Sukuk issuance grows 17% to $17bn

CRUNCH RESEARCH: Neale Downes says fears that slowdown would hit lending levels has proved unfounded.

Islamic corporate bond (sukuk) issuance in the Gulf jumped 17 percent in the last year to $17 billion, dispelling fears that lending to companies in the region would be hit by the credit crunch.

Western institutions were the majority purchasers of Islamic debt, now accounting for around 60% of take up, according to research by London-based law firm Trowers & Hamlins.

“Appetite for Islamic debt has been remarkably resilient to the credit crunch and shows just how low-risk investing in Gulf corporates is now seen by Western institutions,” Trowers & Hamlins partner Neale Downes said.

Rising yields from US corporate bonds has recently fuelled fears that Islamic bonds would be under-subscribed.

“A few banks in the region have taken sub-prime write downs, but there is so much liquidity in the Gulf with the high price of oil, that recapitalising these institutions has not been a major challenge,” Downes said.

He said doubts voiced over the compatibility of some Islamic bonds with Sharia law have now largely been put to rest.

“Pragmatism guides the vast majority of Gulf investors. Their primary motivation for buying Islamic bonds is the attractive return, the same as Western investors,” Downes said.

The data also showed that sukuk issuance by industry sector is increasingly diverse and is less dominated by real estate than in previous years.

Just 37.5% of Islamic bonds issued are by corporate entities in the real estate sector, compared with 60% last year, the law firm said.

The number of sukuk issued by the oil & gas sector has doubled to 12.5% and 25% of all sukuk are now issued by financial services companies.

The value of Islamic bonds issued in the Gulf over the past year was almost a third greater (30%) than the amount of conventional paper debt, which rose marginally to US$11.2bn in 2007/08 from US$11.1bn.

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