Global sukuk issuance is expected to reach $50 billion$55 billion in 2016, compared with $63.5 billion in 2015 and $116.4 billion in 2014, a Standard & Poor's Ratings Services report said.

Absent its biggest issuer, the global market for sukuk will remain at below-peak levels in 2016, according to the report titled "The Global Sukuk Market: The Correction Is Here To Stay."

The correction started last year, mainly because the central bank of Malaysia (Bank Negara Malaysia; BNM)--the largest issuers of sukuk worldwide--stopped issuing. Excluding the BNM effect, sukuk issuance dropped by around 5 per cent in 2015 from 2014.

"In our view, three main factors will shape the performance of the sukuk market in 2016:  monetary policy developments in the US and Europe, the drop in oil prices, and the possible lifting of sanctions on Iran," said Standard & Poor's global head of Islamic Finance, Mohamed Damak.

“The first two factors are likely to drain liquidity from global and local markets. We think that if oil prices remain weak, some governments of oil-exporting countries in the Gulf Cooperation Council (GCC) and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances (conventional and Islamic).

“In addition, we think that several issuing countries might decide to go the conventional route, rather the Islamic route, because it is less complex,” he added.

However, the market could benefit from the European Central Bank's program of quantitative easing (QE) in a yield-hunting environment pushing some European investors to the sukuk market.

Also, if sanctions against Iran are lifted, and the country starts spending more on infrastructure projects, we could see some new growth opportunities there for the sukuk market, the report said.

“Over the next few years, we believe the market will benefit from the greater involvement of traditional stakeholders--such as the Islamic Development Bank Group, the Islamic Financial Services Board (IFSB), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the International Islamic Financial Market (IIFM)--as well as new ones like the International Monetary Fund (IMF),” said Damak.

"These institutions are now working on several projects to strengthen the foundations of the Islamic finance industry and prepare it for greater innovation and accelerated growth.

“We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee,” e concluded. – TradeArabia News Service