GCC sukuk market is weak, while Malaysia’s surges

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riyadh stock exchange
The Sharia-compliant Islamic bond market is still working towards success in the GCC. Photo: bfg-global.com

A decrease in the sale of Gulf Islamic bonds reveals that the market for the Shariah-compliant instrument is still forming-up and that much more needs to be done to encourage investor interest.

Data by Bloomberg points out, that compared to the previous year, the number of sukuk offerings in GCC has fallen by 29 percent thus far, in 2013. On the other hand, sales in Asian markets such as Malaysia have continued to soar by up to 14 percent during the same period.

However, having said that, the total overall value of sukuk sales in the GCC and Malaysia has decreased on concerns that the Federal Reserve will scale back its bond-buying program.

Sovereign or quasi-government issuers in the GCC have continued to prefer the sale of bonds in dollars. Even though these bonds attract the attention of global investors, they are more susceptible to fluctuations in the global market and face a higher risk.

Sales of these bonds in the GCC region decreased by 38 percent to USD 11 billion as state-linked issuers remained on the sidelines during the past two months. The GCC sukuk market is dominated by government and state-linked issuers, accounting for 83 percent of the total sales this year.

Rizwan Kanji; “The drop in the number of issues in the GCC is primarily because medium-sized private enterprises don’t tap the market. We’re a few years behind Malaysia, where private companies have access to a liquid local-currency market.” — Rizwan Kanji, Dubai-based partner at King & Spalding

Malaysia, the world’s biggest sukuk market, has managed to retain volumes as smaller companies have become involved in the potential offered by Islamic bonds.

The corporate sukuk activity has remained weak, but offers tremendous potential as a large majority of businesses in the region are owned and run by families. Private businesses stay away from the sukuk market due to disclosure requirements and higher costs. Company issuance may witness an increase in the coming years as government-linked entities raise more funds to refinance debt and invest in infrastructure projects. Countries in the MENA region are pouring billions into infrastructure spending as they prepare to improve living standards for their citizens and expats and prepare to make a broadly 21st century impression on the world stage.

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