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Monday, 25 August 2008

GCC to drive global sukuk market to $200b by 2010

Source: Khaleej Times

DUBAI - Led by the UAE, the GCC is poised to play a key role in driving the global Islamic bond or sukuk market to a two-fold growth to an estimated $200 billion by 2010, banking industry sources said.

Sukuk issuance in the UAE is predicted by analysts to grow to Dh25-Dh30 billion this year as the market gained momentum after the uncertainty about dollar peg ended. The first half already registered Dh17 billion worth of new issues.

Islamic banking sources said with several new issues in the offing, about 70 per cent of the GCC's sukuks will be from UAE alone by next year. Malaysia currently accounts for almost 60 per cent of sukuk issue year to date. 'With the UAE driving the GCC sukuk market, there might be a shift in the ratio of sukuks between Malaysia and Middle East, in favour of this region,' they said.

According to a study done for the International Monetary Fund (IMF), a strong demand from Muslim countries and conventional global institutions for Shariah-principled bonds would boost the potential for sukuk despite the global credit crises. The total value of issued sukuks is likely to exceed $200 billion by 2010 from the current $100 billion said the IMF study titled 'Islamic Bond Issuance - What Sovereign Debt Managers Need to Know.' However, some critical constraints relating to continued legal uncertainty and regulatory divergences ought to be addressed, it said.

Although sukuk issuance slowed to $2.3 billion in first quarter 2008, the prevailing market uncertainty and the retrenchment of real estate exposures worldwide has created a significant backlog of planned issues, which could see a restoration over the course of this year, the report said.

Islamic finance experts in Dubai said GCC's fast growing Sukuk market is drawing global investors keener on less risky investment tool as well as an exposure to the region's currencies and equities markets.

'There is also the increasing prospects of Gulf-based pension funds and insurance industry looking at investing in sukuks as part of their investment strategy,' they said.

Sukuks issued worldwide totalled $47 billion in 2007, up 73 per cent, compared with about $25 billion in 2006 and $10 billion in 2005. The volume of sukuks issued in the Middle East, particularly the GCC countries, rose to 53 from 38 in 2007, industry watchers said. Worldwide, the total number of Sukuk issued was 207, compared with 199 in 2006 and 89 in 2005, according to the Islamic Finance Information Service (IFIS).

Despite fears that GCC also would be hit by the global credit crunch, Sukuks issued in the Gulf surged 17 per cent in 2007 to $17 billion. 'For international institutions, which account for more than 60 per cent of Sukuk investors, these Shariah-based bonds have been better than conventional bonds in terms of returns. They are also less risky investment vehicles as they offer a key advantage over conventional bonds because of the Islamic condition that all issues must have underlying physical collateral, a true asset-backed security. In addition, there has not been a single Sukuk default so far,' experts explained.

Experts said the UAE and the GCC will see more dollar sukuks in the coming months because the dollar link is no longer an issue after central bank governors maintained they will not revalue or depeg.

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