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16| pfi | Middle East Report 2009 Sukuk market

Sukuk hopes remain high T

he credit crisis has badly affected the sukuk market and with assets expected to come under increasing stress, investor differen- tiation between the structural substance of deals will become ever more critical.

However, given the Gulf region's large financing needs and the desire of many global lenders to tap its rich seam of demand, the longer-term picture is expected to remain positive.

Islamic finance should be able to withstand the current economic crisis and may well emerge stronger, with a return to the 30% to 35% annual growth rates in primary issuance that were seen in pre-crisis days, according to Moody's.

In a report published in February 2009 on Islamic finance, the rating agency said that the retail market, the Islamic mutual fund sector and asset management busi- nesses in Islamic finance all have a strong future. Nonethe- less, it is likely that progress will entail some conditions being met, such as improved transparency and risk man- agement, a better understanding of the product, and con- tinued structural innovation.

The sovereign market for sukuk issuance could well prove one of the first to make a comeback. Bahrain is plan- ning to make a US$500m Sharia-compliant five-year sukuk issue, expected at the end of May, while Indone- sia has stated an intention to issue its inaugural overseas sukuk of US$650m.

Indeed, the sukuk market in general is expected to power ahead this year. According to the chief economist of NCB Capital, Jarmo Kotilaine, the sukuk pipeline for this year is estimated at nearly US$40bn, with the Gulf region accounting for the lion's share.

In a report entitled GCC Debt Capital Markets, Kotilaine wrote that the sukuk market had the "potential to capi- talise on the growing appeal of Sharia-compliant finance in today's significantly more risk-averse market envi-

The sukuk market has been hit hard by the credit crisis but the longer-term picture is expected to remain posi- tive. William Thornhill reports.

ronment". According to NCB, Islamic bond sales from the UAE are likely to account for the bulk of financing from the Gulf region, with an estimated US$12.6bn expected this year, including as much as US$2.5bn from the Abu Dhabi ruling family-owned First Gulf Bank PJSC. But it is not just the region itself that is likely to pro- vide the major issuers. Speaking at the Reuters Islamic Banking & Finance Summit, the chairman of the Islam- ic finance committee at Paris Europlace, Gilles Saint Marc, said that a French financial institution could issue €1bn of sukuk, possibly as early as this June. At that time, Rami Falah, head of Islamic banking, Mid- dle East, at BNP, said that sukuk issues were trading at a discount and felt that the structured murabaha market could have even greater potential. After rising to a peak of around US$34bn in 2007, Sharia-compliant sukuk issuance tumbled to about half that level in 2008, according to S&P. According to Moody's, the sukuk market totalled US$47bn in 2007, taking the outstanding to almost US$100bn. Had it not been for the credit crisis, Moody's reckons that 2008 issuance would have been almost three times as much as the US$15bn that was actually seen.

The ijara sukuk was the preferred structure of 2008,

after the mudaraba sukuk that was the most popular in 2007. The increased popularity of the ijara sukuk "reflects its simple structure and the abundance of tangible assets with which it can be structured", Moody's said. Despite the sharp fall in issuance in 2008, it was not a year without highlights. Two very deserving transac- tions illustrate just how innovative the region is capable of becoming.

Citigroup priced the first true-sale Islamic securitisa- tion backed by land instalment sale receivables. The deal, originated by Sorouh Real Estate PJSC, saw Sun Finance, a Jersey SPV, issue Dh4.016bn (US$1.09bn) of sukuk certificates using a Sharia-compliant structure.

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