The Sukuk Revolution In Capital Markets Starts In The Gulf

01/02/2017 06:45 AST

There's a rumble in capital markets that is about to roar into view: the sukuk. Bolstered by the gradual opening of Gulf States to international investors, the interest-free Islamic bond pioneered almost two decades ago by Malaysia, is expected to carve up an ever-increasing slice of capital markets funding in 2017 and will push investment banks' fixed income teams to alter their business models.

What is a Sukuk?

A sukuk is a financial certificate used for debt origination, similar to a bond, but with unique characteristics and key differences: it is first and foremost designed to comply with Sharia law and principles; that is Islamic religious law that forbids the charging or payment of interest, or "Riba". In order to circumvent the prohibition of fixed interest gotten from bonds, sukuk represents ownership in a tangible, underlying asset. A sukuk investor, therefore, owns a share in an asset and receives a portion of the earning that said asset generates. Both sukuk instruments and bonds are, however, similar in that they can be traded on secondary markets and are rated by ranking institutions.

The issuers, principally sovereigns and corporations in the Middle East and Southeast Asia, use sukuk as a finance raising tool in addition to traditional asset classes, tapping into a wide array of investors with unique investing requirements, most of whom seek to diversify their holdings beyond traditional fixed income products.

Dubai, according to a report by Citi, is the largest issuer of sukuk with 23% of the market, closely followed by the trailblazer of the bond, Malaysia, with 21.4% of issuances. The other Gulf States occupy a much smaller space in the market; Qatar, Saudi Arabia and Kuwait have issued less than 10% of these instruments combined.

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