Global crisis boosting sukuk growth, says S&P

LONDON: Sukuk provides Middle Eastern issuers with a useful tool to tap local liquidity as an alternative to constrained international bank lending, Standard & Poor’s Ratings Services said in a new report.

The report examines why sukuk issuance is gaining acceptance in markets beyond its established strongholds in Malaysia, Indonesia and the Gulf Cooperation Council (GCC) region.

“In our view, European banks are reducing their overseas exposure as their capital requirements have increased and their domestic economies faltered. Governments in the Middle East and Asia have therefore turned instead to local investors to back their infrastructure projects. Banks in the Middle East and Asia that comply with Shariah law have also demonstrated a strong appetite for new assets that meet their requirements,” the report states.

Infrastructure projects in the Middle East and Asia continue to require funding, but will not receive all necessary support from European banks as these institutions reduce their expenditure to deal with higher capital requirements and weakening in their own economies, says S&P.

It highlights the fact that sukuk was more commonly used by corporate issuers before the 2008 crisis, but is now more frequently issued by governments and their related entities, as a response to the global slowdown.

Appetite for sukuk is anchored among Islamic investors who are restricted to buying Shariah-compliant instruments, and the asset class will not become “mainstream” and attract broader international demand until issues surrounding defaults and pricing transparency are resolved, S&P finds.

Unti the global credit crisis of 2008, most sukuk issuances came from corporate issuers; now, most comes from governments and GREs.

“In our view, many sovereign issuers hope that Islamic finance will provide them with an alternative means of supporting their economies by tapping into the excess liquidity available in regions that were less hard hit by the economic downturn, such as the GCC region and Asia. Given the slowdown in global economic growth, we expect this trend to continue in the short term,” the report adds..

“Until the Islamic finance industry overcomes its long-term problems, we do not expect sukuk to become a mainstream asset class. The huge variety of sukuk structures continues to deter some investors, in our view. The process for resolving defaults and restructuring sukuk also remains uncertain; although an increase in the number of issues that have been listed has increased pricing transparency. Sukuk instruments are, however, increasingly attracting attention as a source of funding and diversification.”


(ARAB NEWS, 16 Feb 2012)
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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com