Vying for the sukuk crown

Vying for the sukuk crown

Dubai, Bahrain, or London – which will be the centre of Islamic finance structuring? The competition is hotting up between Bahrain and Dubai as they vie to become the major centre of Islamic finance. But London, once considered a pioneer in Islamic finance structuring, could soon be eclipsed.

A clear example are sukuks, the Islamic bonds which are fast becoming a financial mainstay in the Middle East, taking over from conventional debt instruments as the major source of corporate funding. Demand for sukuk has surged as more of the world’s 1.3 billion Muslims seek investments that comply with their beliefs.

The latest from the UK is that it will be the first Western government to launch an Islamic bond early next year with Treasury Ministers launching a three-month consultation. The UK is naturally keen to get sukuk started in an attempt to make London a centre of Islamic finance. But London will have its work cut out as Gulf centres build an ever stronger Islamic finance sector.

Recent research by international law firm Trowers & Hamlins shows just two per cent of Islamic investment funds now have their head offices in the UK while 75 per cent are headquartered in the GCC countries, indicating that the UK cannot be complacent about its ability to attract the Islamic finance industry.

The number and value of Sharia-compliant bonds has grown fast. In 2006, $7 billion was sold, but with Muslim countries the new powerhouses of global fin-ance, some estimates suggest sukuk issues could reach $100 billion before 2010. The value of sukuks issued in the first nine months of this year doubled to $22.4 billion as Gulf Arab countries in particular helped the Islamic industry weather the storm in global debt markets, according to Zawya Dow Jones data.

Bonds originating in the Gulf Arab countries topped $14.5 billion for the nine-month period, representing almost two thirds of the global market. The data also shows that Bahrain remains the hub for Islamic finance in the Middle East, accounting for about a quarter of all global issuance, shrugging off competition from Dubai, which attracted the largest sukuk, accounting for 31 per cent of the total value of issues in the first nine months of the year.

The sukuk market hasn’t been immune to the more recent fallout from the global credit crunch with several impending issues delayed. But most analysts expect a recovery by the end of the first quarter 2008. Indeed, a recent poll of bankers and analysts showed ten out of 11 saying the value of sukuk waiting to come to market by end-June next year was worth at least $10 billion.

A sign of sukuk growth was the establishment of the Dow Jones Citigroup Sukuk Index. Launched ahead of the curve in 2006, it is the first index to measure the performance of global bonds screened for their compliance with Islamic investment guidelines.

The index is made up of US dollar-denominated Islamic bonds (see table). To be included in the index a sukuk must have a minimum maturity of one year, a minimum issue size of $250 million and a rating of at least BBB-/Baa3 by leading rating agencies.

The development of the Dow Jones Citigroup Sukuk Index along with the Dow Jones Islamic Market Indexes – of which there are now more than 70 – have provided the foundation for an Islamic capital market comprising compliant equities and sukuk.

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