The popularity of Islamic bonds signals the opening up of a new banking market. Issuance last year hit $6.7bn but challenges remain to development.
Islamic bond, or sukuk, issuance is giving the international financial markets a taste for Islamic finance. In fact, sukuk issuance tripled in 2004 to $6.7bn and it is not just Middle East issuers and investors who are interested (see page 48). Not only are international giants such as Citigroup, HSBC and UBS keen to get a slice of the action but non-Islamic borrowers such as the German state of Sachsen-Anhalt see the advantages of tapping into a new funding source and new investor base.
The $600m sukuk issuance by Pakistan in January, the first Asian sovereign issue this year, was aimed at attracting some of the huge amount of Middle East liquidity from investors who are often barred from investing in traditional (interest-driven) debt products. But the Islamic bonds are also attractive elsewhere and 53% of the Pakistan sukuk was distributed in Asia and Europe.
The growing appreciation of the sukuk market is also important for the growth of Islamic banking. This sector failed to develop as fast as expected in the 1980s and 1990s because of the lack of a secondary market in Islamic financial instruments. The Bahrain Monetary Agency has helped develop an Islamic banking regulatory regime and is looking to make the Bahrain Stock Exchange the key arena for global sukuk trading. The surge in Islamic bonds helps provide an increasing range of paper, which helps stimulate a wider range of Islamic banking activity.
But further challenges remain. Islamic banking has been slowly moving from arcane theory into practice but many definitions and products are far from standardised across the Islamic world. One senior banker advised The Banker not to produce a global listing of Islamic banks because of the arguments it would cause over what is an Islamic bank.
Sukuk issuance has stimulated interest and awareness among Islamic and non-Islamic lenders, borrowers and arrangers alike. In a fractious, globalised world, this is a genuine success story. In terms of the growth in Islamic banking, it is only the beginning.
