‘Sukuk market proved resilient in the face of the crisis’

JEDDAH: NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager, discussed the future of Islamic funds industry at the 7th World Islamic Funds Conference held recently in Bahrain under the theme “Global and Regional Economic Outlook: Assessing the Impact on the Performance of Islamic Funds.”

Addressing the conference, NCB Chief Economist Jarmo Kotilaine said: “Strong growth in Islamic banking continues apace,” noting that global Islamic banks’ assets have increased considerably from $145 billion in 2002 to $1,033 billion in 2010.

He added: “While the global economic crisis negatively impacted the Islamic banking sector after growing at double-digit pace for a number of years, resulting in Islamic banking assets slowing down to 9.8 percent in 2009, growth accelerated again to 26 percent in 2010 and the interest for Islamic finance continues to grow even in non-Islamic countries as reflected by the fact that there are over 300 Islamic financial institutions worldwide across 75 countries.”

Discussing sukuk, Kotilaine reported that the sukuk market proved resilient in the face of the crisis, stating that globally, funds raised through sukuk issues grew from $2.8 billion in 2001 to $53.2 billion in 2010 and even during the tumultuous period of 2008-2009 funds raised from sukuk increased significantly.

“Sukuk are also emerging as a new asset class for investors, since asset-backed/based instruments provide relative capital protection and predictable returns to investors, while In addition, a near-absence of long term financing tools and a growing importance of long term capital projects launched in the region have also increased the attractiveness of sukuk.

“After a brief setback in 2010, increasing private sector activity is driving the revival in the GCC sukuk market. Funds raised through sukuk in the GCC in 2011 reached 38 percent ($17 billion) of global issuance up to September 2011, compared to only 28 percent ($7.6 billion) and 22 percent ($6.1 billion) in 2009 and 2010 respectively. Corporate issuance of sukuk in 2011 accounted for around 87 percent ($14.6 billion) of total issuance compared to 77 percent ($4.6 billion) of total issue in 2010.”

According to NCB Capital, Islamic finance is gaining prominence in non-Islamic countries. In the UK, the government has set an objective to make London the hub for Islamic finance and there are plans to issue sovereign sukuk and amend tax laws on IF. France, Germany, Japan, Singapore and South Korea are other countries where the governments are taking active steps to promote Islamic banking and finance, while Hong Kong aims to become the Islamic finance gateway to China.

Looking at the prospects of global economic recovery, Kotilaine commented that economic slowdown in the US, inflationary shocks in Asia and sovereign debt in the EU all remain a core risk to the global recovery.

“After growing by a dismal 0.4 percent in Q1, the US economy grew by 1 percent in Q2, 2011 while the unemployment rate remained over 9 percent during this period. Also, the ratings downgrade by S&P hit the country’s credibility in the international markets. Furthermore, the IMF in its June 2011 report revised the US economic growth forecast downward to 2.2 percent from its previous projection of 2.4 percent for 2011. Over the long term, with US public debt close to 100 percent of GDP mark, substantial increase in the rate of fiscal tightening in coming years is more likely.

“Sovereign debt concerns along with faltering recovery clouds the EU economic outlook,” said Kotilaine. “Germany, the largest economy in the EU region slowed down during Q2 to only 0.1 percent QoQ largely due to a decline in household spending and higher imports. In France, economic activity stagnated with real output witnessing no growth during 2Q, while the Spanish economy contracted by 0.2 percent in the same period. Overall, lack of confidence in the Euro zone’s ability to effectively manage the sovereign debt concerns continues to hurt investor sentiments.”

Moving on to the subject of emerging economies, Kotilaine reported that although their growth rate is nearly twice the pace of their industrialized world counterparts, they are facing increasing inflationary pressure.

“While emerging market central banks continue to raise interest rates, inflation remains at elevated levels – the CPI interest rate in China was 6.2 percent in August while the WPI inflation in India continues to hover near the 10 percent mark. Money tightening along with sluggish recovery in the West will likely have a negative impact on the emerging markets’ economic growth.

“Even though the IMF revised its growth projection for the emerging economies to 6.6 percent from the earlier 6.5 percent for 2011, growth will likely slow down on account of emerging global pressure.”


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