GCC to lead growth in sukuk market

Global Islamic bond sales are expected to grow by 5 per cent this year, led by Arabian Gulf issuers amid an economic resurgence spurred by government infrastructure spending, according to Standard & Poor’s Ratings Services.

Issuances are up almost 30 per cent in the GCC alone this year, but the ratings agency warned that more needed to be done on the regulatory front to support the nascent industry.

“We remain upbeat on the outlook for the GCC Islamic finance industry, but we have seen mixed fortunes across sectors this year and a broad spectrum of structural issues continuing to pose challenges,” said Stuart Anderson, S&P’s Middle East regional head.

"Despite growth, the industry remains a demand-driven market with limited supply," he added. "The expansion and enhancement of existing Islamic finance centres in the GCC and a more transparent regulatory environment are critical to accelerate growth."

Demand for bonds from the UAE has increased in recent years as Dubai recovers from its debt crisis, and because the country’s peg to the US dollar makes it stand out in emerging markets where most currencies have been volatile over the past year.

This demand, amid record low interest rates, has lowered the yield investors receive and has made it attractive for companies, banks and governments to go to the bond and sukuk market to raise cash. Some of that demand going forward is likely to be boosted by companies and banks seeking to refinance existing Islamic debt that is set to mature soon, S&P said.

So far this year GCC sukuk issuances have reached US$20.3 billion, 27.3 per cent higher than the same period last year, S&P said.

The drop in corporate and infrastructure sukuk issuances by almost a third was more than compensated for by higher issuance from governments and financial institutions, it said.

The rise of Islamic banks in the region has helped to bolster the sukuk market. S&P expects the growth of Islamic banks to gradually converge with that of their conventional peers over the next decade.

S&P said it expects total GCC banking assets to rise to $2 trillion by the end of next year from $1.7tn last year.

“Islamic banking growth is being driven by strong economic growth, the recovering corporate asset quality cycle and ample financing opportunities,” Mr Anderson said. “We believe Islamic banks will continue growing visibly faster than their peers, particularly in countries that have the highest domestic credit growth prospects.”

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