Although Sukuk or Islamic bond global issuance for 2010 is expected to be in line with last year's volumes, the sector could experience a boost from a number of legislative and regulatory developments happening over the next few years, a Moody's Investors Service Report said.
This year's Sukuk issuance is expected to see more activity take place in 2H10. For the first half, supranational, sovereign and government-related issuers will continue to dominate the Sukuk market.
"A key factor behind the recent and ongoing dominance by sovereign and government-related issuers was their need to launch a variety of funding programs to combat declining economic activity, fiscal deficits and lower energy and commodity prices," says Faisal Hijazi, business development manager for rating services and Islamic finance at Moody's and author of the report. "By contrast, given the weak economic conditions, corporate entities have proved to be less able and willing to be major issuers of new sukuk, although a small number of highly rated corporate issuers did tap the sukuk market in large issuances."
However, a number of jurisdictions are developing legislative and regulatory initiatives that should enhance their ability to explore the sukuk market for the first time. The potential emergence of Sukuk offerings from new jurisdictions would be a key driver of increased global issuance. These include new markets in Asia — notably Japan, Korea and Thailand — and Europe, most likely the U.K.,
"Such moves could also prompt other jurisdictions with similar regulatory frameworks to pursue similar efforts in this direction," Hijazi said. "In addition, the more established Sukuk markets, including those in the GCC, are also likely to undergo further legislative and regulatory developments, with beneficial implications for their sukuk issuance."
Legislative steps are improving the prospects of Sukuk becoming an attractive issuance structure, especially for local and cross-border investors. Specifically, these legal developments include the establishment of the Tadawul Bond and Sukuk market and the imminent introduction of the mortgage and finance law in Saudi Arabia as well as the approval of a long-awaited capital market authority in Kuwait,
The role of legislation in this growth was successfully demonstrated in Malaysia last year. Local Malaysian currency issuances surged nearly 100% compared to 2008 levels.
In the near term, Moody's considers the recently announced Dubai World restructuring proposal as a positive development for the regional Sukuk market. The credit-friendly proposal and wider market acceptance will help increase issuers' appetite for new issuances because of the reduction in credit risk spreads. It will also improve investors' sentiment.