The volume of sukuk (Islamic bond) issuances in the Gulf this year is expected to be in line with the growth recorded in 2013, according to a new report from US ratings agency Standard & Poor’s (S&P).

Total issuances may slightly exceed last year depending on how interest rates develop in the coming months.

Sukuk are also becoming more popular than conventional bonds, the report finds.

“More Islamic bonds were issued last quarter than conventional bonds and we expect to see the same this quarter,” Karim Nassif, primary credit analyst at S&P, told reporters on 17 March.

In the long term, S&P says capital markets in the Gulf are set to strengthen, buoyed by the region’s economic growth and new regulations.

Global regulations such as Basel III make it more expensive for banks to provide conventional long-term lending. Regionally, the UAE has introduced regulations that have placed lending caps on banks lending to government-related entities (GREs), which is encouraging GREs to tap the capital markets instead.

The use of bonds and sukuk is also expected to play an important role providing the much-needed finance to support large-scale infrastructure spending plans in the region, the report says.

Last year, Abu Dhabi-based Ruwais Power Company tapped the capital markets for a $850m bond to refinance conventional project finance bank debt used to support the construction of Abu Dhabi’s Shuweihat S2 independent water and power project (IWPP) .The multibillion-dollar project financing for Sadara Chemical Compan,y which closed in mid-2013, also featured a $2bn sukuk tranche.

To date this year, there have been several issuances including Saudi Electricity Company’s (SEC’s) domestic local currency sukuk for SR4bn and Dubai Investments Park’s (DIP’s) $300m sukuk. Both these issuances were oversubscribed, suggesting high demand for sukuk issuance.

Companies are also looking at diversifying their funding strategies. Rather than just relying on short-term bank lending, they are increasingly considering the capital markets to get longer-term financing.

“Sukuk might be more expensive than short-term funding, it makes more sense strategically,” says Stuart Anderson, managing director and Middle East head, remarking on the changing priorities of chief financial officers in the region.