Sukuk Market Blighted By Credit Crunch, Say Reports

by Carla Johnson, Investors Offshore.com

28 January 2009

Standard and Poor’s and Moody’s released contemporaneous reports last week revealing major declines in the issuance of sukuk (Islamic bonds) in 2008 on 2007’s figures, citing reduced trading in excess of 50%.

Standard and Poor’s blamed the reduced trading on the global financial crisis, observing that “the decline in sukuk issuance in 2008 was as a result of the global market turmoil; drying up liquidity, widening credit spreads, and promoting a wait-and-see attitude amongst investors."

Questions over the compliance of some bonds with Shariah law has also been linked to the market's failure in 2008, with debates ensuing on the compliance of some sukuk with Islamic Finance principles of risk- and profit-sharing.

Despite a 56% plunge in value from 2007 figures with USD14.9bn of sukuk issued in 2008, Damak believes that the market will rebound, stating that the market is likely to start recovering in mid-2009 to early 2010.

Moody’s report released on January 22, said that Islamic finance had faced ‘unprecedented challenges’ in 2008 and blamed the collapse of the Sukuk market on the ongoing credit crisis, rising costs of borrowing and lack of investor commitment to capital market securities. According to figures released by Moody’s, the Gulf Co-operation Council and Malaysia were hardest hit in 2008, citing 55% and 59% declines in sukuk issuance, respectively.

Moody’s said that due to the credit crisis and some issues with Shariah compliance, investors opted for Ijarah Sukuk instead of the previously popular Mudarabah, which was the dominant structure in 2007, to overcome compliance issues.

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