Sukuk market unlikely to see revival
The Islamic bond (sukuk) market in the Gulf is unlikely to see a revival during this year as investor confidence continues to be low, experts said. "I believe currently it's still not time to issue sukuk. This year there won't be much structuring," a Qatar-based Islamic banker, who declined to be identified, said.
He said he expected only a handful of Islamic bonds with volumes below $500m (Dh1.8 billion) to be issued in the Gulf this year.
Two other bankers said they expect issuance in the Gulf to come in below $4bn this year, while a fourth said it would be between $6bn and $8bn.
Islamic bonds do not pay interest, which is banned as usury under Islamic law, and are structured as profit sharing or rental agreements underpinned by physical assets.
Sukuk volumes dropped dramatically in 2008, hit by the global liquidity crunch. Total global sukuk issuance stood at $14.9bn, down 56 per cent from 2007, according to ratings agency Standard & Poor's. As companies have delayed issuing debt, demand for financing through sukuk has become greater, but the market remains wary about investors preparedness to buy.
Mohamed Damak, credit analyst at ratings agency Standard & Poor's estimated that globally more than $45bn sukuk are in the pipeline waiting for more favourable markets.
"It really depends on market conditions how much of that will actually be issued this year," he said. Damak said sovereign issuers will play an important role in the sukuk market during 2009. He said, in the Gulf, Qatar is likely to come to the market if conditions improve.
Bankers said Saudi Arabia and the UAE are seen pitted against each other in the race for the Gulf country to issue most sukuk this year.
While the global financial turmoil is seen as the main reason for a difficult year for sukuk, comments by a leading scholar that some forms of sukuk are not compliant with Islamic law because of their repurchase agreements will also continue to weigh on markets, bankers said.
Sukuk markets were also hit by critical comments by a top Islamic finance scholar in late 2007.
Sheikh Muhammad Taqi Usmani, from the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) said the promise to pay back bonds at face value at maturity, or in the event of a default, violates the Islamic principle of risk- and profit-sharing.
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