Sep 28 2010
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New reports from KFH Research and NCB Capital suggest that the Sukuk market is on the up. Isla MacFarlane shares the good news
According to KFH Research and NCB Capital, there seemed to be a recovery in the growth of the total value of Sukuk issuance in 2009 and during the first half of this year. KFH Research expects the Sukuk market to maintain its vitality during 2010 and for the foreseeable future. It said that the most important factors that will drive this are stimulus programmes, huge government expenditures and government initiatives that will enforce and develop Sukuk as well as the increasing popularity of Shari'ah-compliant products.
KFH's report predicts that global Sukuk issuance will reach $30 billion in 2010 in light of the recovery in global economic activity and the increase of Sovereign Wealth Funds (SWFs), companies, and the revival of private sector projects.
According to the report, the value of the Sukuk market has increased to reach about $100 billion in 2009, pointing out that the total value of issues for this market has seen a marked increase during the first half of 2010 to reach $16.5 billion - a growth of 16.3 per cent. Hence, sovereign and similar funds played a prominent role in the rehabilitation of the Sukuk market after hitting 79.7 per cent of the funding period, as Malaysia is still controlling the largest share of the global Sukuk market.
In the GCC (Gulf Cooperation Council) region, Saudi Arabia has allocated almost $70 billion to development projects for 2010, an increase of 16 per cent (year on year). In Qatar, the Government and state-owned companies plan to spend as much as $100 billion in the next four years on projects including roads, sewage treatment, water treatment, ports and airports. The UAE is investing in nuclear power and railways to revive economic growth in 2010 and 2011. Bahrain is investing heavily in infrastructure as a means of providing economic stimulus in the short term and to lay the foundations for economic growth in the future.
The Central Bank of Bahrain also tapped the market with six short-term issues. By contrast, the corporate sector saw just one Sukuk issue worth $1.9 billion by the Saudi Electricity Company during the quarter. Globally, a total of 74 Sukuk were issued in 2Q10, with 41 coming from Malaysia where the value of issuance increased almost three-fold from $2.5 billion in 1Q10 to $7.4 billion in 2Q10. Encouragingly, NCB Capital said that the tenors of Sukuk issues appear to be growing longer.
Jarmo Kotilaine, the Chief Economist of NCB Capital, said, "Government issuances emerged as a key market driver. Out of the eight GCC Sukuk issued during the last quarter, seven were sovereign issues from Bahrain and Qatar. The progress made in restructuring troubled Sukuk also boosted sentiment in the Shari'ah-compliant market segment."
According to KFH Research, the global Sukuk market has grown to reach approximately $100 billion and contributed to 12 per cent of the total global Islamic finance assets in 2009. The Sukuk market has come out of the worst of the financial crisis and its prospects remain high. In 2009, global Sukuk issuances rebounded by 58.8 per cent y-o-y to $24.65 billion compared to the $15.46 billion raised in 2008.
In the first half of 2010, total Sukuk issued globally was at $16.5 billion, 116.3 per cent higher than the $7.6 billion raised in 1H09. On a quarterly basis, 1Q10 global Sukuk issuance was up by 114 per cent y-o-y to $4.7 billion, while 2Q10 issuance increased by 112 per cent y-o-y to $11.8 billion, underpinned by an emerging markets-led global economic recovery and huge government stimulus packages and infrastructure spending. As such, approximately 79.7 per cent of 1H10's fund-raisers were sovereign and quasi-sovereign entities. The power and utilities sector trailed behind at 11.5 per cent of total Sukuk issues while the financial services sector stood at 3.4 per cent, driven by continued infrastructure spending and fund raising activities by financial institutions worldwide.
By country, KFH Research said that Malaysia continued to dominate the global Sukuk market, contributing to 60.5 per cent of the total value of Sukuk issued in 1H10. Saudi Arabia and Indonesia each trailed at 14.1 per cent. As such, by currency type, ringgit-denominated Sukuk deals topped at 53.4 per cent, followed by USD deals of 10.3 per cent and Qatar riyal issues of 8.3 per cent.
For 2010, global Sukuk issuance is expected to potentially come in around $30 billion, which according to KFH Research is characterised by the following:
The 2010 Sukuk market will be driven by the recovery in global economic activities, record low interest rates, continued sovereign fund raising to support economic growth as well as revival of private sector projects.
More sovereign and corporate issuers are anticipated in 2010, which include potential debuts from Japan, Thailand, Turkey, the UK and Russia.
Sovereign Sukuk issuances in 1H10 are expected to help to revive the global Sukuk market as they provide the necessary benchmark pricing for the private sector to gauge investor appetite in 2010.
According to KFH's report, the factors that will drive the demand for Sukuk include the following:
A growing preference for Shari'ah-compliant products from both conventional and Islamic investors particularly after the subprime crisis.
Massive liquidity from emerging markets (Asia's surplus savings and huge reserves and GCC's oil revenues) searching for Shari'ah-compliant investment products.
GCC economic diversification away from oil and gas investments.
A greater understanding of Sukuk instruments.
Governments initiatives to further develop and promote Sukuk instruments and investments.
In summary, the long-term prospects for the Sukuk market are expected to remain strong given the increasing popularity of Shari'ah-compliant products, governments' support for Islamic finance, huge investment and financing requirements in the GCC and Asia regions, and issuers' desire to tap investors from the Middle East and Muslim Asia. With a healthy array of Sukuk in the pipeline, the market is attracting interest from an increasing number of issuers in Muslim and non-Muslim countries alike.
© Islamic Business and Finance 2010
© Copyright Zawya. All Rights Reserved.
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