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Sunday, 23 September 2007

Sukuk market set to top $150bn in 3 years: study

DOHA: Debt raising, especially by the GCC countries and their corporate segments, through ‘sukuk’ jumped four-fold to $27bn during 2004-06, indicating diversified investor base and deepening domestic capital markets, according to a study.Governments and corporate houses are expected to issue in excess of $30bn in sukuk annually over the next three years to lift the market size to more than $150bn, said an International Monetary Fund (IMF) working paper.However, harmonisation of standards is imperative as the current level of sukuk remained a fraction of either conventional bonds or asset-backed securities in emerging markets, said the study.Islamic financial institutions are increasingly eyeing investments that comply with Islamic law to accommodate their excess capital. Similarly, hedge funds and conventional institutional investors have largely been drawn to Islamic securities in search for yield pickup and diversification, the study said.“This has resulted in a flurry of Islamic securitisation transactions, with issuance of sukuk (non-interest-bearing securities based on Islamic principles) quadrupling to over $27bn in 2006 from $7.2bn in 2004,” the study said.Sukuk has been concentrated in parts of Asia and the GCC countries, where its development has been facilitated by sovereign benchmark issues that have been growing strongly at 40% in the first six months of 2007 compared with 2006 as a whole. “In value terms, about half of these issues originate in Asia (primarily Malaysia and Brunei) and the other half in the GCC,” the IMF study said. Corporate issuance - both public and private — had expanded rapidly, doubling between 2004-05 (from $5.7bn to $11.3bn) and 2005-06 (from $11.3bn to $24.8bn).While Asia (specifically Malaysia) accounted for the bulk of Shariah-compliant corporate issues in 2004 (close to 90%), issuance in the GCC picked up rapidly and “now accounts for close to half of all issues in the marketplace,” the study said.The study said many corporate issuances – particularly larger ones – were quasi-sovereign and were seen to benefit from an implicit state guarantee.Although these issuances may be linked to an underlying asset, investor appetite may be driven primarily by the sovereign nature of the risk, it added.While there may be a cyclical element of current demand from high oil revenues in the GCC, the demand supplemented a long-term upswing in demand for Shariah-compliant securities from Islamic institutional investors, the study highlighted.In the absence of conventional securitisation in many Islamic nations, sukuk will remain a favoured structured finance funding option, the study said.“Outside Asia and the GCC, the demand for sukuk has been limited, but they are beginning to gain popularity,” it said, observing that the World Bank had issued its first local currency-denominated 760mn Malaysian ringgit ($200mn) sukuk in 2005.However, the current level of sukuk issuance remain a fraction of the issuance of either conventional bonds or asset-backed securities in emerging markets. “But a growing number of countries are considering tapping the sukuk market to diversify their investor base and deepen domestic capital markets,” the study said, adding the increase in demand, along with the standardisation of Islamic securities, is expected to fuel further growth of the sukuk market.Despite strong potential in the sukuk market, a number of economic, legal, and regulatory challenges remain, irrespective of Shariah compliance. The impediments include the substitution of standard structural features in conventional securities, such as credit enhancements, which are not normally contractually permissible in the Islamic context; legal uncertainty as transaction structure needs to satisfy commercial as well as Islamic law, in particular in non-Islamic countries and the regulatory differences between national regulators.“The ongoing efforts by Islamic regulators – notably the Accounting and Auditing Organisation for Islamic Financial Institutions, the International Islamic Financial Market, and the Islamic Financial Services Board – to facilitate harmonisation of standards and practices should help overcome some of these teething pains,” the study said. - (GT, 21 Sep 07)

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