Islamic finance shows no sign of slowing, sukuk sees phenomenal growth

The Islamic finance market has grown by 15% in each of the past three years, partly as a result of the increased wealth in Islamic countries, which in turn was driven by high oil prices, Moody's Investors Service said in its special report "2007 Review & 2008 Outlook: Islamic Finance". Looking ahead, Moody's said that the Islamic finance market shows no signs of slowing.

Islamic finance is estimated to be worth around USD 700 bln globally. Sukuk (or Islamic bonds) are the fastest-growing segment of the market, which has seen phenomenal growth in the past six years. By 2007, global volumes had reached USD 97.3 bln, with the majority coming from Malaysia and the Arabian Gulf.

In EMEA and Asia, overall issuance volume of sukuk increased by 71% to USD 32.65 bln in 2007 compared to 2006. The number of sukuk transactions rose to 119 from 109 in 2006, while the average deal size increased to USD 269.8 mln from USD 175 mln.

The largest proportion of sukuk was issued in the financial services sector, accounting for 31% of total volume, followed by real estate with 25% and power and utilities with 12%.

At the same time, musharaka sukuk consolidated its position as the size-dominant sukuk structure, with USD 12.9 bln of issuance, closely followed by ijarah sukuk, with USD 10.13 bln issued. However, ijarah structures were more frequently issued, with 54 deals compared to 22 issued for musharaka structures.

Moody's also noted that many GCC issuers opted for local currency-denominated sukuk in light of the declining US dollar, and demand for convertible sukuk continued, demonstrating investors' strong appetite for sukuk with an equity potential upside due to the recent gains in the equity market.

"In 2008, we anticipate that overall sukuk issuance should continue to increase by 30-35% a year," said Faisal Hijazi, a Moody's analyst and author of the report. Sovereign sukuk is likely to gain popularity, with new issuance of sukuk out of Japan, Thailand and the UK.

Moreover, given that most GCC currencies will continue to be pegged to the US dollar in 2008, and due to inflationary pressures and the need to create a benchmark against which to value corporate sukuk, a number of GCC governments might be considering issuing sukuk.

Moody's expects Islamic funds issuance to flourish, with new funds being raised in the GCC and Asia-Pacific. More than 65% of funds are likely to emanate from the Middle East, North Africa and Asia-Pacific. New sukuk funds will come to the market, although the majority of new funds will still be equity-based due to the underdeveloped and still growing Islamic debt markets.

Islamic real estate investment trusts (IREITs), both in Asia-Pacific and the GCC, are expected to reach new record issuance in 2008. "Given the phenomenal property boom in these markets, IREITs are a much needed product and a useful investment tool," said Hijazi.

"Moreover, the potential for growth is aided by the tremendous concentration of high-net-worth individuals and family businesses whose collective wealth in the GCC alone is estimated at over USD1.3 trillion."

In terms of Shari'ah-compliant insurance, the Takaful industry is expected to grow by about 13% per year until 2015, with Takaful premiums expected to reach USD 7 bln. Moody's notes that this represents a segment of growing demand for Islamic investment opportunities.