The Islamic Bond Market Is Exploding

HSBC analyst Andre de Silva recently released a report discussing the rapidly expanding market for sukuk instruments, more commonly referred to as Islamic bonds. The global sukuk market has expanded by an average annual rate of 40 percent since 2000, and it has now reached a size of about $322 billion.

In the report, Silva provides an overview of the market, discusses some facts about Islamic bonds and answers some common questions about the instruments.

Shariah principles
Sukuk structures must comply with Shariah principles. While the rules can vary from region to region, there are three fundamental prohibitions: “riba” (interest), “maysir” (gambling or speculation) and “gharar” (unnecessary risk).

There are more than 14 types of sukuk structures, but Silva groups them into three main categories:
1. Project-based instruments used to finance a specific project
2. Asset-backed instruments that serve to transfer the benefits of assets to investors
3. Balance sheet-specific instruments that help fund multiple projects

Sukuk facts
The first sukuk-like instruments appeared in Turkey as far back as 1775. The largest global sukuk market is Malaysia, which accounts for about 56 percent of outstanding sukuk.

In 2009, Singapore became the first AAA-rated country to issue sovereign sukuk.

Despite its rise in popularity, Silva names several challenges that face the Islamic bond market, including a lack of global standardization, high issue cost and a lack of secondary market liquidity.

What kinds of Islamic bonds can investors buy?
Investors can purchase both government and corporate sukuk. In certain countries, such as Malaysia and Indonesia, government bonds dominate the market. However, in counties such as Saudi Arabia and the UAE, corporate bonds are more popular.