Standard and Poor's expects strong years ahead for sukuk market

"Global issuance expanded for the fourth year in a row in 2012, growing 64% to about $138bn, and we expect another strong few years," said Standard & Poor's credit analyst Paul-Henri Pruvost.

Despite increased growth, the market for sukuk, the Islamic equivalent of bonds, is still a small segment of the global fixed-income world.

Sukuk comply with Sharia law, meaning they do not technically pay interest; rather, they are structured to provide sukuk holders a profit margin.

While still considered an alternative investment, we believe the sukuk market has the potential to grow and join the mainstream.

Largely dominating issuance are sovereign and sovereign-related issuers from Malaysia, and, to a lesser extent, from the countries of the Gulf Cooperation Council (GCC; comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates or UAE).

"Funding needs and large infrastructure investments in Malaysia and the GCC, combined with better global investor sentiment, is behind today's momentum in the sukuk market," said Mr. Pruvost.

For that reason, we believe that GCC issuers, especially, are likely to come to market with bigger issues that are more commensurate with the potential suggested by their asset size.

Yields in the region have been declining, and even fell under those on conventional debt. We believe that a number of banks, particularly, will come to market, needing to refinance their existing debt and seeking larger amounts to match the credit needs of their corporate clients, especially in project finance.