The new appetite for Sukuk

Sukuk has become a common financial instrument in East and West, for long-term and short-term financing. In October, the Dow Jones Citigroup Sukuk Index added 1.12% (as of the close of trading of October 25th).

This does not seem enough to attract investors as Shariah-compliant equity indices offered more attractive returns, such as the Dow Jones Islamic Market (DJIM) Kuwait Index, which rose 4.41% in October, or the Dow Jones Dubai Financial Market (DFM) Index, as the latter surged 5.88% higher. But the comparably lower return of the Dow Ones Citigroup Sukuk benchmark composite, which measures the performance of investment grade, dollar-denominated sukuk, is not representative of the comeback of Islamic Bonds.

Dubai World marks a turning point

On September 10, Dubai World announced an agreement with its creditor banks to restructure $24.9bn. Of this amount, a share of $14.4bn is owed to creditor banks "The conclusion of the Dubai World's debt restructuring saga is a credit positive development for the UAE banking system," Moody's has said, and bank shares across the GCC surged since then. In recent months, sukuk issuances were announced and executed at breakneck speed.

Real estate developer Nakheel, a subsidiary of Dubai World and builder of the palm-shaped Jumeirah island, plans to issue a five-year $1.6bn Islamic bond as part of its restructuring to help pay off its debts. The placement might occur at the end of 2010 at the Nasdaq Dubai, along with the first UAE equity IPO in 2010 of telecom retailer Axiom. Nakheel's inability to pay off a $3.52bn sukuk raised eyebrows worldwide in November 2009. To many bankers in the West it gave proof that Islamic Finance, although less risky by nature due to its ban of derivatives and hedge funds, is no magic wand. Only a $10bn bailout from the Abu Dhabi government saved Nakheel from default.

Banks jump on the bandwagon
The sukuk market's revival is taking place across the region. In Istanbul, Kuveyt Turk's three-year $100m Islamic bond was launched as the first sukuk in Turkey. Qatar Islamic Bank's $750m sukuk from end of September received $6bn in bids. The five-year Islamic bonds were priced to yield 237.5 basis points above similar maturity midswap, according Bloomberg.

Abu Dhabi Islamic Bank, also known as ADIB, also aims to sell a five-year sukuk reports revealed on October 11. Due to the action in the market, Samad Sirohey, Dubai-based CEO of Citi Islamic Investment Bank, expects the global sukuk volume to grow further. "The yields offered here are high, and investors globally are willing to take the risk of investing here to get that spread and return," he told Reuters. The value of sukuk issued in 2008 plummeted by more than 56% compared with 2007, to $14.9bn.

In 2009, it took six months until the London Stock Exchange (LSE) - the leading Western capital market for Islamic securities - welcomed the first sukuk of that year, a $750m sukuk issued by CBB International Sukuk Company on behalf of the Government of Bahrain. Total sukuk in 2009 rebounded to $24.65bn. 2010 should see similar if not higher levels. "The market could see issues of close to $46 billion in 2011 as investor confidence returns and new issuers emerge in the growing Islamic finance industry, BMB Islamic's chief executive Humayon Dar told Reuters.

Filling in the blanks
Nevertheless, there are still some white spots on the map. Germany and Switzerland have only seen one sukuk so far. The EUR100m sukuk of the Eastern German region Saxony-Anhalt, launched in 2004 as Europe's first sovereign Islamic Bond, was a watershed, but since then no German entity followed. Even Kuveyt Turk's move to the largest EU state this last spring might not be enough, because the Turkish Islamic bank focuses primarily on Islamic retail clients in Germany.

While Malaysia remains a sukuk stronghold (60% of issuances come from Kuala Lumpur) globally and in East Asia, Hong Kong and China still hesitate to tap the market, despite increasing economic links to the GCC and although its returns are less volatile and sometimes even as attractive as equity indices. On a year-to date basis Dow Jones Citigroup Sukuk Index gained 10.14%, far more than the Shariah-equity composite Dow Jones Islamic Market GCC Index which gained 10.03% year-to-date.