Global crisis affects sukuk issuance

Asian Islamic bond (sukuk) market has undergone a significant drop in issuance levels - a direct result of the fallout from the global financial crisis - but it also shows resilience and good long-term prospects, according to Moody's Investors Service.

"Most of the current challenges are because of the adverse nature of the global credit environment and the associated increase in risk perceptions and widening in spreads," said Dominique Gribot-Carroz, Moody's Vice-President and Business Development Executive.

Asian currency-denominated sukuk outstanding - namely in Malaysian ringgit, Pakistani rupees, Indonesian rupiah and Brunei dollars - grew by close to 50 per cent, from $43.6 billion (Dh160bn) at end-2006 to $65.3bn at end-2007, while in 2008, the market contracted slightly by 1.5 per cent to $64.3bn at 2008-end.

Global sukuk outstanding at 2008-end amounted to $103.6bn, of which 62 per cent were Asian-currency and 26 per cent US-dollar denominated.

"However, despite the drop in volume, it is encouraging to note that sovereign sukuk issuance has already brought significant vitality to the Asian market in 2009," Gribot-Carroz said.

In January, the Monetary Authority of Singapore announced the completion of sukuk issuance facility, while in the first quarter, Indonesia issued its first sukuk to retail investors, and recently launched its first off-shore issuance. And in Malaysia - the world's largest sukuk market - the government has issued sovereign sukuk this year, and is expected to return to the domestic market later this year.

From the perspective of the market's promising prospects, in coming months, issuing sukuk in Malaysia - a market where investors are familiar with the instrument - could be an option for institutions seeking funding for foreign infrastructure projects, for example, in Thailand or China. And Singapore and Hong Kong are likely to continue their efforts to position themselves as efficient platforms for sukuk issuances.

However, various key issues need to be resolved over the longer term, for example, the ongoing absence of standardised commercial and technical criteria.

The sukuk market globally remains a relatively young asset class and faces problems typical of any new market, the investors' service agency said in a report. Even before the present financial crisis, liquidity on the secondary sukuk markets was quite limited, while the fact that most sukuk investors have always adopted a buy-and-hold strategy only exacerbates the problems.

Moody's said risk management challenges have increased for the Islamic finance industry as a whole. While Shariah compliancy prohibits excess leverage, Islamic assets suffer from other limitations, such as the narrow range of tools available to hedge risk, manage liquidity and a tendency to concentrate on tangible real estate assets.

Moody's said that most recent issuances in Asia as previously have been asset-based and not asset- backed. Indeed, while most sukuk have assets in their structures, Moody's only considers them as asset-backed or asset-secured if key securitization elements are present to ensure that holders enjoy beneficial title and realisable security over the assets and associated cash flows.