Analysts predict growth in sukuk as Islamic bond become more popular

News - Funds

Written by Ray Clancy

Growth in sukuk issuance offers Islamic funds an opportunity as they become increasingly popular among investors, according to a new report.

The sukuk market returned to growth in the first half of 2010 and has grown large enough to support a transformation in the Islamic fund industry, says the report from Standard & Poor’s Ratings Services.

Global sukuk issuance topped $13.7 billion during this period, nearly twice the $7.1 billion recorded during the same period last year.
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‘Sukuk funds are increasingly popular among investors as they produce fixed income returns similar to those from traditional fixed income investment products. Sukuk funds
also help investors to diversify away from pure equity and real estate funds, which suffered heavily during the last credit cycle,’ said Standard & Poor’s credit analyst Samira Mensah.

‘The expansion of the sukuk funds industry will, in our opinion, go hand in hand with the growth of the sukuk market, which continues to face obstacles. We believe the success of efforts by governments and other market participants to remove those obstacles will shape the direction the sukuk market and funds industry will take in the future,’ she added.

Global assets held by financial institutions that comply with Shariah law may climb to $1.6 trillion in 2012 from about $1 trillion, according to the Islamic Financial Services Board.

Meanwhile, Egypt, home to the Arab world’s largest Muslim population, will issue its first Islamic debt guidelines in 2011 to catch up with the Persian Gulf and Southeast Asia and help spur sales, it has been announced.

‘The target of issuing these regulations is to help companies that want to issue sukuk. Right now, we don’t have a framework to help anybody who wants to issue sukuk,’ said Ziad Bahaa El-Din, chairman of the Cairo based Egyptian Financial Supervisory Authority.

Al Baraka Bank Egypt ESC, a Cairo unit of Bahrain based Islamic lender Albaraka Banking Group, may sell dollar denominated Islamic bonds, known as sukuk, in the second half of 2011, the bank’s chairman, Adnan Ahmed Yousif.

Egypt, where one of the world’s first Islamic financial institutions was established in 1963, has struggled to develop the Islamic debt market because of political and economic reasons, said Samer Sulaiman, professor of political economy at the American University in Cairo.

The development of Islamic debt in Egypt also was undermined in the 1980s and early 1990s by the collapse of investment companies such as El Rayan and El Saad, which failed after setting up ponzi schemes that claimed to invest in Shariah compliant assets, Sulaiman added.