Sukuk issuance falls sharply in 2008

Malaysia Star: Global sukuk issuance fell sharply last year due to global market turmoil and drying up of liquidity but Standard & Poor's Ratings Services said the long-term perspectives are still good.

Standard & Poor's credit analyst Mohamed Damak said in a report released on Friday that sukuk issuance fell in 2008 due to global market turmoil, drying up of liquidity, widening of credit spreads, and investors' wait-and-see attitude".

"Although difficult to measure, part of this decline could also have been due to comments about the Shariah compliance of some sukuk by the Accounting and Auditing Organization for Islamic Financial Institutions,” it said.

More than 45% of sukuk issued last year were "ijara" (lease financing), most probably due to the debate about Sharia compliance among some scholars.

The value of sukuk issued last year fell by more than 56% to US$14.9bil from a year ago.

"We do not expect the market to start reviving before the second half of 2009 or early 2010," he said.

However, Damak said the sukuk market’s long-term prospects remained strong. Although volumes fell dramatically last year, the sukuk market attracted about the same number of issuers. Conservative estimates of the pipeline of sukuk that have been talked about or announced were more than US$45bil.

Several factors support sustainable growth of this market, including increasing popularity of Sharia-compliant products and government openness to Islamic finance, massive investment and financing needs in the Gulf, and issuers' desire to tap investors from the Middle East and Muslim Asia.

“Issuers from more than 20 countries have expressed interest in issuing, or announced their intention to issue, sukuk, and we anticipate that several new sovereigns will enter the market,” he said.

S&P had rated 27 sukuk (or sukuk programmes), most of which were ijara or "musharaka" (venture capital financing). Credit spreads on sukuk have followed the same trend as for conventional bonds, with a sharp widening in the past 12 months.

The average size of the sukuk issued last year declined significantly, partly due to the lower appetite of investors.

At the same time, the US dollar lost its place as the currency of choice for sukuk, with only about 10% of issues raised in this currency. S&P expected the sukuk market to continue being skewed toward issuances in local currencies, at least in the foreseeable future.

Once global markets return to normal, dollar-denominated sukuk issuance will pick up again.