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Driving The Development Of ESG With Sukuk

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A sukuk contract is simply defined as a debt arrangement agreed between the sukuk holders and sukuk issuer to engage in Shariah-compliant activities. Let’s look at how we can drive the development of ESG with sukuk.

But first, what are Shariah-compliant activities?

They are activities that are permissible as disclosed by the Shariah Advisory Council (SAC) of the Securities Commission Malaysia(SC). For example, this includes any activities that are not involved in gambling, prohibited entertainment, riba’-based transactions, tobacco, weapons, and others. When a sukuk holder invests in a sukuk, he basically has the ownership of the given assets and the sukuk is the certificate evidencing the ownership.

When sukuk holders have the ownership, it gives them the ‘financial rights’ (remember, it is a debt arrangement) stated in the terms and conditions of the sukuk. The sukuk holders are entitled to the returns generated with the underlying Shariah-compliant transactions structured and disclosed in sukuk contracts.

A sukuk contract consist of various transactions contracts which form a foundation and has different implications, such as profit sharing, leasing and sale and buyback. There are few structures commonly applied to name a few: ijarah, musharakah, mudharabah, murabahah and wakalah.

In terms of sukuk structures, features and participants there is generally a difference between the international and domestic sukuk markets hence the requirements and popularity of various sukuk financing structures also differs between the two markets. The hybrid structured sukuk is the most common structure issued representing 48% in 2021 by Sovereign Sukuk Issuers, followed by ijarah (31%) and wakalah (20%).

As far as the international sukuk market is concerned, sukuk wakalah has been the most popular structure for some time now. Malaysia on the other hand is popular with the commodity murabahah. Based on the International Islamic Financial Market 2022 Sukuk Report, sukuk issuances in the past ten years has been growing. As of 2021 the market stands at US$188.12 billion.

Throughout the past ten years, however, sukuk issuances were not in constant trajectory. The lowest decline was in 2015 due to a strategic move by Bank Negara Malaysia (BNM) to halt issuing short-term investment sukuk.

So how then we can drive the development of ESG with sukuk?

Read: The Islamic Sustainability Approach In ESG

Total Global Sukuk Issuances In USD Millions

The US$188.12 billion comprised of international sukuk issuances stood at US$49.43 billion whilst US$138.69 billion represents the domestic sukuk issued in respective countries. Malaysia issued 735 domestic sukuk issuances in 2021 totalling to US$61.045 million representing 44% of total domestic issuances globally.

Main factors for this improvement in sukuk issuances despite the global pandemic was due to continuation of economic stimulus measures implemented by respective countries coupled with rising commodity prices including oil (IIFM Sukuk 2022 Report).

Source: IIFM Sukuk Database

Sukuk issuance had a stronger than usual start to the year, based on the considerable momentum it had built up in 2021. Total sukuk issuance reached a total of US$51.6 billion in Q1 2022, compared to US$43.4 billion issued in Q1 2021 (Source: Refinitiv).

Referring to Q4 2021 research by Moody’s, Malaysia and Saudi Arabia continued to dominate the sukuk issuance market with 37% and 29% of total issuances, respectively. However, in Q1 2022, a boost came from sukuk issued by Saudi-based entities, which amounted to US$17.9 billion, outpacing issuances from Malaysia (a market leader) for the first time. Sukuk issuance from Saudi Arabia nearly doubled from US$9.3 billion in Q1 2021.

The Saudi government ramped up issuances through its domestic sukuk programme despite higher oil prices that reached their highest level since the global financial crisis of 2008, amid rising demand for debt from highly rated issuers. The sovereign raised US$14 billion during Q1 2022, up from US$3.7 billion during the same period in 2021.

This included a US$7 billion in sukuk in March 2022, issued with the purpose of consolidating domestic public debt under the sukuk program.

Moody’s expects the outlook for sukuk issuance in 2022 to remain divergent. It is expected that the burst in issuance momentum will wind down over the rest of the year as the Gulf Countries Corporation’s (GCC) government funding needs may reduce in the short-term.

Refinitiv’s Sukuk Perceptions and Forecast Study 2022 also echoed Moody’s forecast stating “whilst the Global sukuk issuance reached US$100.9 billion in H1 2022, issuance momentum is slowing as oil prices are elevated and the Fed leads a global monetary tightening cycle which reduces government borrowing.”

Read: 4 Things That You Should Know About ESG In Malaysia

Driving The Development Of ESG With Sukuk

Nevertheless, just like what was stated in Moody’s and Refinitiv’s report, sukuk is safely being perceived as a viable source of financing for corporate and financial institutions. This includes general purpose requirements, capital adequacies, project financing, budgetary and fiscal requirements, and of liquidity management purposes. ESG with sukuk sure can get along nicely.

In addition, the integration of ESG considerations into investment mandates is also driving the development of green, sustainable and Social Responsibility Investment (SRI) purposes, which would be attractive to sukuk investors and ultimately embodies the true concept of maqasid al-Shariah. That’s how we can drive the development of ESG with sukuk.

Read: ESG Investing And The 3 Steps To Build An ESG Portfolio

About the Author

Established IFRAC Sdn Bhd in March 2022, Baizurah, a certified HRDC trainer has 15 years of Sukuk experience. Throughout her tenure in the financial industry, she was responsible for various dealings related to Debt and Islamic Capital Market, Project Financing and Financial Advisory. Her achievements include arranging the first aviation Sukuk Musyarakah, global Sukuk Ijarah and a pioneer in financial guarantee structures relating to the plantation and real estate industry.

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