The Asset Awards: Islamic finance embraces sustainability and green financing
Middle East issuers manifest leadership in issuances across sovereigns, financial institutions and corporates
24 Jul 2020 | The Asset

LIKE the rest of the international debt capital markets, Islamic finance had its initial shock when Covid-19 unraveled earlier in the year. Global sukuk issuance, which rose 40.4% from the year previously to US$157.8 billion in 2019, almost came to a standstill in March and April as both issuers and investors digested the impact of the virus outbreak. The market, however, has since recovered with the resumption of the deal flow during the second quarter of the year.

In fact, Fitch Ratings expects the sukuk supply to rise further in 2020, with the sovereigns in key Islamic finance jurisdictions, many of whom are net oil exporters, continuing to issue sukuk and bonds to fund their rising fiscal deficits due to lower oil prices and to implement the fiscal policy responses to the health crisis. Issuance by financial institutions and corporates are also likely to increase as they diversify their funding sources and take advantage of low financing costs.

Sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey, and Pakistan reached US$12 billion in the second quarter of 2020, according to Fitch, representing a 42% increase from the first quarter. These markets similarly accounted for the bulk of the sukuk offerings in 2019 based on the evaluation by the board of editors at The Asset of all the submissions to The Triple A Islamic Finance Awards 2020. Like its conventional bond counterpart, the sukuk market embraces sustainability and green financing-related transactions as issuers and investors enhance their commitments towards ESG.

Two issuers out of the Middle East stood out in 2019 as they demonstrated their strong ESG engagements with ground-breaking sukuk transactions. These types of deals are a manifestation of how this region can underpin the growth of the industry going forward, particularly with their propensity to print deals in US dollar, not just in local currency, which was prevalent in transactions out of Malaysia and Indonesia, the two Islamic finance core markets in Asia. The robust sukuk issuances in the Middle East span from sovereigns to financial institutions and corporates, with several of the transactions achieving tighter pricing due to strong investor demand.

The Dubai-based Majid Al Futtaim, which owns and operates shopping malls, retail, and leisure and entertainment businesses, priced in May 2019 the first benchmark-size green sukuk by a corporate globally amounting to US$600 million. It is one of the first companies in the MENA region to focus on sustainability, having first developed a sustainability strategy in 2011.

The Islamic Development Bank (IsDB), a multilateral development finance institution based in Jeddah, Saudi Arabia, also launched in November 2019 its first-ever green sukuk under its newly-established sustainability finance framework amounting to one billion euros (US$1.15 billion). This was the first-ever euro-denominated green sukuk and the first AAA-rated green sukuk, and enabled the IsDB to achieve its lowest coupon ever.

Asia had its fair share of sustainability and green financing-type of deals in 2019. The Republic of Indonesia (RoI) priced its second green sukuk in January 2019 amounting to US$750 million in another demonstration of its commitment to sustainability financing. Proceeds from the offering were used exclusively to finance or refinance expenditures directly related to eligible green projects as defined by RoI’s green bond and green sukuk framework.

Renewable energy projects have been the mainstay of Malaysia’s sustainability and green financing-related sukuk transactions. In the first sukuk issuance arranged under the Asean sustainability SRI (sustainable and responsible investment) framework, Edra Solar raised 245 million ringgit (US$57.65 million) to finance the construction of a 50MWac solar photovoltaic (PV) power plant in the state of Kedah.

Telekosang Hydro One raised 470 million ringgit, labelled as Asean green SRI sukuk, to fund the development of 24MW and 16MW small hydropower plants, using run-of-river hydro scheme, located in Sabah. This is the world’s first greenfield mini-hydro sukuk, which was confirmed by Climate Bonds Initiative.

In another renewable deal, Cypark Resources, through its limited liability private company Cypark Ref, raised 550 million ringgit to finance the development of three solar PV power plant projects of 30MWac each. It comprises of one ground-mounted solar and two floating solar PV power plants, featuring the first-of-its-kind solar turnkey financing structure.

In another trailblazing transaction, Blossom Finance arranged the world’s first microfinance sukuk launched on the blockchain to fund micro, small and medium enterprises, and entrepreneurs in Indonesia. The deal for Indonesian microfinance company BMT Bina Ummah amounting to 715 million rupiah (US$50,000) has been described by its proponents as the future of investing – with tokenized assets and end-to-end digital execution.

Indeed, Islamic finance continues to innovate, which further contributes to the development of the debt capital markets. In a landmark transaction in Bangladesh, for instance, United Mymensingh Power issued the first zero coupon Islamic certificates in the market amounting to 5 billion taka (US$59 million). The deal, the first sukuk offering by United, has set a precedence as a starting point for Shariah-based bond issuances in the country.

The Islamic finance market in 2019 also witnessed a proliferation of bank capital sukuk in the Middle East, such as in Kuwait, Qatar and United Arab Emirates. In the case of Qatar International Islamic Bank, which raised US$300 million additional tier 1 (AT1) perpetual sukuk in November 2019, this was the first time that Qatar Central Bank has allowed a bank to access the US dollar market for capital. The rationale for approving the transaction was two-fold: (i) the central bank initiated a review process to align its standards with the GCC peers and (ii) to allow Qatari banks to take advantage of the current yield environment for AT1 issuances.

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