Sukuk resurgence likely resilient to market stress

Regarding the thesis that “the outlook for [GCC investment banking] is broadly positive” as “the region's investment and project finance needs are growing enormously,” Global Finance notes this month (“Banking on Stability”) that “after M&A, fees from debt capital markets operations (DCM) constitute the largest portion of investment banking fees in the Middle East.”  The piece quotes Mohammed Ali Beyhum, executive general manager at Lebanon's Bank Med, who opines that the “Islamic bond, or sukuk, markets could hold great promise in 2011.”  Analysts in general have been calling for a sukuk ‘convergence' of sorts ever since Dubai's debt crisis, which some observers blame for unfairly calling into question the entire premise of Islamic financing structures.  “It is important to note that during 2010, the sukuk market lagged the conventional bond market, as the former was hit by the aftermath of Dubai's debt restructuring and the accompanying series of defaults on high-profile sukuk issuances,” Beyhum said.  And recent regional turmoil may have only added further fuel to market discrepancies as well as to upside resurgence: Markaz, a Kuwaiti asset management firm, reported earlier this month that yields on Dubai's Islamic bonds had dropped to a five-month low, leading a GCC sukuk rally, on speculation that UAE and Qatar would be spared from protests that toppled the governments of Egypt and Tunisia.  To that end, a recent New York Times article stated that while uncertainties “may have lowered appetite for sukuk introductions and made issuance more costly by raising premiums,” the long-term trend appears in tact.  Per Paul-Henri Pruvost, an analyst with S&P, while Malaysia accounted for nearly 80 percent of last year's issuances, activity in the Gulf [in Saudi Arabia, Qatar and UAE in particular] is destined to flourish given not only the region's “huge pipeline of [planned] government projects and infrastructure,” but also the need to “develop a more solid fund-raising market for Islamic banks and insurance companies . . . typically constrained in terms of the asset classes they can invest in.”  One U.S.-based law firm, in fact, projected that by next year already GCC-based Shariah-compliant financing will account for nearly one-third of the global market, up from 12.5% five years ago.  Said Pruvost: “These institutions in the Gulf and Asia are trying to make their balance sheets very liquid, so they are very hungry for this kind of instrument.”  Finally, it will be important for investors to weigh the long-term effects of recent measures taken by Qatar's Central Bank, which earlier this year banned Islamic banking in conventional institutions, and the possibility of related policies in surrounding countries.  At first blush, the move (designed purportedly to squash co-mingling of conventional and Islamic funds) would appear to greatly benefit a handful of domestic Islamic banks such as Qatar International Islamic Bank (QIIB), whose shareholders gave approval earlier this month for a sukuk issuance later this year.