Sukuk demand to reach US$900bn in five years

Conventional institutions are increasingly demanding Shari'a compliant securities alongside Islamic banks in the wake of the euro-zone debt crisis as a result of the real-asset backed nature of the Islamic products.

Islamic banking is currently growing at an annual rate of more than 10% driving an increased appetite for Sukuk that extends to fund managers and high net worth individuals.

"Major South East Asian and Middle Eastern companies are tapping into the international Sukuk market to raise Shari'a compliant funds. Global financial firms are also in the fray to raise money through Sukuk instruments and to offer Shari'a compliant products," said Ashar Nazim, Ernst & Young's MENA Islamic finance services leader.

The fastest growing segment is Ringgit-denominated Sukuk, which accounts for more than two thirds of total global issuance, according to the EY report, with Malaysia regularly tapping into the Sukuk market to support its infrastructure development program.

The Sukuk market is largely dominated by governments seeking project funding, with 86% of total issuances in 2011 flowing from sovereign linked entities.

Despite the upsurge of global interest in Islamic debt post-GFC, Sukuk issuance platforms are currently proprietary to a few Islamic institutions, which the EY report says, may act as a restriction to the growth potential of the industry posing a supply side restriction even as demand rapidly rises.

"There is an urgent need for a new direction in the market to be led by leading Islamic financial institutions and multilateral institutions in a collaborative manner," Ashar said.

"Globally, at least 14 Islamic banks today have the financial muscles to venture into international Sukuk capital market."

He identifies the necessary pre requisites as international connectivity, Sukuk structuring and trading expertise and balance sheet strength.

(Financial Standard Online / 13 Sept 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com