gif Editor letter
The global issuance of sukuk is expected to dou- ble this year, driven by economic recovery and is-
suers actively targeting a broad base of investors. This issuance almost doubled in the first half of the year to $13.7bn, and will continue to grow for the rest of 2010 in spite of continuing shaky global market conditions
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When sukuk first burst onto the glo- bal financial market it was unlike any other instruments the market had known. The main question remains as to whether the global financial market
would welcome this newly born exotic instrument or not. According to HSBC, the Islamic finance industry enjoyed a compound annual growth rate for 2006-2009 of 28 per- cent, with assets forecast to hit $1.033 trillion in 2010. Within the market many observed the growth rate of glo- bal sukuk issuance as a portentous sign of the success in the newly established notorious Islamic finance market.
Modern sukuk, sometimes referred to as Islamic bonds, are better described as Islamic investment certificates. This distinction is as crucial as it is important, and it is stressed throughout this pioneering work that sukuk should not simply be regarded as a substitute for conven- tional interest-based securities. The aim is not simply to engineer financial products that mimic fixed-rate bills and bonds and floating-rate notes as understood in the West, but rather to develop innovative types of assets that com- ply with Shari’a Islamic law.
This is indeed an important rule for Sukuk globally and in particular in some countries and regions the instrument is still shinning and the market is growing nonstop. The global issuance of sukuk is expected to double this year, driven by economic recovery and issuers actively targeting a broad base of investors. This issuance almost doubled in the first half of the year to $13.7bn, and will continue to grow for the rest of 2010 in spite of continuing shaky global market conditions, Standard & Poor’s predicted in a recent report.
Based on this data on the heels of the sukuk market’s sharp upturn as of midyear 2010, we sustained growth for the second half, given issuers’ interest in tapping foresee the market, both in historical locations like Asia, especial- ly Malaysia, and in other regions newer to sukuk. Another recent study shows that sukuk issued globally jumped by 116.3m to $16.5bn during the first half of 2010, com- pared to $7.6bn during the same period last year, accord- ing to UAE daily Khaleej Times. Total global Islamic bond issuance reached $20.2bn (according to Thomson Reu-
6 Global Islamic Finance October 2010
ters data, $19 bn) last year, up from $14.1bn in 2008. It seems the long-term prospects for the sukuk market remained strong given the increasing popularity of Sharia- compliant products, governments’ support for Islamic fi- nance, huge investment and financing requirement in the GCC and Asia regions, and issuers’ desire to tap investors from the Middle East and Muslim Asia.
Although we have to point out that the recovery is still likely to be bumpy, however, the default – and near-default – of some high-profile sukuk have highlighted the legal uncer- tainty of how they are treated in bankruptcy, and clerics still differ on how closely they can be structured to mimic conventional bonds. Taking to account the up and down of the recovery road, the fact is that optimism in the su- kuk market is increasing. “We are hoping for a very good year for the sukuk market. We had a good first six months and hope the momentum will continue,” HSBC Amanah managing director for global markets, Rafe Haneef, told Business Times in an interview.
Sukuk issuers are now looking at a broader set of investor base, unlike previously, where they had a narrow base of investors. Another reason could be seen in sukuk pricing. Unless you are a sharia-compliant company, bank or fund, fundamentally driver of what instrument you choose is what price you can get from investors. And currently sukuk is still more costly and more structured than comparable conventional instruments.
However the performance of sukuk is relatively better than conventional debt as their structure as asset-based instruments is safer. Although sukuk is on a road to suc- cess when it is compared to global bond market size close to $91 trillion last year it seems that this is not a straight road and it has a long way to complete its brand recogni- tion. However it might be a matter of time before certain people are calling sukuk a market phenomenon.
Farhad Reyazat
PhD in Risk Management Editor in Chief
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