Middle East sukuk market retains considerable promise

GCC issuers are likely to enter the market in significant numbers, given the considerable potential for new issuance.

Recent sukuk issuance in Singapore, Malaysia, Indonesia and Kazakhstan has driven a market revival and with Hong Kong, Japan and Korea all creating a favourable tax environment, Asia has become a more visible source of these instruments than has the GCC region.

Dr. Jarmo Kotilaine, Chief Economist of NCB Capital, commented:

"Two factors have depressed sukuk issuance in the GCC of late. The rulings made by the AAOIFI in 2008 regarding shariah-compliant sukuk structures generated some uncertainty and their effect has been amplified by the sharp economic correction brought on by the precipitous drop in the oil price."

He was speaking at the Fifth Annual World Islamic Funds and Capital Markets Conference in Bahrain on Tuesday.

"The change in economic sentiment in the Gulf was far more sudden than in Asia, but once the dust settles, the situation is likely to change, potentially quite quickly," he said.

The GCC stills displays numerous opportunities for sukuk issuance, partly because of constraints on bank finance and the weakness of the equity markets and, in addition, there will be a wave of corporate restructuring, all of which should favour sukuks and redress the balance.

"Saudi Arabia is potentially a huge market for sukuk, yet many assets and opportunities are effectively being overlooked for various reasons - municipality projects and urban regeneration; oil, gas and petrochemical sectors, even Waqfs could all benefit from sukuk financing," he said.

Education and experience will help to overcome any reservations and already some leading Saudi corporates, potentially followed by government-related entities, are creating benchmarks, and facilities are emerging for sukuk trading on Tadawul. If these positive trends continue, the critical mass needed for the take-off of a sukuk market should eventually emerge.

Dr Kotilaine concluded, "It would be a good idea to involve retail investors in the process, perhaps primarily through funds, as they need instruments offering reasonable capital guarantees and steady returns. Sukuks meet those requirements."