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Booming Islamic bonds mop up liquidity

Tuesday 1 March 2011 - by Andrew Hickley

Following a turbulent two years, Standard & Poor's has declared the sukuk market "back on track" after a record-breaking 2010 and a booming start to this year.

In a report released today, S&P declares that issuance of the popular security in 2011 so far has already reached $16bn (€11.56bn), threatening to smash the $51.2bn (€37bn) issuance figure reached last year. That figure was already 34 per cent above the previous record set in 2007.

However despite early progress the report anticipates that overall sukuk issuance for the year will hinge on the state of the global economic recovery.

It also argues that while Malaysia accounted last year for 78 per cent of all sukuk issuances, it will soon be caught up by the six members of the Gulf Cooperation Council.

Comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, S&P argues that the GCC consists of members who are "long-term aspiring champions of the sukuk market".

It states that sovereign sukuk could be used to mop up extra liquidity held by domestic banks, noting that the Qatari Central Bank did this in January 2011 with a $9.1bn (€6.58bn) issuance of sukuk. Overall it sees two thirds of the year's issuances in the Islamic bonds coming from Malaysia, Qatar and the UAE.

"We believe that given its economic resilience and bright prospects, the GCC region may catch up with Malaysia and begin to play a larger and more sustainable role in the market in the next five years."

While some western economies have shown interest in sukuk, the report judges that a complex web of socioeconomic, political and religious issues will hold back any swift uptake in sukuk in non-Muslim countries.

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