Sukuk Islamic bonds surge, dominated by government issuers

Global issuance of sukuk or Islamic bonds has surged in recent months in a marked turnaround from earlier in the global credit crisis, according to Moody's Investors Service.
Amid current economic and capital market conditions, sukuk issuance is starting to become dominated by sovereigns and government-related entities, a development that Moody's believes will foster a more efficient and soundly based sukuk market. The launch of sukuk funds and various legislative measures in certain countries should also deepen the market and add transparency and efficiency.
"Global sukuk issuance rose over 40% in the first ten months of 2009 compared to the same period last year. This marks a clear turnaround compared to the declining trend witnessed in the second half of 2008, when the impact of the global credit crisis started to be felt in many regions, including the Gulf Cooperation Council (GCC) and Asia Pacific," said Faisal Hijazi, Business Development Manager for Rating Services and Islamic Finance at Moody's. "Full-year growth in global sukuk issuance is anticipated to reach 50% this year, offsetting the 55% decline in 2008," Hijazi added.
"The recent surge in sovereign or government-backed issuance is a long-awaited development that should help create a more efficient and soundly based sukuk market. It should also help the market develop a more detailed yield curve, and hence a risk benchmark across several tenors and credit profiles," Hijazi explained. In the longer term, a stronger sukuk market should result in an increase in corporate sukuk issuances that can be more transparently priced, in Moody's view.
Much of the decline in sukuk prices over the past year has been a reaction to negative sentiment related to the global crisis, rather than issuer-specific developments. Many intermediaries and other asset management houses have seen value in either trading or launching sukuk funds for the more conservative and value investors, including pension, endowment, Takaful fund and other retail investors, which were until recently excluded from this asset class.
The rating agency believes the gradual introduction of such funds will help create a secondary market for sukuk, whereby investors, including banks, can price their sukuk fairly, enhancing both liquidity and secondary market tradability.
Moody's new report also explains that legislative steps — such as the introduction of the Tadawul sukuk market in Saudi Arabia — are improving the prospects of sukuk becoming an attractive issuance structure, especially for local and cross-border investors. Recent similar reforms in South Korea and Indonesia should also support the longer-term viability of the primary sukuk market and the establishment of an active secondary market.