Despite the significant volume decline seen in 2008, the long-term perspectives for global sukuk issuance are still good, said Standard & Poor's in a report called Sukuk Market Declined Sharply In 2008, But Long-Term Prospects Remain Strong.

"The decline in sukuk issuance in 2008 was as a result of global market turmoil, drying up of liquidity, widening of credit spreads, and investors' wait-and-see attitude," said S&P credit analyst Mohamed Damak. He added that even though it is hard to measure, part of this drop could also have been due to comments about the Sharia compliance of some sukuk made by the Accounting and Auditing Organization for Islamic Financial Institutions.

More than 45% of sukuk issued in 2008 were "ijara" (lease financing), most of which are likely a direct consequence of the debate about Sharia compliance among some scholars. The value of sukuk issued in 2008 dropped by more than 56% compared with 2007, to $14.9 billion.

"We do not expect the market to start reviving before the second half of 2009 or early 2010," added Damak.

However, long-term prospects for the sukuk market are still strong, according to the rating agency. Event though volumes dipped significantly in 2008, the sukuk market attracted about the same number of issuers. Conservative estimates of the pipeline of sukuk that have been talked about announced are over $45 billion.

S&P cited the several factors that support the sustainable growth of this market such as the increasing popularity of Sharia-compliant products and government openness to Islamic finance, massive investment and financing needs in the Gulf, as well as issuers' desire to tap investors from the Middle East and Muslim Asia.

Issuers from more than 20 countries have expressed interest in issuing, or announced their intention to issue, sukuk, and  the rating agency anticipates that several new sovereigns will enter the sector, according to S&P.

To date, the agency has rated 27 sukuk (or sukuk programs), most of which are ijara or "musharaka" (venture capital financing). Credit spreads on sukuk have followed that of conventional bonds, widening sharply in the past year.

The sukuk's average size issued in 2008 dropped notably, partly a restult of the lower appetite of investors. At the same time, the U.S. dollar lost is place as the currency of choice for sukuk, with only around 10% of offerings raised in this currency.

S&P expects the sukuk market to continue being skewed toward issuances in local currencies, at least in the foreseeable future. Once the global markets normalize, dollar-denominated sukuk issuance will pick up again.

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