Sep 17 2012
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Strong potential for growth of sukuk market in Oman
MUSCAT -- The upcoming launch of sharia-compliant financial products and services in the Sultanate augurs well for the growth of sukuk - the Islamic equivalent of bonds, says a leading expert on Islamic Banking.
Khalid Yousaf, Director -- Islamic Finance Advisory Services, KPMG Oman, envisions significant demand for sukuk in the financing of, among other things, infrastructure projects, housing schemes, real estate ventures, tourism resorts, and other development projects. Additionally, sukuk will open the way for new fund-raising opportunities via the Capital Market and provide a new investment vehicle for investors in the Sultanate.
"Prospects for the development and growth of sukuk in Oman are particularly strong. Oman's GDP is approaching $70 billion and the government has made a strong commitment to infrastructure projects like the new Muscat International Airport, gas-fired power generation, road networks and other projects adding up to $30 billion. These projects will require financing lasting for several years," Yousaf stated in an interview to the Observer.
As Islamic deposits swell in size, liquidity in Islamic Banks and Islamic Windows will inevitably increase. "Placing this liquidity into building Retail, SME and Corporate asset portfolios will take time. Sukuk can therefore, bridge the gap and channel the excess liquidity from Islamic Banks and Windows to infrastructure projects," he explains.
The expert lists a number of sectors that are expected to benefit from sukuk upon the introduction of sharia-compliant products and services in the Sultanate. "Institutions like Oman Development Bank and Oman Housing Bank can access the sukuk market to finance their projects over the medium-to-long term.
The private sector too will also find sukuk a useful and flexible instrument to replace their bank financing at cheaper rates. The real estate sector in particular can raise fresh financing for major development projects like shopping malls, holiday resorts and hotels through sukuk. In general, it is anticipated that sukuk will provide new Capital Market fund-raising opportunities to issuers and a new investment vehicle for investors in Oman," he notes.
Globally, the sukuk market has grown phenomenally over the past decade and currently grosses around $103 billion, says Yousaf. Malaysia, with a share of $77 billion (369 issues), dominates the market, followed by the GCC region. Within the Gulf, Saudi Arabia's sukuk market is valued at $9 billion. Other key markets are that of the UAE ($5.3 billion), Qatar ($4 billion) and Bahrain ($1 billion).
All of the large-size sukuk have however come from UAE and Saudi Arabia (Aldar Properties $2.53 billion; Nakheel $3.52 billion; PCFC $3.5 billion; Dubai Global $1 billion; and Sabic $800 million).
"Domestic sukuk issues dominate the market over international issues by $90 billion to $13 billion.
Malaysian Ringitt, US Dollar and Saudi Riyals dominate the currencies of issuance. Also, most of the issues have been made by Government or Quasi-government institutions followed by Transportation and Financial Services Sectors. Turkey has recently announced the issuance of a 2-year Turkish Lira-denominated sukuk, the first of its kind and is aimed at attracting surplus capital from petro-dollar economies," the expert added.
Unlike bonds, which are essentially debt instruments, sukuk (plural 'sak') is a legal instrument or voucher that represents a proportionate beneficial ownership in the underlying asset, giving the holder the right to the benefits of the income stream of the underlying asset. The yield is usually linked to a return on an underlying asset through an Islamic structure e.g. lease (Ijara).
It is priced, listed and rated as a bond, although it is more akin to a participation in a collective investment scheme. Sukuk therefore, is not a debt instrument, even though its characteristics resemble those of a conventional bond.
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