The problem with being tagged a child prodigy is that you have to live up to expectations. Even Mozart had off days.
The global market for sukuk – the Islamic equivalent of bonds, structured so that they provide a return but do not technically pay interest – is no different. This started to develop a decade ago; was knocked by global turmoil in 2008 and then spurted ahead for four years, leading to $US140 billion ($156 billion) of issuance in 2012. But in 2013, it hit a more sour note as the value of instruments issued slipped 13 per cent, to about $US120 billion.
Explanations for the setback vary. General market uncertainty over US tapering did not help. Neither did hiccups in Malaysia, traditionally the dominant sovereign sukuk issuer, due to its large public investment programme. As credit rating agencies hovered last year amid signs national finances were deteriorating, the government took steps to cut the budget deficit. Investment growth slowed; Malaysian sukuk issuance fell by a quarter.
But there are good reasons to think business will be brisker this year. While corporates are smaller sukuk issuers than the sovereigns – in 2013, they supplied less than $US30 billion – their activity is rising fast. It was up a fifth last year and now both Standard & Poor’s and Fitch expect further increases in 2014. Gulf banks, in particular, may want to tap the market as tougher regulatory capital standards kick in.(sukuk hybrids can count towards capital) On top of that, it is likely that at least one non-Muslim country – perhaps the UK – will make an inaugural sukuk issue. This may be modest in dollar terms but it will open the bidding to host a lucrative hub for Islamic finance in the non-Muslim world.
Investors still face big issues in this market, such as lack of liquidity and standardised deal structures. But the buzz may be returning. And there’s nothing child prodigies like better than a bit of attention.
(Financial Review / 11 Feb 2014)
---Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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