Common market to give a boost to sukuk issue

Gulf states are expected to push the issue of Islamic securities and other bonds to quench the surging appetite for financing following the creation of their common market early this year, said a regional investment group.

The UAE spearheaded sukuk issues in 2007 and is expected to be the main base for such investment tools again this year, said the National Investor, a well-known regional financial and investment group operating from the Emirates.

The issue of sukuk (Islamic bonds) has gained momentum in the UAE and other Gulf Co-operation Council (GCC) states over the past two years because of an international liquidity crunch, better GCC government regulations for investors and a massive increase in project activity in the oil-rich region.

“Such developments will combine with the launch of the common Gulf market at the beginning of this year to stimulate the sukuk market in the region since the common market will largely facilitate the movement of capital among the GCC countries,” the National Investor said in a report.

“We expect this market and the drying liquidity in many international institutions to open up the appetite for bonds in the region and make the issue of sukuks one of the best options for companies seeking to fund their plans and activities.”

Its figures show sukuk issues in the six-nation GCC totalled around $19 billion (Dh69.7bn) in 2007, including $11.1bn in the UAE alone.

“There was an increase of nearly 27 per cent in the UAE last year. The total number of issues also soared to 12 in 2007 from seven in 2006 and the sukuk market is expected to remain buoyant this year,” the report said.

It said the sukuk issue in the GCC exceeded half the total issue of nearly $32.6bn in the Middle East and North Africa region.

Bahrain had the highest number of bond issues in the Gulf last year, standing at 28, but the UAE topped the list in value. There were five issues in Saudi Arabia, four in Kuwait and one in Qatar.

While no data was available for 2008, several UAE banks and other institutions have spoken of plans to issue bonds or convertible sukuks.

They include the Abu Dhabi Commercial Bank and the Abu Dhabi Energy Company (Taqa), which issued $2bn in bonds last year to finance its ongoing overseas investment drive.

According to the Kuwait-based Global Investment House, a financial and investment banking group, high oil prices have given rise to the issuance of Islamic securities over the past few years. It expected the sukuk activity to gain momentum in the next few years as oil prices will likely remain high.

“The recent surge in oil prices has benefited the GCC states tremendously. The abundant liquidity has helped them embark on major infrastructure and real estate projects, in addition to projects in many other economic sectors,” it said.

“The GCC governments have also allowed the private sector to take part in these mega projects, and they have introduced a myriad of legislations that helps their future visions, and relaxed others that impede their growth targets. In the midst of the real estate boom across the GCC, private corporate bodies in need for financing saw the Sukuk market as a favourable means. In the absence of conventional securitisation in many Islamic countries, Sukuk issuance will remain a favoured structured finance funding option.”

In a recent study, it expected a steady growth in the sukuk market in the coming years on the grounds more countries are considering issuing Sukuks to diversify their investor base and deepen domestic capital markets.

“The increase in demand, along with the standardisation of Islamic securities, is expected to fuel further growth of the market. Similarly, hedge funds and conventional institutional investors have increasingly been drawn to Islamic securities in search for yield pick-up and diversification,” the report said.