High oil prices have driven down demand in the sukuk market after 2020's record issuance, according to a report by finance company Moody's.
The US-based agency claimed that Gulf Cooperation Council governments are not needing to rely on the Sharia-compliant bonds to drum up cash thanks to the strong oil market.
Moody's said sukuk activity had been "solid" in the first six months of 2021, with some $102 billion worth of the bonds issued.
However, it is expected that rate will fall to between $90-100 billion in the second half of the year, leaving 2021 behind the record $205 billion issued over the previous 12 months.
Ashraf Madani, a vice president-senior analyst at Moody’s and the author of the report said: “Sukuk issuance will be flat or slightly lower this year, as higher oil prices have reduced sovereign funding needs in GCC countries.”
The report argued that despite the small contraction. the future of the sukuk market was secure, and pointed to the rise of the green and sustainable sukuk as a driver of long-term growth in the sector.
A green sukuk is similar to a conventional Islamic bond, except the proceeds from the product can only be used to fund environmentally-friendly projects.
"A steady stream of new issuers have joined the sukuk market in recent years and we expect this trend to continue," said the report, continuing: "Green sukuk issuance will also accelerate as governments promote sustainable policy agendas and as demand for sustainable investments encourages new issuers to consider green sukuk as an alternative financing tool."
The report comes in the wake of a leading analyst from rival credit agency Fitch Ratings telling Arab News the green sukuk market will not ignite without the backing governments in the Gulf.
Bashar Al Natoor, the global head of Islamic finance at the agency, said the green sukuk sector was growing, with issuances of the bond rising from $3 billion in 2020 to $6 billion in the first half of this year alone.
However, the rise still represents just 2.5 percent of total outstanding sukuk.
Al Natoor warned that without leadership from governments in the Gulf region, this branch of the sukuk market may fail to reach its potential.
He told Arab News: “We’re not yet there, we don’t even have enough projects to push this ahead.
“We don’t have incentives from the government, we don’t have infrastructure, we don’t have a lot of governments themselves even in the GCC [Gulf Cooperation Council] issuing green and sustainable [sukuk], it continues to be efforts either by a bank or a company rather than a government."
