Huge growth in market for 'sukuk' products

Standard & Poor's Ratings Services (S&P) released a report yesterday entitled "The Sukuk Market Continues to Soar and Diversify, Held Aloft by Huge Financing Needs".

"We expect sukuk growth to remain on the same impressive trajectory, fuelled by huge investment and financing needs - notably in countries of the [Persian] Gulf and Asia," said S&P credit analyst Sani Hamid.

That said, sukuks are becoming a global phenomenon, attracting more issuers from a larger pool of countries than ever before.

This type of sharia-compliant financing is set to continue providing issuers with non-bank alternatives to longer-term funding.

Sukuk growth, nevertheless, has been slowed in the past six months by unfavourable credit-market conditions. Some sukuks were postponed when liquidity dried up and credit spreads widened. But once market conditions return to normal, issues are expected to resume double-digit growth, the agency said.

Most sukuks issued last year were of the ijara (lease financing) or musharaka (venture-capital financing) varieties, but in the future S&P said other types will become more common. To date, S&P rates 22 sukuks, the bulk of which are ijara or musharaka and carry credit enhancements.

The US dollar continues to be the currency of choice for sukuk issuers but has been declining in favour over the past five years.

Corporations and entities involved in project finance are the main issuers, with banks coming in second.

"Corporations find that sukuks are an alternative to financing their business or their projects, and financial institutions are increasingly turning to sukuks to sustain strong lending growth with stable funding sources and to curb maturity mismatches," said credit analyst Ritesh Maheshwari.