|Since its debut on the international financial market, sukuk issuance has grown and developed significantly year on year. From a market worth less than U.S.$500 million in 2001 to one worth over U.S.$60 billion in 2007, the sukuk market experienced phenomenal growth between 2001 and 2007. Despite this growth, in 2008, the number of sukuk issued globally declined for the first time - this slowdown in the issuance of sukuk has been attributed to a number of different factors by commentators in the market, including the global financial turbulence and resulting market conditions.
The treatment of sukuk in a default scenarioHeadlines relating to sukuk defaults by Kuwaiti firm The Investment Dar Company, the financial difficulties surrounding Saudi conglomerates the Saad and Algosaibi Group and previous uncertainty around the repayment of sukuk by Dubai property developer Nakheel, have also led to investor uncertainty as to the treatment of sukuk in a default scenario. In particular, recent events may have left investors nervous as to whether they have a claim over the assets underlying the issuance or not and whether sukuk are more 'secure' than conventional bonds because they are backed by tangible assets. If there is a claim over the assets, investors could expect priority in realising their investment in a default scenario. However, if this is not the case, investors would be unsecured creditors in the bankruptcy of the obligor. This uncertainty may have arisen because a number of structural features are typically present in sukuk such that they are constructed on the foundations of tangible assets, for example, land, real estate or machinery and equipment.
So have some investors been misplaced in their belief that sukuk offer a more secure investment than conventional bonds?...Read Full Story