By Nitin Nambiar
The Islamic bond market may expand by about 35 per cent a year to be worth $200 billion (Dh735bn) by 2010 on back of Gulf oil wealth and sovereign debt sales by countries such as the United Kingdom, Japan and Thailand, Moody’s Investors Service said in a report.
The Islamic finance market has grown by about 15 per cent in each of the past three years and shows no signs of slowing down, global ratings agency Moody’s said in its report on Islamic finance. “Sukuk, or Islamic bonds, are the fastest-growing segment of the Islamic finance market, which has seen phenomenal growth in the past six years,” Faisal Hijazi, Moody’s analyst and author of the report said. “Expectations for this year are high, including multi-jurisdiction issuances.
“This year, overall sukuk issuance should continue to increase by approximately 30 per cent to 35 per cent per annum,” Hijazi said.
“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 this year, 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.”
More sukuk will be sold in local currencies and with convertible features to give investors with “equity potential upside”, Moody’s said in the report. About $97bn of sukuk have been sold to date, the report said, without specifying how much of that debt has matured. Sukuk avoid breaching Shariah law’s restrictions on the payment or receipt of interest by providing a predetermined income from specified assets, such as leases on land.
Islamic finance is estimated to be worth around $700bn globally. Sukuk are the fastest-growing segment of the market, with phenomenal growth in the past six years. At the end of 2007, global volumes had reached $97.3bn, with the majority coming from Malaysia and the Gulf.
In the Europe, Middle East and Africa (EMEA) and Asia regions, Moody’s notes that overall issuance volume of sukuk increased by 71 per cent to $32.65bn in 2007 over the previous year. The number of sukuk transactions rose to 119 from 109 in 2006, while the average deal size increased to $269.8m from $175m.
The largest proportion of sukuk was issued in the financial services sector, accounting for 31 per cent of total volume, followed by real estate with 25 per cent and power and utilities with 12 per cent.
Global sukuk sales rose to $30.8bn last year from $18.1bn the preceding year, according to data compiled by Bloomberg. Borrowers in Gulf states, including Saudi Arabia and the UAE, sold $17.9bn of the securities, 75 per cent more than 2006, even though companies including Amlak Finance delayed sales citing the credit slump triggered by record defaults on US home loans.
Moody’s expects Islamic funds issuance to flourish this year, with new funds being raised in the GCC and Asia-Pacific. More than 65 per cent of funds are likely to emanate from the Middle East, North Africa and Asia-Pacific, Moody’s said in its report.
New sukuk funds will come to the market, although the majority of new funds will still be equity-based due to underdeveloped Islamic debt markets.
Islamic real estate investment trusts (IREITs), both in Asia-Pacific and the GCC, are expected to reach new record issuance this year. “Given the phenomenal property boom in these markets, IREITs are a much needed product and a useful investment tool,” Hijazi said.
“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 more than $1.3trn,” he said.
In terms of sukuk structure, musharaka sukuk consolidated its position as the size-dominant sukuk structure, with $12.9bn of issuance, closely followed by ijarah sukuk, with $10.13bn issued. However, ijarah structures were more frequently issued, with 54 deals compared to 22 issued for musharaka structures, Moody’s said.
The agency also noted that many GCC issuers opted for local currency-denominated sukuk last year 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.
The Takaful – Shariah-compliant insurance – industry is expected to grow by about 13 per cent per annum until 2015, with Takaful premiums expected to reach $7bn. Moody’s said this represents a segment of growing demand for Islamic investment opportunities.
Takaful industry premiums reached nearly $2.5bn in 2007, and are expected to reach $7.4bn by 2015, representing a growing segment for Islamic investment opportunities, said Moody’s. Nevertheless, Malaysia accounts for 90 per cent of all Takaful customers worldwide.
In the GCC, Saudi Arabia is recognised as the most active Takaful market. The Capital Market Authority (CMA) is opening up its insurance market with the issuance of 13 new licences, including five for Takaful companies.
Last year, the largest proportion of sukuk was issued in the financial services sector, accounting for 31 per cent, followed by real estate with 25 per cent and power and utilities with 12 per cent.
Moody’s said the declining US dollar led many GCC issuers to opt for local currency-denominated sukuk, meeting the needs of investors. JAFZ Sukuk, was the first dirham-denominated sukuk to be listed on the Dubai International Financial Exchange.
Demand for convertible sukuk continued throughout last year, the Moody’s report said.
“High demand for these issues demonstrates that investors’ appetite for sukuk with an equity potential upside remains strong, given the recent gains in the equity market. The future of convertible sukuk looks promising. A number of issues have come to the market recently, including Tamweel for $300m.”
“New sukuk funds will come to the market, albeit the majority of them will still be equity based,” said the report.
UAE Sukuk outlook buoyant
A total of 50 sukuk transactions came to the market from the Gulf last year, with 28 in Bahrain, 12 in the UAE, five in Saudi Arabia, four in Kuwait and one in Qatar, exceeding $19bn in issuance.
Also during the year, three UAE sukuk, amounting to more than $1bn (Dh3.6bn) each, were issued by JSL, DP World Sukuk and Dubai Investments. Overall, the UAE Islamic finance market experienced a record year of growth in sukuk transactions, with 12 transactions coming to the market last year compared to seven in 2006. Volume issuance of UAE sukuk rose by nearly 27 per cent to reach $11.1bn.
The majority of issuance came from the financial services and real estate sectors, including sukuk transactions from DIB, JSL, Dubai Investments, Aldar and a residential ABS transaction from Tamweel, Moody’s noted in its report.
This year, Moody’s predicts the number and volume of new issuance of sukuk to remain buoyant. More Shariah-compliant securitisation is expected to take off in the first-half of 2008, mainly mortgage leases.
In addition, Islamic funds are expected to witness noticeable developments, especially in private equity, which saw the launch of the first Islamic mezzanine fund by Corecap last year.
Moreover, Abu Dhabi Ports Company is planning to develop Khalifa Port and Industrial Zone (KPIZ). The work includes the creation of a 2.2 square kilometre port island, located five kilometres offshore, and will take about 18 months to finish.
The estimated development cost of KPIZ is more than $10bn. Abu Dhabi hopes a significant portion of investment will come from the private sector, through the issuance of several capital market instruments including sukuk.
UAE to lead finance bond
Project finance sukuk will be issued in the GCC, mainly in the UAE and Qatar. Qatar plans to issue $15 billion (Dh55bn) in conventional bonds and sukuk in 2008.
According to Moody’s, more sukuk will be issued in local currencies and convertible structures, given the continued appetite for equity exposure and revaluation considerations, due to inflationary pressures.
The market could also see an increase in subordinated sukuk issuance. Unlike senior debt, subordinated sukuk could be more favourable to Islamic banks in terms of capital requirements, and investors may be attracted by the higher yield of subordinated paper, said Moody’s.
Major bonds to be launched
Japan, through Japan Bank for International Co-operation, or JBIC, plans to sell as much as $500 million (Dh1.8 billion) of sovereign sukuk by the end of March, Moody’s said.
Thailand and Singapore may also hold sales this year and the United Kingdom is planning to sell sukuk in pounds. Economies in the Middle East will expand 9.2 per cent in 2008 as oil earnings fuel growth, Morgan Stanley has forecast. That’s more than double the 4.1per cent global average projected by the International Monetary Fund.
Gulf companies likely to tap the Islamic debt market include Albaraka Banking Group and Abu Dhabi Ports Company, which is spending $10bn on its Khalifa Port and Industrial Zone project.
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