Sukuk market comes of age
Islamic bonds are becoming an increasingly important part of the region’s financing landscape
The sukuk (Islamic bond) market is becoming an important part of the financing landscape for both governments and private companies in the Middle East. Nothing has proven this as much as the government of Dubai’s $1.25bn sukuk issue in January this year.
The deal was a huge success. It has enabled Dubai to raise its first 30-year financing, and lowered borrowing costs not just for the government, but also a wave of other state-owned firms that proceeded to refinance their debts and capitalise on renewed confidence in the emirate’s economic recovery.
It neatly demonstrated the argument that successful sovereign issuance will open up the debt markets for others to follow. Similar developments can be seen in Saudi Arabia, where sovereign-backed entities, including Saudi Aramco and the General Authority for Civil Aviation, have tapped the local sukuk market. Such deals are paving the way for other issuers to diversify their sources of funding away from just the equity markets and bank loans.
Even in just the past four years, sukuk has become a much more significant part of the Middle East debt capital markets. In the first half of 2009, just 7 per cent of all regional bond issuance was in the form of sukuk. In the first half of 2013, it was 27 per cent. Many investors were choosing Islamic bonds not just for ideological reasons, but because it was also often a cheaper source of funding.
Since then, markets have been shut as a result of investors being spooked by the prospect of the US unwinding its quantitative easing programme. The challenge for the sukuk industry now is ensuring it does not lose momentum as a result of the vagaries of international markets.