Monday, July 18, 2011

Sukuk have record first half

Zawya and KFH Research separately have announced that the first half of 2011 had the highest level of sukuk issuance compared to comparable periods (Zaywa reported $43.8 billion, KFH reported $47 billion).  For comparison sake, $34.3 billion was issued for the entire year of 2007, the pre-crisis peak (according to an Ernst & Young Trend Analysis in the Zawya Sukuk Report released in 2009).  The return to growth in sukuk markets is a good development, but there is still some concern about the sustainability of this growth.  For one thing, most of the growth has occurred in Malaysia; the GCC has not participated nearly as much.  Of the GCC issuers, most have been sovereign or government-related entities and many issuers have tapped Malaysia's more liquid sukuk market for financing rather than issue in their local markets. 

This is good news for Malaysia, which had been largely domestically focused in Islamic finance, in part because of differences in Shari'ah standards. However, the standards, which are viewed as more permissive in Malaysia, have allowed for more cost-competitive products, which have led to much deeper secondary markets (aided by government involvement in promoting the industry).  Now that sukuk that conform to GCC standards are being issued in Malaysia, they can maintain the Shari'ah standards prevailing in the GCC while also tapping the greater liquidity that has developed over the past 20-30 years. 

The growth of Malaysian sukuk markets for local issuers as well as foreign issuers is even more important with the UK seemingly stalled on legislation to facilitate government sukuk, the US non-existent and other developed countries either moving slowly or not at all (e.g. South Korea for religious reasons, Japan for economic reasons and Europe because of the focus on resolving sovereign debt crises).  For now, sukuk remain largely an emerging market phenomenon and this doesn't seem likely to change any time soon (it may even be further off on the horizon than it was a year or two ago). 

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