MANAMA Dec 11 Demand for sukuk, or Islamic
bonds, is expected to almost double in value over the next four
years, driven by strong economic growth in the Middle East and
Asia and their spread to new markets, according to a report by
Sukuk are Islamic investment certificates that pay returns
on money invested, instead of interest, to obey Islam's ban on
interest. They are a major funding tool for both banks and
corporates in the Islamic finance industry, which has its core
markets in the Middle East and southeast Asia.
Global demand for sukuk is expected to reach $421 billion by
2016 from $240 billion in 2012, according to a Thomson Reuters
survey of 169 investors and sukuk arrangers, mainly from the
Gulf region and Asia, conducted in August and September.
Supply is also forecast to grow, but not as quickly as
demand with the gap widening to more than $280 billion over the
next four years from around $160 billion now, the report said.
On average, investors expect to allocate $200 million into
Islamic investments, or 50 percent of their portfolios, next
year, with sukuk representing 35 percent to 40 percent of this.
The report highlighted concerns over liquidity of sukuk in
the secondary markets. Only 19.2 percent of investors expect to
hold sukuk for less than a year for trading purposes.
Investors' preference is to hold sukuk for longer, with 42.4
percent saying they would hold sukuk between one to three years,
and more than a quarter expecting to hold sukuk to maturity.
Arrangers, however, expect the liquidity of the secondary
market to improve in coming years. Both arrangers and investors
see the emergence of a mega Islamic bank as a way to boost
liquidity, as well as dedicated sukuk traders.
Sukuk issuance is expected to remain anchored in core
markets such as Malaysia and Saudi Arabia, with investors also
showing appetite for Omani sukuk. Arrangers also favour Egypt
and Kazakhstan outside of core markets.
Despite agreeing on the growth potential of sukuk, investors
and arrangers have differing views on several key features.
There is greater demand by investors, for example, for
dollar-denominated international sukuk, while arrangers see a
more even split with domestic-currency issuance.
Investors are also seeking an even split between fixed and
variable profit rates on their sukuk, while most arrangers
expect fixed rates to be offered in the next two years.
Investors prefer tenors of three to five years, compared
with the longer terms expected by arrangers. And asset-backed
sukuk are preferred by a majority of investors, whereas
arrangers see these accounting for only a third of issuance in
the coming two years.
(Editing by Mark Potter)