Higher oil prices are threatening the growth of sukuk

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Islamic Bank of Britain was launched in London, England in 2004. The bank has since been renamed to Al Rayan bank.

Higher oil prices this year have reduced the need for energy-exporters in the Middle East to raise funds through the Islamic bond market — threatening the growth of a niche finance sector that has been struggling to gain wider traction.

Oil prices have stayed above $60 per barrel so far this year. That’s expected to persist: S&P Global Ratings has revised upward its forecast for oil to an average $65 per barrel this year from the $55 per barrel it projected earlier.

As the key commodity inched higher in its price, global issuance of Islamic bonds fell 15.3 percent year-over-year to $44.2 billion in the first six months of this year, according to S&P. The agency said it expects 2018 to end with $70 billion to $80 billion in total volume — coming off 2017’s three-year high of $97.9 billion.

Islamic bonds, also called sukuk, are debt instruments that comply with Sharia principles. Sharia is an Islamic law that prohibits earning interest on loans and bars funding activities involving alcohol, pork, pornography or gambling.

Oil-exporting Arab countries were among the largest sukuk issuers last year. Saudi Arabia, for one, issued a sovereign sukuk worth $9 billion — the largest ever Islamic bond.

But higher oil prices have resulted in “a decline in financing needs in some of the (Gulf Cooperation Council) countries,” said Mohamed Damak, senior director of financial services research and global head of Islamic finance at S&P Global Ratings, in a conference call last week.

The Gulf Cooperation Council is made up of six Arab nations: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Those countries were forced to diversify their revenue sources when oil prices slumped and stayed at multi-year lows from 2015 to 2017.

In addition to current higher oil prices, the better fiscal discipline that the countries now have — from cutting spending and subsidies when oil revenue fell — has given them fewer reasons to replicate last year’s large sukuk deals, Mohamed said.