Global sukuk market to reach $200bn by 2010 - Emirates24|7

Global sukuk market to reach $200bn by 2010

Appetite for Islamic bonds is growing at an unprecedented rate due to the support of regulators and governments in the Gulf and Muslim Asia. And the sukuk market is expected to reach $200 billion (Dh734.61bn) by 2010 on the back of Gulf oil wealth and sovereign debt sales by the United Kingdom, Japan and Thailand, said a report by Damac Capital International.

Between 2006 and 2007, the market for sukuk more than doubled, reaching $62bn – up from $27bn. From 2001 to 2006, sukuk grew by a compound annual growth rate of 123 per cent, the recent report found.

The increasing acceptance of Islamic finance applications – which are becoming more of a global phenomenon – has played a major role in this rapid growth. Currently, the Islamic banking and finance market is worth more than $500bn and is growing at 15 to 20 per cent annually, Hany Hussein, vice-president and head of asset management and equity research at Damac, told Emirates Business.

"Affluent Muslim investors are looking for some serious investment options that comply with Shariah," he said. "It is estimated that 20 per cent of Muslim investors, with billions to invest, would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile."

Mohammad Faiz Azmi, global Islamic finance leader at PricewaterhouseCoopers, said Islamic finance is no longer just a niche market and is now considered mainstream. "If you look at the region, most of the funding is through sukuk and not through commercial bonds," he told Emirates Business.

"Sukuk are shooting throu-gh the roof," he added. "The middle class's demand is driving Islamic finance. Now that they have money, they want choice. If they can invest money, then why not do it in a halal way? Now you see sukuk that are almost always oversubscribed. It is because while there are many interested in halal products, there are not so many halal products being offered."

As per Moody's estimates of the Islamic finance market, 50 sukuk worth $19bn came to the market from the Gulf last year, with 28 in Bahrain, 12 in the UAE, five in Saudi Arabia, four in Kuwait and one in Qatar.

The UAE's sukuk market, which registered only seven transactions in 2006, has thus increased by 70 per cent up in one year alone. Volume issuance of UAE sukuk rose by nearly 27 per cent to reach $11.1bn. Moody's report noted the majority of issuance came from the financial services and real estate sectors, including sukuk transactions from DIB, JSL, Dubai Investments, Aldar and a residential ABS transaction from Tamweel. In 2007, three UAE sukuk, amounting to more than $1bn each, were issued by JSL and DP World.

According to the report by Damac, more countries are issuing sukuk, and there are expectations other non-Muslim countries will enter the field. In 2007, 10 countries issued sukuk, as opposed to only two in 2001.

The UAE and Malaysia continue to be the two main locomotives of sukuk issuance. More than $25bn of sukuk or 75 per cent of all sukuk issued in 2007 originated from these two states.

Standard & Poor's has said it expects them to continue to be the giants in the market. However, analysts hope the Gulf will eventually adopt the Malaysian model of a single national Shariah board overseen by the government, rather than individual banks maintaining their own boards.

But for Azmi, there is no right or wrong model. "It's what the investors want that matters," he said, adding Malaysia – where 56 per cent of the world's sukuk issues originated – is talking to the Middle East about creating a banking model that could span the two regions.

He said: "In 2002, we made a major decision in Malaysia that rather than just make products acceptable to ourselves, we started reinventing some other products to make them acceptable to the GCC. So there were two sukuk and that was unusual because for the first time they used a different basis [global Shariah] that was acceptable to the GCC. Now in Malaysia we have two types of bond, one is called the local Shariah and the other is called a global Shariah."

The West is also upbeat about joining the sukuk bandwagon. The UK has set out plans to become the first Western government to issue sukuk this year. There has been a lot of discussion and preparatory work done by Her Majesty's Treasury specialists and various Islamic finance experts from the City of London prior to the launch. London has already been named as a leading financial centre with regard to Shariah-compliant finance and experts agree it is currently the strongest European centre for the industry.

Kitty Ussher, MP and economic secretary to the Treasury, said on the sidelines of the Norton Rose Women in Islamic Finance Summit in London that the UK was "keeping up the momentum". While she was unable to give a date as to when the UK would issue a sovereign sukuk, she said the response to a consultation paper finished in April would be published on June 2.

Financial analysts agree a major challenge in Islamic finance is the lack of standardisation and homogeneity. Because there is no single interpretation of Islamic law, each financial institution has a board of religious scholars who determine which products are Islamic. And what one bank considers Shariah-compliant may be unacceptable for another.

Azmi shrugs off this argument saying differences should not come as a surprise. "In anything that is used by different countries, inherently there will be some interpretation challenges. But the interpretation issue is not unique to Islam. There are examples from the conventional world where they cannot get it right, either."

Currently, the key issuers are corporations and financial institutions who view sukuk as a source of stable funding for their long-term projects and as a remedy for their maturity gaps.

According to Hussein, financial institutions and governmental agencies were the first to tap the market and accounted for 58 per cent and 42 per cent, respectively, of the total issuance in 2003.

As of 2007, corporations' share of the sukuk market has amounted to a significant 71 per cent. The share of financial institutions and governmental agencies am-ounted to 26 per cent and three per cent, respectively.

"Companies issue sukuk to diversify their source of funding and to benefit from the strong demand for Islamic finance products," Hussein said. "Sukuk issues have ranged from the simple sale and leaseback [Ijara] structures, such as the $1bn Dubai Department of Civil Aviation sukuk issued in 2004, to the $2.53bn trust finance sukuk structure issued by Aldar Properties in 2007, demonstrating the flexibility of Islamic finance principles."

 

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