk market is more local or regional rather than a true international market. There is basis to this assertion. The very nature of sukuk indicates that it is based on assets, projects, and services, which are necessarily localized to particular regions and local markets. Although sukuk has grown impressively in the last decade, international sukuk issuances still only account for about a sixth of the total yearly issuances. The biggest challenge for the Islamic financial market is to cross borders and gradually move outside of the largest sukuk markets in the GCC (Gulf Cooperation Council) states and Malaysia. The recent issuance of sukuk by the United Kingdom is a step in the right direction.

So, currently, how global is the global sukuk market? The fact is that about sixty percent of sukuk investors are from the two regions mentioned above. S & P has noted in its April report that sukuk operates as a collection of local markets, centered mainly around Malaysia and the GCC states. Although the Central Bank of Malaysia has been the leader in the global Islamic financial market, its strong involvement has led to claims of rigging of the market and of excessive localization. The Central Bank of Malaysia has issued more than forty percent of worldwide short term sukuk in 2013.

There is an element of suspicion related to the fact that most sukuk was not issued in US dollars or listed on major international exchanges. This is an element that Islamic banks around the world have recognized. Currently, new sukuk issuances and Islamic financial products and instruments are being developed to help sukuk truly become international. As Western governments participate in increasing number in the Islamic financial market, there is little doubt that this will be a successful goal in the coming years. The main driver that may help sukuk overcome this perception of being confined to a particular region is the increased interest outside of traditional sukuk. Although about half of sukuk investors invest in sukuk because of religious motivations, according to S & P, there is a growing interest in investors with considerable assets that are more interested in the impressive growth these financial instruments have had in the last decade.