The Philippines Enters Islamic Financing Sukuk Bond Market

Manila to issue US$1 billion Sukuk bond in a national first as it targets Middle East financing

In a groundbreaking move, the Philippines has officially declared its entrance into the Islamic finance market. The Philippines Bureau of Treasury (BTr) disclosed plans for a benchmark-sized Sukuk offering denominated in US dollars with a 5.5-year tenure.

Manila’s historic foray into the Islamic finance market has generated excitement throughout the Middle East and Southeast Asia as the government prepares to issue its inaugural Sukuk bonds.

To orchestrate this significant financial endeavour, BTr has appointed major players, including Citigroup, Deutsche Bank, Dubai Islamic Bank, HSBC, MUFG, and Standard Chartered Bank, to conduct fixed-income investor calls across Asia, Europe, the Middle East, and the United States.

Diversification

Finance Secretary Benjamin Diokno, who earlier expressed the government’s target of raising US$1 billion through Sukuk bonds, emphasised the move’s role in diversifying financing sources and broadening the investor base.

Market interest is poised to drive heightened bids for the Philippines’ first Sukuk issue. Analysts highlighted favourable global market conditions, including lower US sovereign bond yields and the potential for a cut in Fed rates in 2024, creating an opportune scenario with lower borrowing costs for both issuers and investors — thus creating a mutually advantageous scenario in the evolving landscape of Sukuk bonds.

This inaugural Sukuk issue marks a significant step for the Philippines, which has a Muslim population of about 7 million, based mainly in the Bangsamoro region of Mindanao island to the south.

What is Sukuk?

Sukuk (Islamic bond or “Sharia-compliant” bond) is an Islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets.

The basic principle behind Sukuk is that the holder has an undivided ownership right in a particular asset and is therefore entitled to the return generated by that asset. Similar to investing in bonds, Sukuk are diversified and attractively priced instruments with stable returns.

Sukuk issues had seen a huge jump over the years. In 2004, the Sukuk market was valued at US$9.6 billion. In 2013, the market topped US$269.4 billion, with an exponential growth in the number of large deals and increasing diversification of issuers.

By the end of 2022, outstanding global Sukuk bonds had maintained double digit growth (+11.2%) to reach values of US$751.6 billion, despite global tightening of monetary policy, according Bank Negara Malaysia research.

The Islamic finance industry is expected to continue growing at nearly 20% per year, and the pool of investors interested in Shariah-compliant securities is expected to rise along with it.

While Islamic investors are the natural buyers of Sukuk, the appeal of Sukuk now extends far beyond the Islamic world. Some estimates suggest that conventional investors may account for as much as 40% to 60% of any individual Sukuk offering, according to Franklin Templeton Global Sukuk and Mena Fixed Income Strategies.

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