Islamic syndicated loans could make up for sukuk's shortcomings - S&P


The Islamic syndicated loans market has been modestly outperforming sukuk in 2020, after Islamic countries were hit hard by the double impact of COVID-19 and low oil prices.

Sukuk issuance fell by 27 percent year-on-year in the first half of 2020, S&P Global Ratings said, while syndicated loans in Islamic countries in the first half of 2020 were at $50.1 billion, 40 percent of the 2019 total.

Core Islamic countries including the GCC states, Turkey, Malaysia, Indonesia are all facing economic contractions, and corporates have cut capital expenditure, while using banking facilities to stay afloat.

It could be the case that governments find syndicated loans a more convenient solution: “S&P Global Ratings has observed that the Islamic syndicated loans market has been modestly outperforming the sukuk market this year.

“Although the bulk of syndicated deals--totaling more than $50 billion--remain conventional, we believe Islamic syndications could increasingly complement traditional financing options.

“Because such syndications involve a limited number of counterparties, they could support quicker and easier issuance than is the case for sukuk,” the ratings agency said.

S&P noted a shift by Islamic countries towards conventional finance, which it said was often the case at times of crisis.

“This year, GCC governments and government-related entities have tapped the conventional markets for bonds and syndications more often than the sukuk market,” S&P said in its Ratings Direct report.

“There are several reasons for this, but the most common relates to the complexity of issuing Islamic instruments, particularly sukuk, due to a lack of standardisation.”

Central banks in some core countries have increased the flow of liquidity, asking banks to channel these funds to local corporations to support economic activity, according to the report, which also said banks’ risk appetite will lessen in light of the economic stress in the region.

Bank lending is expected to increase by low to mid-single figures to Islamic countries in 2020, the report concluded.

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