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Gulf Sukuk Issuance Bounces Back 61% Following Recessionary Crisis


Neale Downes, Partner, Trowers & Hamlins


• Gulf conventional bond issuance surges to record high of $15bn • Sukuk issuance reaches $7bn


2009/10 (to June 30), compared to $4.3bn the previous year. At the same time issuance of con- ventional bonds surged to record levels. The value of conventional bonds issued in the Gulf hit $15bn in 2009/10 compared to $12.9bn the year before, an increase of 16.3%. Trowers & Hamlins says that the sukuk market was hit much harder by the credit crunch and global financial crisis than the conventional bond market in the Gulf.


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In addition to the wider negative effect on global financial markets flowing from the credit crisis, the reputation of Sukuk and sentiment to sukuk as po- tentially safer investment instrument than vanilla corporate bonds took a battering after investors were left nursing potentially heavy losses follow- ing several high profile sukuk defaults (e.g. Golden Belt, Investment Dar and International Investment Group). These defaults hit demand for sukuk as in- vestors realised that, contrary to popular (but often


52 Global Islamic Finance February 2011


he value of Islamic ‘bonds’ (sukuk) issued in the Gulf has jumped 61% in the past year having slumped to the lowest level in four years as a result of a number of fac- tors, including the global financial crisis, according to research by Trowers & Hamlins, the international law firm. $7bn of sukuk was issued in the Gulf in


misplaced) belief, many sukuk were neither genuine- ly asset-backed nor came with an express or implicit sovereign guarantee. Trowers & Hamlins says that, as well as facing these broader structural issues, many sukuk were primarily based on land values and/or revenues intended to flow from real estate and construction projects, an asset class and sector that lost much of its allure during the downturn, with Dubai particularly hard hit.


Issuers are now looking for other asset classes which may form a suitable basis for sukuk and also revert- ing to “debt” (e.g. ijara) rather than equity based structures, such as musharaka.


Neale Downes, Regional Banking & Finance Partner in the Trowers & Hamlins’ Bahrain office, comments: “While sukuk issuance has rebounded, it is still less than half of its peak in 2007/08. The financial crisis was the first real test for sukuk. Investors are flock- ing to the comparative safety of conventional bonds while issuers address some of the particular legal and structural concerns surrounding sukuk and their robustness in a default or insolvency scenario.”


“The crisis laid bare several misunderstandings about sukuk. Many investors assumed that sukuk came with a sovereign guarantee, or that if the is- suer defaulted they would have an underlying asset as ‘security’ or that they (or their trustee) had sole re- course to such asset. The limitations of merely asset- based sukuk are now more widely understood.” “With


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