A general view shows the Grand Hamad Street that hosts banks and financial institutions in Doha. Sukuk issuance in Qatar and other GCC countries have reached a “record high” this year, propelled by positive developments in the region’s economy and capital markets.

By Pratap John/Chief Business Reporter

 

Growth in Islamic finance will be propelled by the GCC region and Asia, which have large infrastructure development needs with finance in this sector becoming a “good fit” with Shariah principles, Standard & Poor’s has said in a report.

“The future of Islamic finance will be centered around the GCC and Asia, which are likely to fuel global economic growth for decades to come,” S&P said in its “Middle East outlook”.

Both regions face large infrastructure development needs, and in S&P’s view, finance in this sector is a good fit with Shariah principles, since infrastructure financing is asset-focused.

Furthermore, creating an investment culture in infrastructure assets within each region could boost cross-border sukuk trading, which, in turn, could help harmonise Islamic finance globally.

According to S&P, corporate and infrastructure issuers in the Gulf region may increasingly rely on sukuk, the Islamic equivalent of bonds, as a source of funding in forthcoming quarters.

Sukuk issuance in Qatar and other GCC (Gulf Co-operation Council) countries have reached a “record high” this year, propelled by positive developments in the region’s economy and capital markets.

Yields have fallen dramatically on both conventional and sukuk capital market issuance in the past year. This trend was supported by the GCC financial system’s sound liquidity, local investors’ strong appetite for debt, and accommodative monetary policies around the world.

As access to capital markets widened, several corporate issuers in the region were able to successfully refinance large amounts of debt falling due, notably by tapping the sukuk market.

“We also expect the project finance sector, including real estate and transport projects, to increasingly rely on sukuk issuance to fund transactions,” S&P said.

Overall, rising oil prices have led S&P’s economists to revise their GDP growth forecast for the GCC for 2012 to 5%, from 4% previously, and created a fertile environment for credit growth, particularly in the Gulf’s oil-exporting economies.

However, tough global economic conditions and continued political tension in the region following the Arab Spring should remain key challenges over the coming months.

Good levels of liquidity in the GCC financial system, local investors’ strong appetite for debt, and accommodative monetary policies resulting in negative real interest rates, are translating into rapidly falling bond and sukuk yields.

We anticipate the lower yield environment will encourage increasing capital market issuance in the coming quarters.

Sukuk issuance in the GCC has peaked so far in 2012 at more than $19bn following a lull in activity between 2009 and 2011.

“Not only has sukuk issuance in the first nine months of the year surpassed total issuance for full-year 2011, it also exceeded conventional bond issuance for the first time. This remains at odds with sukuk market developments globally, as sukuk still represent less than 1% of total debt issuance,” S&P said.

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