Sukuk and future growth in Islamic finance

In an interview, deputy minister of finance Nor Mohammad Yakcop, describes the efforts taken by Malaysia's government to expand its international presence. One comment, in particular, struck me as a valuable observation that is often lost in stories about the rush of different cities like Kuala Lumpur, Singapore, Dubai and London to become centers of Islamic finance.

"Malaysia welcomes the growing acceptance and popularity of Islamic finance, together with the emergence of other Islamic financial centres such as Dubai. We believe it is not a zero sum game. In fact, the increasing number of financial centres undertaking Islamic finance, is a necessary condition to provide critical mass and sustainability for the sector."

The Islamic Bank of Britain claims that it saw an uptick in the number of non-Muslims opening accounts in the wake of the credit crisis. It would be interesting if, in addition to vague suggestions about the popularity of Islamic finance by non-Muslims, there were numbers attached to track the growth or contraction in numbers of non-Muslim clients. I think that would provide a more useful measure of how much progress is made to attracting non-Muslim to Islamic finance, an important thing for the growth of the industry particularly in countries like the U.K. with relatively small Muslim populations.

The sukuk secondary markets have about $40 billion in sukuk that are 'actively traded', according to a GCC-based asset manager. The yield difference between conventional and Shari'ah-compliant debt have fallen. Relative to US Treasuries, conventional debt with issuers sharing similar characteristics with issuers of sukuk yield 314 basis points while the yield spread for sukuk is 320 basis points.

The minister of finance in Indonesia was recently asked about the plans to issue a sovereign, dollar-denominated sukuk in the wake of a fall off in sukuk issuance:

Gulf News: An HSBC report recently reported that sukuks have witnessed a $10-billion drop in sales since early 2008 and an average price fall of 1.51 per cent. Viewed against Indonesia's impending plans to sell dollar-denominated sukuk, how do you view the appetite for Islamic bonds in the Gulf markets next year?

Sri Mulyani Indrawati: We still believe that our plan to sell sukuk is relevant and will get positive responses from Gulf markets. Our skuk will attract the demands of Gulf's investors for several reasons:

The sukuk is fully guaranteed by the government; The government has a good track record in fulfilling bond obligations; many investors are waiting the issuance of sukuk; and Indonesia is the biggest Muslim country, and the Sukuk is a tool to enhance the brotherhood between investors in Gulf countries and Indonesia.

My optimism also relies on data released by Standard and Poor's on September 9 suggesting that the Sukuk market will rise again.

In this regard, I think the liquidity in the Gulf is still abundant and requires secured investment instruments such as our sukuk.