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Sukuk issuance to reach pre-crisis level in 12 mths-expert

South East Asian issuance held up well, but Gulf slumped.

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January 11, 2011 2:30 by



Global issuance of Islamic bonds will take another year to reach pre-crisis levels as new markets in Europe and Asia have yet to make up for the slump in the Gulf, said Deloitte’s head of Islamic Finance on Tuesday.

Underwritten issuance of Islamic bonds, or sukuk, reached $14.3 billion last year, according to Thomson Reuters estimates, well below the $20-30 billion in annual issuance before the global financial crisis.

Malaysia, the industry’s biggest market, held up well in 2010 but issuance in the Gulf Arab region has been hurt by some sukuk defaults and investor confidence has yet to return.

“I think it’s going to be another year or so before (sukuk issuance) gets back to pre-crisis levels,” said Daud Vicary Abdullah, head of Islamic finance at advisory firm Deloitte.

He said that new markets will help a come back in sukuk issuance, as governments in Brazil, Australia, Western Europe and Central Asia are considering issuing sukuk to tap the Muslim wealth pool and nurture their own Islamic financial industries.

He said that American re-insurers are considering entering Islamic re-insurance business, or re-takaful, which would also increase demand for Islamic bonds.

The global financial crisis popped a Gulf real estate bubble in 2008, severely hitting regional investors and pushing the region’s business hub Dubai to the brink of default.

Investors are still holding back their funds as the full extent of the damage took long to surface due to a lack of strong and transparent regulations in the region.

“This market is always much more sensitive to economic ups and downs…there is still some ground to make up and people are sort of nervous about what they have seen in Dubai,” said Abdullah.

The Gulf saw a modest revival in sukuk issuances in the last quarter of 2010 but market experts fear it could be a fragile recovery with investors fearful of any more bad news.

Sukuk issuance has also been hurt by a debate about the compliance of some of its structures with Islamic law. Sukuk are structured around underlying assets, from which returns to bondholders are derived.

Estimates of sukuk issuance can vary significantly depending on the methodology applied.

Experts polled by Reuters in October estimated that sukuk issuance will likely be less than $25 billion as Gulf debt restructurings and state deficit constraints dampen borrowing.

(Reporting by Frederik Richter; Editing by Shaheen Pasha)



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