Islamic Bond Market Doubles to US$22.4 Billion

The value of Islamic bonds issued in the first nine months of the year doubled to $22.4 billion as the oil-rich Gulf Arab states helped the industry weather a storm in global debt markets, according to Zawya.com data.

Ijarah structured bonds, linked to a form of Islamic leasing agreement, accounted for 46% of all issuance over the same nine-month period, Zawya's Sukuk Monitor shows. Pointing to a slow down, Zawya's data indicates that only eight of the total 81 sukuk issued in the first nine months, worth $1.3 billion, were closed since the current global market turmoil began. It remains unclear to what extent Islamic debt markets have been hit by the global credit crunch that forced central banks to pump liquidity into the system and led to companies delaying debt plan, including Shariah-compliant bonds. "Credit spreads are tightening again and we're cautiously optimistic," Arul Kandasamy, head of Islamic finance at Barclays Capital, told Zawya Dow Jones on Tuesday. Bond market volatility and a slowdown in investor demand have already forced United Arab Emirates-based Dana Gas(DANA.AD) and DAE Aviation Holdings to put on hold debt issues worth $1.94 billion. Saudi Basic Industries Corp. (2010.SA) was forced to lower the senior unsecured bond portion of its financing to buy GE Plastics to $1.5 billion from about $2.76 billion and raise the bank loan portion to about $6.6 billion from $5.4 billion because of the tightening in global credit markets. Earlier in July, Abu Dhabi-based First Gulf Bank (ADS) postponed its $3.5 billion Eurobond program and Bahrain's Ithmaar Bank (ITHMR.BH) delayed a $300 million sale of five-year Islamic bonds. National Bank of Abu Dhabi (NBAD.AD), the largest lender in the United Arab Emirates, plans to delay its $1.7 billion bond program until conditions improve in global debt markets, the company's chief executive told Zawya Dow Jones last month. Barclay's Capital's Kandasamy expects the value of Islamic bonds issued this year to peak at $28 billion.

Sukuk Hubs

Bonds originating from the Arab Gulf states, which pump about a fifth of the world's oil, topped $14.5 billion for the nine-month period, representing almost two thirds of the global market, according to Zawya.com data. The Zawya data shows that Bahrain remains the hub for Islamic finance in the Middle East, accounting for about a quarter of all global issuance. The Gulf archipelago continues to shrug off competition from Dubai, which is seeking to become a top location for the region's financial industry. The U.A.E., the second-largest Arab economy in the Middle East, attracts the largest Sukuk, accounting for 31% of the total value of issues in the first nine months of the year, according to Zawya.com. "It's too early to say who will win," Geert Bossuyt, managing director of Middle East structured global markets at Deutsche Bank AG (DB) told Zawya Dow Jones. "There is only room for two financial centers in the region. One will be Riyadh in the future and the other either Bahrain or Dubai." Islamic bonds, or sukuk, that comply with Muslim Sharia law are becoming a mainstay of financing in the Middle East where they are superseding conventional debt instruments as a major source of corporate funding. International Monetary Fund Managing Director Rodrigo de Rato said on September 24 that the situation in credit markets is slowly returning to normal.