Sukuk listings in GCC region to exceed $20b
BY BABU DAS AUGUSTINE (Assistant Editor)

28 October 2006


DUBAI — The market for Sharia-compliant notes, also known as sukuks, is set to expand rapidly. The majority of sukuk issues that originate from the Gulf region is expected to exceed $20 billion by 2010, according to global rating agency Standard and Poor's.

“In the Gulf, investing in sukuk has become part of mainstream asset allocation and diversification, with Islamic banks in particular seeing these instruments as an important tool in managing their assets and liabilities and recycling liquidity. S&P currently rates more than $5 billion of the $10 billion market for listed sukuk, which is expected to grow to more than $20 billion by the end of the decade,” S&P said in a report.

Islamic finance is currently expanding beyond its historical borders of the Gulf region, where it began to emerge in the 1970s, as a result of the oil boom.    Other Arab and non-Arab Muslim countries, particularly in Asia, are increasingly attracted by the principles of Islamic finance.

Amid rapid growth, Sharia-compliant banks are looking to expand beyond their traditional markets. The retail market, the key profit driver of banking in the Gulf region, is attracted by what Islamic banking can offer.

The size of global Sharia-compliant assets is estimated today at up to $400 billion, whereas S&P Ratings Services believes the potential market for Islamic financial services to be closer to $4 trillion, meaning that Islamic finance currently has only a 10 per cent market share among the Muslim community globally and still has a long way to go.

The report said that Islamic banks in the Gulf have displayed and should continue to show strong profitability, so long as oil revenues pour into the Gulf economies, maintaining economic momentum through a powerful multiplier effect. However, S&P has warned Islamic institutions of being complacent.

For the first time in the industry's history, several Islamic banks headquartered in the Gulf have recently set up business operations in Malaysia, while making clear that on their radar screens are Indonesia and China — large and deep markets only a short hop away from the Malaysian platform.

New horizons are also emerging for Islamic finance within the Arab universe: Lebanon, Syria, Egypt, Turkey, and, to a lesser extent, North Africa, have been identified as potential engines for unlocking franchise value.

Although the existing Islamic institutions such as Al Rajhi Bank (with S&P credit rating, A), Kuwait Finance House (A-), Albaraka Banking Group (not rated), and Dubai Islamic Bank (A) still have bright prospects within their own marketplaces, their current market positions face significant competition from new entrants, S&P said.

According to S&P, faced with growing competition, Sharia-compliant investment banks such as Gulf Finance House (BBB-), Arcapita Bank (not rated) and

Unicorn Investment Bank (not rated), are shaking the old rules of Islamic finance with more aggressive business models.

In addition, S&P analysts said they believe that new heavyweights such as Al Rayyan Bank, Al Masref, Boubyan Bank, and Bank Albilad are examples of institutions that could reshape the entire industry, given the relatively large size of their capital bases, by regional standards, and very focused strategies.

The growing competitive pressures from new generation of Islamic banks are forcing even the deeply entrenched conventional financial institutions to make inroads into the promising territory of Islamic finance, although strategic approaches vary.

Some have opted for the route of opening Islamic branches (particularly in Saudi Arabia and Qatar), some for creating fully fledged Sharia-compliant subsidiaries and complete conversion for Sharia compliancy. About half a dozen banks in the UAE are in the process of opening Islamic subsidiaries.

Commenting on the global aspirations of Islamic finance, the report said, greater interaction between the two important centres of Islamic finance namely the Gulf and South East Asia could eventually contribute to the emergence of a common conceptual framework for Islamic finance.

“Consolidation within the Islamic finance industry does not seem to be on the horizon, while the two historical centers of Islamic banking — the Gulf and Southeast Asia — have just started actively talking to each other.

Intellectual competition and differing interpretations of the fundamental rules of Islamic finance have so far kept these two universes apart.