New issuance of sukuk (bonds compliant with Islamic law) topped $9.3 billion in the first seven months of 2009 compared with $11.1 billion during the same period in 2008, said Standard & Poor's Ratings Services in a report published today, "The Sukuk Market Has Continued To Progress

 In 2009 Despite Some Roadblocks."

"The smaller amount of issuance was due not only to the still-challenging market conditions and drying up of liquidity, but also to the less-supportive economic environment in the Gulf Cooperation Council countries, particularly in the United Arab Emirates," said Standard & Poor's credit analyst Mohamed Damak. "The medium-term outlook for the sukuk market remains positive, though, in our view, given the strong pipeline--with sukuk announced or being talked about in the market estimated at about $50 billion--and efforts to resolve the major difficulties impeding sukuk market development."

Malaysia has taken the lead as the major country of issuance for sukuk, accounting for about 45% of sukuk issuances in the first seven months of 2009. Issuers in the Kingdom of Saudi Arabia have contributed another 22% of sukuk issued during the same period.

The default of a couple of sukuk was possibly partly responsible for the slowdown in issuance. The silver lining was that these defaults should provide the market with useful information on how sukuk will behave following default.

Major hurdles remain on the path to sukuk market development, however, including:

Difficult market conditions, which are slowing the planned issuance of numerous sukuk;The lack of standardization, notably when it comes to Sharia interpretation; and

The low liquidity of the sukuk market, which constrains investors trying to exit the market in times of turbulence or access the market looking for distressed sellers.

Global Arab Network