Islamic bonds, or sukuk, had a record year in 2011. This
year looks set to be even better. Issuance volume last month
was more than three times as high as in January last year,
according to Dealogic.
One good example from
last month was the biggest-ever sukuk from Saudi Arabia: a
SAR15 billion ($4 billion) 10-year deal for the General
Authority for Civil Aviation, led by HSBC Saudi Arabia. This
was the first government-backed sukuk in the Kingdom. It will
be used to finance an expansion of Jeddah airport, a hub for
pilgrims to Mecca and Medina.
Another example was the
$300 million five-year deal by Dubais phoenix-like
mortgage company T
amweel. Led by Citi and Standard Chartered, the notes pay a
profit rate of 5.154%.
A report by Ernst &
Young shows the Islamic fund management industry resumed strong
growth in 2010, reaching almost $60 billion after a couple of
flat years after the 2008 global crisis. Ernst & Young
estimates that Islamic commercial banks a key investor
in sukuk will see assets rise to $1.1 trillion in 2012:
a 33% increase from 2010.
The arrival of new
Islamist-leaning governments thanks to the Arab Spring has
reinforced the trend of new countries opening to Islamic
finance in the Middle East and North Africa.
government, for example, has stated its intention to make Tunis
a hub for Islamic banking. Partly as a result of this trend,
Ernst & Young reckons Islamic banking assets in this Arab
World will more than double between 2010 and the end of
As retail demand for
Islamic banking continues to grow, high oil prices keep up the
flow of funds to oil-rich Islamic countries, such as Kuwait and
Saudi Arabia. Economic growth also continues to shift eastward,
towards countries with larger Muslim populations, such as
Indonesia and Turkey.
Islamic capital markets
have lagged. Today, the majority of Islamic banking assets are
commodity murabaha on the London Metals Exchange. Islamic
investors need to diversify, and the sukuk market might be
finally catching up.
Issuers around the world,
including sovereigns, are by necessity waking up to Islamic
investors pent-up demand for new assets. In December, the
government of South Africa asked for pitches for an advisory
and structuring mandate for a sukuk. Ireland is mulling issuing
sukuk when it returns to the bond market next year.
However, it was only a
couple of years ago that the sukuk markets very existence
was thrown in doubt when a prominent scholar said 80% of sukuk
went contrary to Islamic law. More recently, Goldman Sachs has
had to contend with a debate over whether the $2 billion sukuk
programme it announced in October would be Shariah
These legal challenges are a reminder that the sukuk market
might have inherent limits.