Global Sukuk rebound seen

JEDDAH - The global issuance of Islamic bonds, or Sukuk, fell 35 percent to $5.3 billion in the second quarter compared with a year earlier but a rebound may be within sight, data from Zawya Sukuk Monitor revealed.

Year-on-year declines in the primary Sukuk market were offset by a 164 percent surge in volume compared with the first quarter for Sukuk, indicating renewed demand for Shariah-compliant debt instruments.

Investors are once again putting faith in the Sukuk market despite the ongoing financial crisis, which continues to weigh on banks and finance companies.

 

"The global market for sukuk issuance should recover by the second half of 2009," said Afaq Khan, Standard Chartered Bank's chief executive officer for Islamic banking. "We expect close to $10 billion in primary Sukuk issuance this year," he said.

Malaysia and Indonesia topped Zawya's list of issuers, followed by Bahrain and Saudi Arabia, the largest Middle East economy. A total of 42 bonds went to market in the second quarter, out of which 30 deals where sold by governments, the data shows.

In the Middle East and North Africa close to $1 billion worth of Sukuk were sold during the second quarter, excluding SR7 billion ($1.9 billion) this week by Saudi Electricity Company, or SEC. SEC's Sukuk will close on July 6. The government of Ras Al Khaimah is also seeking to raise $500 million this year through a sukuk that's expected to hit the market soon, Zawya Dow Jones reported last week.

The quarter saw the first US dollar international issuance this year by Islamic finance heavyweight Indonesia, followed by a similar sovereign bond by the government of Bahrain.

Several countries including France, Hong Kong, Kenya and Nigeria have recently, or are in the process of changing their laws to facilitate the introduction of Islamic financial products in a sign of the continued appeal for Shariah-compliant financial instruments.

Standard & Poor's Financial Services expects the $700 billion global Islamic finance industry will weather the financial crisis and resume its growth driven by high demand for Shariah-compliant products, which are considered less risky than convention debt.

"The long-term pipeline for Sukuk issuance is healthy, and the market is attracting interest from an increasing number of issuers in both Muslim and non-Muslim countries," said Mohamed Damak, credit analyst at Standard & Poor's Ratings Services in a recent report. 

Executives at HSBC's Shariah unit corroborated the data from Zawya Sukuk Monitor.

They said the recovery of the global Sukuk market and a lack of Shariah-compliant assets around the world should encourage domestic firms to tap the Islamic financing market,

The Sukuk, or Islamic bond, market is showing signs of recovery, with Indonesia and Bahrain successfully selling international Sukuk this year after almost a year-long hiatus due to the global recession, said Mahmoud Abushamma, head of HSBC Amanah Syariah.

Amid the downturn, the total volume of global sukuk issues halved to less than $15 billion in 2008 from $30 billion the year prior, HSBC said in a statement.

The market virtually ground to a halt in March 2008, it said.

Gahet Ascobat, HSBC Amanah's senior vice president of structured finance, said that many investors seeking Shariah-compliant investments have been unsure about where to put their money, due to a complete lack of Sukuk issues for more than a year.

"But once a Sukuk issue finally came along, investors grabbed it with both hands," Gahet said.

Indonesia's success was followed this month by Bahrain, which just issued a $750 million global Sukuk, beating Indonesia's offering.

The Bahrain issue also elicited strong demand, with an order book of $4 billion.

"The huge oversubscription for both the Indonesia and Bahrain sukuk clearly signals that the sukuk market is on the rebound," Mahmoud said. 

"It also reflects the need for Sukuk instruments among Muslim investors."

Strong demand, combined with a lack of supply, said Mahmoud, should encourage Indonesian firms to "seriously consider the Sukuk market as a viable funding source to diversify their investor base."

© The Saudi Gazette 2009