Focus on Frontier markets: sukuk issuance set to break records

Global sukuk issuance for 2012 is expected to reach a new all-time high, more than doubling the pre-crisis record total set in 2007, according to the Zawya Sukuk Monitor.

Sukuks are bond-like financial instruments that are compliant with Shariah law. So far this year, Q2 sukuk issuance is up 55% compared to last year, reaching $25bn. The first half of this year is the best half-year on record, with $67.9bn sukuk issued, and this is expected to translate in to a 2012 total to set an all-time record.

The ‘best case scenario’ for 2012 suggests sukuk issuance could reach a total of $126bn. Even the worst-case scenario of $91.8bn is more than double the pre-crisis record total of $37.8bn in 2007.

The current outstanding global sukuk market is estimated at $214bn, as of May 2012. The largest amount of issuance (70%) comes South-east Asia ($148.8bn), and Malaysia in particular. The Gulf Co-operation Council countries, led by Saudi Arabia and the United Emirates, account for 29% ($62.9bn).

London Stock Exchange is home to the largest number of listed sukuks, followed by Bursa Malaysia, Nasdaq Dubai and LFX (in Labuan, owned by Bursa Malaysia).

Excluding central banks, the lead managers are Maybank (with issuance of $1.5bn, or 29% market share), CIMBC ($1.3bn, 25%), HSBC ($1.1bn, 23%), Citigroup Global Markets ($693bn, 13%) and Dubai Islamic Bank ($543m, 10%).

Factors generating this growth include the increased adoption of Islamic finance and banking by post-Arab spring regimes, at a time when the Eurozone crisis is causing investors and borrowers to seek asset-backed safe havens; large financing and refinancing requirements, backed by large pools of Muslim wealth and abundant liquidity; demand comfortably exceeding supply; and a thriving Islamic funds industry.

The growth is despite a number of obstacles holding back the sukuk market. These include relatively high issuance and structuring costs; a limited supply of issuers and issuance; and, in certain countries, political opposition.

Other factors reflect the fact that the Sukuk is a fledgling market: no standardised interpretation and application of Shariah law; the absence of a well developed secondary market; and the continued existence of double taxation between certain jurisdictions. 

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