Sukuk Scaling the Next Trillion

Welcome to today's panel on the Suk market and scaling the next trillion. The Sukuk market both globally and regionally here in the Gulf has had a phenomenal run these last few years. We've seen volumes grow year on year. We've seen the market draw in issuers from new geographies. And perhaps most importantly, we've seen the investor base continue to get deeper and deeper.

Today's session is going to look at some of the factors that are expected to drive growth in the market in the coming years. And we're also going to naturally talk about some of the challenges that lay ahead. We have quite a bit to get into in only 30 minutes, so let's jump straight in. Uh Mustapa, I think it'd be a good idea to start by getting a lay of the land. So perhaps you can give us a quick pulse check on the market.

Sure. Thank you Miam. Uh I think um you know most of us understand that suk market is one of the fastest growing segments within Islamic finance. It sits at over a trillion dollars today. It makes up roughly about 18% of the global Islamic finance industry.

But what's interesting is that you know whereas Islamic finance you know has been around now for 50 years the modern version suk really only took off about two and a half decades ago 25 years ago. So that has been tremendous growth in that spectrum. Uh I think issuances sat at about 250 billion last year. They'll be about 280 billion this year. So continuing to grow at more than double digit rates which is fantastic.

But I think it's important to understand how the market is shaped as well. So where where you have you know over 20 countries issuing suk it's highly concentrated in a few key markets. Malaysia and Saudi Arabia each make up almost 35 35% of suk. So 70% of suk issuances are coming just from these two markets. The UAE is another 12% and uh Indonesia is another 8%.

So collectively about 90% of the market or 80% of market is coming from just these few countries. So it is highly concentrated. In Malaysia the dynamics are different. You have a lot of smaller issuances but a lot more of them. In Saudi Arabia you have few issuances but large volumes as well.

So that is something that I think you know as the industry evolves you're going to see more markets play a more active role move beyond simply issuing a you know let's say debut sovereign issuance followed by you know maybe one or two blue chip corporates to get to a model where it's like Malaysia Saudi Arabia where you have across the market multiple corporates issuing um and across multiple teners as well from a

it's very cold inside

from a demand perspective

I think what is interesting is that um there is still a lot unmet demand in the suk space. So if you see issuances taking place there the suk tanches are always overs subscribed compared to conventional tanches and the coupon rates are lower as well. Right? So corporates and sovereigns still have a commercial benefit to uh accessing suk market. On the demand side what you also see is that there's a significant interest from conventional investors as well.

So at least half of sukurances are bought by conventional investors. So that is going to continue to drive people to opt into the suk space where they're able to find the physical assets to underline those suks. And finally there's a number of emerging trends which I think we'll talk about in the session as well. But I think that you know this growth trajectory is not going to stall is going to continue in the near term.

Fantastic very very happy to have the buy side perspective on the panel today. I mean when we take a look at the market regionally here in the Gulf, how would you characterize investor sentiment for Cookook right now? Thank you Mariam. I think uh the investor are quite happy with the level of issuance that we are seeing in Sukk. I think as Mustafa said if you look at 2025 people were not coming investor were not coming in the region because they like it.

They were coming because they were able to achieve the returns target that they were looking for. So looking at uh the market precisely you can see that is dominated by the like of the UAE and Saudi. But again the prospect is quite attractive. We all know that uh Kuwaiti uh KOI government changed their rules. So we're going to see them coming to the market and again nobody's trading the suk for the objective in term of returns.

But that said we agree that the dominance of the suk market in the GCC is mainly by the government the government related entities and the financials. But we expect that going forward as we said uh the next trillion I think other entities will be able to issue as well. Yeah, fantastic. I think that's given us a pretty comprehensive overview of where we stand both globally and regionally. And now I'd like to focus on some of the factors that are expected to drive the growth and to build on the momentum that we've just spoken about.

Um diversification is one of those terms that is always talked about when it comes to growing any market uh sukook or conventional where the point at which you can diversify an investor base or an issuer base or even a product. That's the point at which you can expand the market, increase access, and therefore increase the likelihood of of growing that market. Can you talk to us a bit about investor diversification? How can we attract more non-core investors to this space?

Thank you. Alhamdulillah. Uh great question, Mskin. I think um for us to plan for the next trillion dollar for the suk market, it's very very important that we realize that we're not going to go and uh make much progress with the core set of investors. So as Mustafa was talking about the geographical distribution of the suks on the investor side if you see 60% of the suk demand today comes from GCC right another 20 25% comes from your core markets in Asia which is Middle East Indonesia you know Malaysia Indonesia Bernay your core Islamic investor base how do we attract the European investors how do we attract US investor which are hardly 2 3% um of the overall suk investor base today how do we attract the Asian investors I've been for a very long time very very strong believer in bringing East Asia together with West Asia which is Middle East and get the two to talk more to each other because I think historically here in Middle East we've been very very west uh words looking looking at the you know sort of US looking at European markets very important that we start looking at Asia tremendous amount of opportunity and I think if you look at the the broader um uh international landscape especially with the the whole tariffs issue that we saw at the beginning of this year.

We started looking at countries starting to look at uh diversifying their trade corridors, diversifying away their investment partners. So therefore, as a result, we believe that uh for us as Islamic finance practitioners to attract non-core set of investors, we have to really take the suk uh as a platform to the next level. Now these investors are non-faithdriven investors. You have to acknowledge what is it that these investors need. These investors need uh maturity in suk as a product.

So they need that the suk must comply with international standard. They need standardization. They need stability. They don't need noise. So within the industry there's a lot of noise that we as as Islamic finance players you know we keep arguing about this is Sharia compliant this is not Sharia compliant standard 62 standard something else right so we need to keep this noise down because there's nothing that scares away an investor than this infighting that happens within the region so I think what is very very important is that we now kind of suks has been have been around uh for almost 20 plus years now um and it's very important important that we we kind of move this to that level of maturity scale it bring it to international standards you know the like like the likes of IKMA etc and then you know be able to reach out it's very important that we go and create that awareness we need to have get into a a road show mode where we go and talk to these investors you know I want to I would love to see more Islamic investors spending their time in Asia in Beijing in some of these hubs where these decisions are taking place.

I'll stop at that.

Fantastic. Adrisa, again coming back to the buy side perspective. What else do you think can be done to to entice these investors? Are there any pricing or structural adjustments that can be made? I

I think uh for us uh the investor we need to have a open discussion and uh by open discussion I'm talking about education because a lot of people seems to think that they know what sukook is and when you ask them quite blankly what it is what you tend to hear is about liquidity. So how much are you willing to invest in suk? Because if you ask us at Ajit, we don't think we can meet any sovereign wealth fund having a dedicated suk investment. So the trillion that we saw so far has been driven by uh the supply side. And I think if you're talking about going to the next trillion, we need to talk about uh the investor side.

And by that I mean making sure that we understand each other because not everyone is investing in the suk for religion based and I think some of them are investing because it's attractive. So analyze your suk make sure you understand the riskreward because you're not wasting your time by trying to understand the structure. The structure is as you said is a lot of noise. Karam said it's a lot of noise. We think that if we move that on one side and we sit down the suk is an instrument and you are not investing because you like it.

you're investing because it's attractive. The risk profile is something that you understand. So for us, education will always be the distribution. So that's something we need to push forward.

So education and outreach seem to be pretty pretty critical in terms of diversifying the investor base. Um geographical diversification is another topic that I want to talk about and it's something that we've seen really take place in the market in the last few years. So traditionally this product has had its home in the Middle East and parts of Southeast Asia as Mustafa was talking about but in recent years we've seen issuers across uh the US across Europe other parts of Asia take an interest in this market for the various reasons that we've discussed. Um even now we're hearing that there are some sovereigns in Africa that are looking to debut in the market the likes of Benin and Sagal. So there's a lot of momentum there.

Adris I want you to uh talk to us a bit about which regions offer the most potential for growth. I think uh we have to look at it in in two lenses. If you take the next five years, I think the GCC will continue to drive the issuance. But if you go further than that, I think all other countries from as you mentioned north North Africa or Asia will come into the dance. But at the end of the day, they need to be familiar with the structure.

I think standardization is a word that we like to use on our side. But for me, it's not really the standardization that is the problem. is because when you're talking about attracting investor from the Middle East, most of the issuer think that they need to issue suk but suk is not really only for the middle east investors. Suk is for everyone who is looking for a good return less volatile investment and as we can see in the recent 18 to I'll say 12 months the suk market has been well behaved that's what we had the plethora of uh issuance so I think that the next five years the GCC will continue to dominate but behind that I think that other countries as in Asia and northern Africa will definitely take the lead. Mustapa, any thoughts on that geographical diversification, how do we encourage this?

No, I think I completely agree. I think that as Adidris mentioned, you know, in the immediate near-term, the GCC will continue to drive and I think this is, you know, because there is a broad acceptance and understanding of the instrument in question as you know, you go into the you know, let's say 10 years or 15 years down the line, I think a lot of the countries that have in the last five years started on this suk journey. So you have the likes of Philippines. You have the likes of um you know Hong Kong, the UK, many other markets that are you know issuing their um you know sovereign issuances that they usually followed up by one or two corporate issuances from the larger blue chips. I think as they go down that journey you know they're going to see that the suk market is one that should be tapped into and can help them meet their economic aspirations.

So um I I do agree but as Kuram mentioned you know the noise is something that really scares investors right when you're entering the suk space you already don't understand what the instrument is about and then when you get a lot of noise you get differing opinions you get you know uncertainty as to what the future is going to look like then you know you retreat into your very familiar space of just issuing corporate bonds. So I think that would probably be the biggest hindrance and I think we as an industry need to understand the responsibility that we hold when we talk about some of these challenges because uh you know we don't want to damage the growth of India. We all want to see it succeed right so that has to be taken into account.

Most definitely and we're going to touch on some of that noise in case some of you in the audience are interested because we've we've heard that uh word quite a few times already. We will touch on that as one of the challenges. Um how about product diversification? Can you talk to us a bit about some of the other products that can be used to boost supply?

Yeah, so I think there's a lot of room for us to bring product innovation in the suk space. I mean if you look at it purely from the perspective of tenor availability large majority of the suks that we have today and I'm talking international dollar suk issuances these are all longdated suks 5 to 10 years mostly right we have seen very very uh uh limited sukuk issuances in the under two years tenor for example right and there's a huge demand in that space especially if you look at uh uh some of the money market funds If you look at the treasuries or Islamic banks, they need the full full spectrum of you know uh uh rates the the the complete rate curve that need to be. So what we've seen over the years is the rise of uh what we call the CD programs. So till about last year I think there were there were just two this year alone we ourselves have been involved with um another six programs. So there are about eight Islamic banks who are now offering Islamic certificates of deposit.

And this is an instrument interestingly if I tell you uh we've seen a a a very interesting trend this year where we were talking about non-core investors. So we've seen a lot of Asian investors taking interest in these uh um instruments. So we've seen Thai money market funds. We've seen uh private banks out of Singapore. Similarly Vietnam.

we've seen these investors coming and tapping into this segment. So I think that's definitely an area we need to uh see more issuances because uh typically the investors in that space have relied on the likes of IILM and there are not too many such options available right so I think tenor availability is one thing that we need to definitely diversify and get into uh uh more variety there number two is the types of structure so we need to see more securitization uh we need to see more EMTN programs come up we need to see more commercial papers. I think Malaysia to to the best of my knowledge is the only meaningful Islamic CP market that we see there's tremendous potential for us to have that uh here in the Middle East. Uh of course we want to see more corporate suk issuances. So I think to have a flourishing suk market which you know we want to scale to the next trillion dollar it is very important that we give that product variety to the investors.

Most definitely. Um, still on this topic of product diversification, Mustafa, I want us to talk a bit about the rise of ESG Suk. So, uh, ESG has taken over in all uh, all asset classes, all sectors you can think of and it's made its way to the Suk market, but it's still a relatively nent part when we look at the mix of sustainability link, suk, social, suk. Um, do you think you volumes can move the needle or are they still just going to be a nice to have? No, I think it's definitely, you know, one of the most significant trends in the space and I think that as we go forward, we're going to continue to see tremendous growth there.

Um, there there's a couple of things to keep in mind when you think about this. One is there's a very natural alignment between ESG considerations and Sharia considerations, right? So the investor base that is looking or going out of its way to issue something that is Sharia compliant will have a natural affinity to the ESG consideration and as you have more awareness about how it should be ma managed how should be tracked the uh benefits of positive uh screening versus negative screening that is going to play a role in this. The other thing that I think is very very important is when you look at globally you know which markets are leading when it comes to ESG um Islamic markets are playing a big role. I mean if you look at the last four cops three of them were held in Muslim countries Egypt, UAE and Azarbaijan.

The next one is going to be held in Turkey. So you know five out of four out of five are coming from these markets. So I think that there is a broad government drive to make uh ESG significant part of the broader financial services industry and in particular Islamic finance and within the uh stakeholders in the industry there is an alignment there. So I think although it is small it has been growing I believe you know over the last 5 years grown at a ker of 60% year-onear so significantly outpacing still a small base but will become a major component of suk in the next 5 years

from from an investor's perspective is there is there sufficient appetite for these sorts of instruments whether it's a social suk or green suk

it's an interesting one I don't know if uh the audience remember when uh the suk and the the ef G came to be the main focus. Some of the investor were thinking that suku could be identified already as ESG compliant. But for us uh the way we address it, I think it has to be an open conversation with your investors. What we found out is most of the time when we are meeting with investor they have a bigger team looking at ESG. This is behind the scope of what we do in Suk.

So what we came out we came up with with an agreement is to say okay since you have your way of looking at ESG and we are the expert in investment. We think that we have to find a pathway to meet and that pathway is basically you tell us for example your exclusion list and we optimize the portfolio based on what you are looking at. We we didn't try to educate anyone on ESG because we think that we are the expert when it comes to investment but we also realized that by talking to investor from the Middle East from Europe or US everyone has a different view. So that's why we said okay you have a bigger team and most of the time most investor don't like to admit it they have a bigger ESG team than the investment team that we have. So it's better if you rely on you to tell us you are the expert in ESG.

you constrain the universe and we optimize on that and we found it to be a great solution. So there's no more misunderstanding or discussion for waste of time if I can use that term. So we think that it's always an open discussion. You are the expert. You know what you want.

You know what you don't like. You tell us and we tell you exactly what's the expectation in term of your return. So everyone is an expert and what they do. So that's quite important for us to have an open communication with the investor and move forward.

Quite a nuance discussion there on on ESG Suk. Um I want to talk a bit about retail suk. So broadening access to the sukug uh getting these retail investors in Mustafa perhaps you can talk to us a bit about the impact of doing that. Where can we take lessons from?

Sure. I think um you know retail suk is a very much untapped uh space because there is a lot of demand that exists right and we have very few examples of this but the signs from those are very very positive if you look at Indonesia Indonesia operates a green retail suk program that currently sits at over $2 billion right so there's over $2 billion they've generated from the retail space that can help finance many of the government's green transition uh programs if you look at the UAE UAE has a tremendous example example in sukalwatnney the national bonds program and national bonds program um you know as of this year had over $4 billion uh in assets right uh almost I think 5.8 billion 15.8 8 billion dirhams. So a tremendous program that is immediately redeemable that is structured using suk structures that is u available through technology and that is being used very broadly.

So I think the signs are very positive in the UAE in Bahrain in Saudi you have many institutions that are offering uh tokenization of suk. So they're taking suks and breaking them up into uh you know retail segments that are at much smaller denominations of the 200,000 typical denominations. So I think that is going to grow as a trend but it is a tremendously untapped uh opportunity uh for Islamic finance. When you think of Islamic finance banking which is deposit driven is the largest segment right by far 70% of the industry and a vast number of those customers don't have access to be able to invest in suk. So retail sahuks can help solve that problem for them.

Interesting. Um okay, I think that's enough bullishness for now and I think we can perhaps move on to some of the challenges that are expected to face market participants in the suk space. Um the first and perhaps the most pressing is regulatory changes and I think we've already referred to some of that on the panel. Um Mustafa and I were sitting on this very same panel one year ago when we were talking about uh regulatory changes namely uh AOPI standard 62 and the several question marks that surrounded it at the time and the uncertainty that a lot of market participants had and some would argue that we're sitting here one year later and there are just as many question marks um and and just as much lack of visibility. Um Kuran perhaps I can I I can get your take on where the market stands right now with standard 62.

So I think uh uh there has been a healthy debate in the industry on this subject. If you just step back and look at the broader framework of what came out from IO you have to appreciate and respect the intent and objective of what he's been trying to achieve. Suk as an instrument has been around 20 plus years. It started off as a base concept. Over the years a lot of things have come in lot of evolution has happened and the attempt from IO is to refine the product right from a Sharia perspective obviously there are certain expectations from the Sharia circles from the Sharia scholar these are very legitimate asks I think that the scholars are asking for the important point is how do you draw the right balance between trying to achieve a um higher level or higher degree of Sharia compliance versus uh practical issues the practical ical challenges which uh the investors uh you know in terms of their requirements uh issuers what challenges they have.

So some of the core issues that have come up in this uh discussion are uh you know around the issue of title transfer. I think UAE takes a lot of credit the central bank the high shar authority there they took lead in this whole conversation and have been actively working with the industry and we are part of the suk working committee here uh with the hsa secretariat trying to solve that issue ahead of IO coming out and issuing their uh uh standard so I think currently where we stand IO has publicly come out and they've kind of announced that they've they've they've put the the the the process on hold. They are in that uh advanced stage of further consultation with the industry. They've heard the industry. They acknowledge and respect the feedback that has come.

It's it's it's now about finding that uh right balance that right middle ground that allows us to inshallah progress with the the the the uh the the Sharia quality of the suk structure but at the same time meet uh the requirements of the issuer uh the requirements from a legal and from a regulatory perspective to allows us inshallah to scale suk to the next trillion dollar. Mustapa uh in this discussions that you're having with market participants how do you how do you see issuers trying to navigate this space are we seeing any workarounds being developed

so it is it is a major challenge and I completely agree with you know and a sentiment that you know the the motivation behind the standard is a noble motivation right to bring it in line with Sharia when we spoke last year you know we were on the cusp of the standard being mandated and then the grandfathering period kicking in now the standard has been put on hold and you know credit to IO that they have taken the feedback from the market and they are looking to ensure that market concerns are addressed. I think you know there there are certain key issues uh that the standard brings that um need to be really considered. One is the sovereign challenge right transferring of assets of sovereign is very different than a corporate or any other type of issuer right there are you know legal challenges legislative challenges you know laws have to be changing countries and security has to be considered as well. So that I think um you know will continue and it's very difficult to to address that the uh you know challenge that rating agencies have highlighted to us as well as you know if we push the instrument too far on the equity spectrum then you know the rating implications and what that means for the instrument have to also be taken into account. I mean, you know, to your question about issuers, we've had conversations with issuers very recently um and you know, they they've put in task forces where they look at upcoming Suksuences and to determine what is the feasibility of it being HSA compliant versus IOI compliant versus um you know the the the pre-existing structures that they've adopted, right?

So, it's definitely on their radar. There are workarounds that um you know people are looking at that have not been made public yet but they have them in the back burner in case they need to adopt them. So the market has taken this point seriously. They have um you know developed structures to make sure that you know the industry doesn't you know collapse and some of the risks are taken into account. But I think when the standard is eventually launched, it's going to be one that is much more um aligned to the market considerations and will be something that will continue to help drive the growth of the industry inshallah.

Fantastic. Um if we had more time, there were a few more challenges that I would love to get into standardization being one of them and I know that Adrisa has some thoughts on that. Um but we only have just over a minute left so I think it'd be good to to wrap up with a closing thought from each of our panelists. And the question that I was thinking about was if there is one thing that has to be done, one action that has to be taken be it by issuers, investors or regulators that could most advance growth and accelerate us towards the next trillion. What is it?

We'll start with you.

Great. I thought you'll start on the other end. I I think for me I will answer it with a with a quote from uh Mark Twain because I think that it fits perfectly the suk universe and the suk investment. It's uh if it goes as uh it's not what you don't know that will put you in trouble. It's what you know for sure that not true that will put you in trouble because most of us when you're investing in suku we have a lot of assumptions.

You never go into a meeting with an investor willing to learn. They're willing to tell you what they know. So I will advise everyone to go back to the basic before going getting into sukum.

Uh I think it's important for us to scale the suk market, open it up to non-core investors, open it up to non core issuers and that's a responsibility that lies us as practitioners. Uh be it bankers, be it Sharia scholars, be it regulators in the Islamic finance market. I think that is uh absolutely critical for us to take suk to the next trillion dollar level.

Mustapa the one action

I think I I'll mention two very quickly. One retail which we discussed which I think is a tremendous untapped potential. The other is I think you really have to open suk is from a corporate perspective and one thing we can learn from Malaysia is the role that ram rating has played within that market to open up suk issuance. So it's a local rating agency that issues rating advice on corporate issues with a local market. I think if you had more of those so that smaller corporates wouldn't have to rely on you know the S&Ps and the Fitches but could have a local institution that can at a commercially viable option provide them the rating that could significantly open up the corporate suk space.

Interesting. Okay. Hadn't hadn't thought about that one.

Uh fantastic. Well, thank you very much to our panelists for sharing their contributions and thank you all for attending. We hope you found that useful. Thank you.