Sukuk Issuance Fell Dramatically In 2008 But Long-Term Market Prospects Are Good, Says S&P

Press Release

PARIS, January 14, 2009--Despite a dramatic decline in volumes in 2008, the long-term perspectives for global sukuk issuance are still good, said Standard & Poor's Ratings Services in a report published today "Sukuk Market Declined Sharply In 2008, But Long-Term Prospects Remain Strong."

"The decline in sukuk issuance in 2008 was as a result of global market turmoil, drying up of liquidity, widening of credit spreads, and investors' wait-and-see attitude," said Standard & Poor's credit analyst Mohamed Damak. "Although difficult to measure, part of this decline could also have been due to comments about the Sharia compliance of some sukuk by the Accounting and Auditing Organization for Islamic Financial Institutions.

More than 45% of sukuk issued in 2008 were "ijara" (lease financing), most probably as a direct consequence of the debate about Sharia compliance among some scholars. The value of sukuk issued in 2008 dropped by more than 56% compared with 2007, to $14.9 billion. "We do not expect the market to start reviving before the second half of 2009 or early 2010," added Mr. Damak.

Long-term prospects for the sukuk market remain strong, however. Although volumes dropped dramatically in 2008, the sukuk market attracted about the same number of issuers. Conservative estimates of the pipeline of sukuk that have been talked about or announced are in excess of $45 billion.

Several factors support sustainable growth of this market, including increasing popularity of Sharia-compliant products and government openness to Islamic finance, massive investment and financing needs in the Gulf, and issuers' desire to tap investors from the Middle East and Muslim Asia. Issuers from more than 20 countries have expressed interest in issuing, or announced their intention to issue, sukuk, and we anticipate that several new sovereigns will enter the market.

To date, Standard & Poor's has rated 27 sukuk (or sukuk programs), the bulk of which are ijara or "musharaka" (venture capital financing). Credit spreads on sukuk have followed the same trend as for conventional bonds, with a sharp widening in the past 12 months. The average size of the sukuk issued last year declined significantly, partly due to the lower appetite of investors.

At the same time, the U.S. dollar lost is place as the currency of choice for sukuk, with only about 10% of issues raised in this currency. Standard & Poor's expects the sukuk market to continue being skewed toward issuances in local currencies, at least in the foreseeable future. Once global markets return to normal, dollar-denominated sukuk issuance will pick up again.

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Analyst contacts:
Mohamed Damak, Paris
Emmanuel Volland, Paris
Ritesh Maheshwari, Singapore