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22 April 2024

High oil prices to boost Gulf Islamic bonds

By Nadim Kawach




High oil prices have given rise to issuance of Islamic securities after creating massive business opportunities in the Gulf. The UAE has emerged as the world’s leader in this process, according to a Gulf report.


As crude prices are expected to remain strong and Gulf governments are encouraging investment, the sukuk issuance is expected to gain momentum in the region, said the report by the Global Investment House (GIH), a well-known financial and investment consultancy firm based in Kuwait.


Although the sukuk activity emerged only a few years ago, it has sharply grown in the Middle East and other parts of the world, with the value of issuance surging from around $7.2 billion (Dh26.4bn) in 2004 to $27bn in 2006 and nearly $39bn in the first 10 months of last year, GIH said in a study about Islamic financial instruments.


“The recent surge in oil prices has benefited the GCC states tremendously. The abundant liquidity has helped them embark on major infrastructure and real estate projects, in addition to projects in many other economic sectors,” it said.


“The GCC governments have also allowed the private sector to take part in these mega projects, and they have introduced a myriad of legislations that helps their future visions, and relaxed others that impede their growth targets. In the midst of the real estate boom across the GCC, private corporate bodies in need of financing saw the sukuk market as a favourable means… In the absence of conventional securitisation in many Islamic countries, sukuk issuance will remain a favoured structured finance funding option.”


The report noted that while there may be a cyclical element of current demand stemming from high oil revenues in the GCC, it supplements a long-term upswing in demand for Sharia-compliant securities from Islamic institutional investors.


“In addition, hedge funds and conventional investment institutions are beginning to hold sukuk for purposes of either yield pickup or diversification.”


Its figures showed the UAE has emerged as the world’s number one in sukuk issues during 2001-2007, contributing nearly 36.2 per cent of world’s total.


Malaysia accounted for around 32.1 per cent in the same period despite the fact that Malaysia had the largest number of sukuks issued, amounting to 137, compared to the total number of 29 in the UAE.


“It is important to note that the Emirates had a few huge sukuk issues in 2006 and 2007, which helped the UAE surpass Malaysia in the total sukuk size. A few examples of these are the $3.52bn Nakheel sukuk, the $3.5bn PCFC sukuk, and the $2.5bn Aldar Properties sukuk.”


The report expected a steady growth in the sukuk market worldwide in the coming years on the grounds more countries are considering issuing sukuks to diversify their investor base and deepen domestic capital markets. “The increase in demand, along with the standardisation of Islamic securities, is to fuel further growth of the sukuk market… Similarly, hedge funds and conventional institutional investors have increasingly been drawn to Islamic securities in search for yield pick-up and diversification.”


According to GIH, the total number of sukuks issued in the world during the last six years is around 360. It predicted sukuk issuance will reach $100bn in the next five years.


“In the Middle East, sukuks represent a significant new development in global capital markets as one of the fastest growing sectors in Islamic finance,” it said.