Financing on faith: The rise of Islamic finance

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decouples the sector from more conventional pricing.
Global sukuk issuance exceeded $85bn last year, more than 90 percent higher than the previous year.

decouples the sector from more conventional pricing. Global sukuk issuance exceeded $85bn last year, more than 90 percent higher than the previous year.

On the surface, the Islamic finance industry in the Gulf has never been healthier. When Emirates Airline looked at the markets last year to secure financing for yet another tranche of new aircraft, it decided against its traditional option; the European banks.

“We were kind of planning for finance from European banks, but it’s just a bit difficult now,” Emirates president Tim Clark told Reuters in November. “We still have the Islamic finance market to go with, and other funding options are always open for us.”

That kind of approach is telling. As European finance houses wilt under the pressure of the continent’s sovereign debt crisis, fast-growing emerging markets firms are in dire need of liquidity that Islamic banking institutions apparently stand willing and ready to provide.

Another example of the industry’s popularity was investment banking behemoth Goldman Sachs, which announced last October that it was planning to issue as much as $2bn through sukuk. Recent reports indicate that the Goldman sukuk could well be received positively, particularly by Saudi investors.

And in November last year, the launch of the Islamic interbank benchmark rate (IIBR) was another sign of the growing maturity of the local industry. A result of the collaborative approach taken by Islamic finance institutions, industry associations and sharia scholars, the IIBR finally offers a proprietary benchmark that decouples the sector from more conventional pricing.

Global sukuk issuance exceeded $85bn last year, more than 90 percent higher than the previous year, according to Kuwait Finance House Research Limited (KFHR). Its monthly report on the Islamic bond market also said issuance during December fell below the average, hitting $5bn.

The report showed that sovereign issuance was the main catalyst for the sukuk market last year, making up $59bn, while companies' issuance reached $19bn. The 2011 total to $85.1bn represented a year-on-year increase of 90.2 percent compared to 2010, KFHR added. The global sukuk secondary market also reached an all-time high of $178.2bn by the year-end, a 24 percent increase on 2010, the report said.

On a monthly basis, December was a quiet month for issuances outside of Malaysia. However, the primary market still recorded a year-on-year increase of 0.7 percent.

The largest issuance for the month was the third issuance of the year for Pakistan Domestic Sukuk Company Limited which issues on behalf of the government. The $781.1m sukuk Ijarah was structured with a three-year tenure. The vast majority of primary market issuances were domiciled in Malaysia with only one sukuk each arising from Pakistan and Bahrain, the report added.

However, while the sharia-compliant industry is clearly popular, it still faces plenty of criticism. Is the industry simply seeing success by default due to the problems being faced by more traditional sources of finance, or is the trend on merit alone?

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Kuwait Finance House - Kuwait
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