20/01/2010

The market for sukuk, Islamic bonds, experienced phenomenal growth during its first years in existence.

At its inception in 2001 the market was worth less than $500 million (Dh1.83 billion) yet by 2007 the value of sukuk issued around the world was greater than $60bn.

Despite this, in 2008, the number of sukuk issued globally declined for the first time. Market commentators attribute this to a number of factors, including the global financial turbulence and resulting market conditions.

Additionally, the default by the Kuwaiti firm Investment Dar on a $100m sukuk and the headlines relating to Nakheel has possibly led to investor uncertainty regarding the treatment of sukuk in a default scenario.

In particular, recent events may have left investors nervous as to whether they have a claim over the assets underlying the issuance or not, and whether or not sukuk are more secure than conventional bonds because they are backed by tangible assets.

If there is a claim over the assets, investors could expect priority in realising their investment in a default scenario.

However, if this is not the case, investors would be unsecured creditors in the bankruptcy of a debtor.

This uncertainty may have arisen because a number of structural features are typically present in sukuk such that they are constructed on the foundations of tangible assets, for example, land, real estate or machinery and equipment.

For more on this:

http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100119/BUSINESS/701199958/1048

Debashis Dey & Stuart Ure - The National