CAIRO – Proving more stable during financial crises, Islamic bonds (sukuk) are increasingly luring the interest of investors in the West as an alternative vehicle for investment.
“European problems helped fuel demand for alternative products like sukuk in emerging markets, which is why we’re seeing a strong wave of interest coming in from Western investors lately,” Mohammed Dawood, managing director of debt capital markets for HSBC’s Islamic banking division, told The New York Times on Thursday, February 28.
Sukuk have lured the interest of many investors in several Western countries, whose economies have been shrinking in recent months.
Sukuk, which conforms to Islam's prohibition of usury, typically work as profit-sharing vehicles.According to a research by Standard & Poor’s nearly 38 percent of a $500 million, 10-year sovereign sukuk issued by Dubai were swiftly obtained by Western investors.
Firms that issue sukuk make payments to investors using profits from the underlying business, instead of paying interest.
The money, however, can’t be invested in alcohol, gambling, tobacco, weapons or pork.
Muslims-majority Malaysia is the hub of the sukuk market, accounting for 74 percent of the $135 billion Islamic bond issuance in 2012.
Sukuk have often proved to be more stable than conventional bonds during the global financial crisis.
The sukuk market has reached $111.9 billion in the eight years to 2008, according to the International Islamic Financial Market.
Global sales of sukuk have reached $6.6bn in 2012, from $2bn a year earlier, according to data compiled by Bloomberg.
Booming Sukuk
Economists agree that the sukuk market has been gaining more demand among investors.
“The developing global Islamic asset management industry is also creating further demand for sukuk,” said Paul-Henri Pruvost, a credit analyst at Standard & Poor’s.
Experts predict more growth in the sukuk market, especially in the Gulf area and North Africa.
“What drives sovereign issuances is the same as any business — if they see an opportunity to get a good amount of money from the market at an attractive rate, they will turn to the market to raise funds,” said Ahsan Ali, global head of Standard Chartered Bank’s Islamic banking division, based in Dubai.
“Corporate entities will begin to access the market, as well.”
Countries facing economic troubles as Egypt and Tunisia are also expected to tap the sukuk market as a new avenue of financing for large-scale infrastructure projects, including airports and roads.
“We’re seeing that there’s a big push to develop capital markets in this part of the world, to increase the investor pool and encourage more issuers,” said Dawood.
“Places like Kuwait and Oman opening up the sukuk market contributes to that development.
Saudi Arabia, which was a major issuer of Islamic bonds last year, “is poised to become one of the largest Islamic markets in the world,” he added.
Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.
A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.
( On Islam / 28 Feb 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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