Sukuks, often referred to as Islamic bonds, are financial instruments that comply with Islamic law also known as Shariah. Unlike conventional bonds, which involve interest payments on a loan, Sukuks represent ownership in tangible assets, services, or an investment in a particular project or business venture. Shariah prohibits interest, excessive uncertainty and speculation and disallows investments in industries such as alcohol, pork production and gambling.
As of Q1-2024, the global Sukuk market is around USD 867 billion in size with almost three-quarters of outstanding instruments denominated in local currencies and the rest in US dollars. Dollar-denominated sukuks are typically structured as trust certificates under English law. The hard-currency international sukuk market is the real attraction and driver of the increased interest in the asset class from an asset allocation perspective.
The first Sukuk transactions date back to the 7th century AD in Damascus, Syria. More recently, in early 2000, the Malaysian government issued the first modern Sukuk bond marking the start of what would become a rapidly expanding market.
Over the past decade, the Sukuk bond market has thus metamorphosed from a niche market into a more mainstream asset class. This growth has been characterized by increasing diversification in terms of geographical issuance and industry sectors. The investment universe now includes sovereign, quasisovereign, and corporate issuers, with a notable increase in participation from non-Muslim majority countries. This expansion has been driven by a growing demand for Sharia-compliant investment products and the increasing attractiveness of Sukuks as stable and ethical investment options.
Malaysia remains the largest Sukuk market globally, with around 60% of its local currency debt market in Sukuk, while Gulf Cooperation Council (GCC) countries account for 35% of global outstanding Sukuk. The GCC is an expanding issuer region due to the vast number of infrastructure projects. Sukuk issuance especially for sovereigns are often heavily oversubscribed. Egypt’s debut USD 1.5 billion Sukuk attracted bids of more than USD 6 billion in 2023. Pakistan’s 2022 Sukuk was oversubscribed by more than two times.
From an investment perspective, allocating to Sukuk bonds offers several compelling benefits. Firstly, Sukuk bonds have historically provided stable returns with low volatility thereby making them appealing on a risk-reward basis. Secondly, they offer risk mitigation benefits, as Sukuk bonds often exhibit low correlation with conventional bonds, thereby enhancing portfolio diversification. Lastly, they provide an avenue for ethical investing, aligning with the principles of ethical and socially responsible investing.
Originally posted here: https://www.linkedin.com/posts/activity-7259787844162908160-Ux_k