LONDON (Reuters) – The Arab Gulf’s fast-growing Islamic bond market is luring global investors less mindful of religious strictures than keen for exposure to the region’s currencies and equities.

Hedge funds and fixed income funds are among those emerging as significant global buyers of the Gulf’s Islamic bonds, or sukuk, which have been traditionally bought by Muslim investors seeking assets that adhere to Islamic or sharia law.

The bonds, which comply with Islam’s ban on interest payments and pay returns derived from physical assets, allow these investors to bypass foreign capital curbs in a region that is seeing its wealth further bolstered by high oil prices.

“These investors are agnostic about where they go. Sharia isn’t a concern for them,” said Doug Bitcon, senior trading and sales dealer at European Islamic Investment Bank (EIIB).

Investors from outside the Gulf now take up the majority of some issues, in marked contrast to their modest participation several years ago when sukuk was seen as a novelty.

In 2006, they took up 20 percent of a $3.5 billion (1.8 billion pound) sukuk for the Ports, Customs and Free Zone Corporation of Dubai.

And last year, such buyers took 80 percent of a $2.53 billion issue by Abu Dhabi’s Aldar Properties, according to Barclays Capital, arranger of both deals.

“Since the region’s wealth means that it does not need to issue external debt often, scarcity value enters into the picture,” said Sonya Dilova, an emerging markets analyst at UK-based investor F&C Asset Management.

Governments and companies in the six-member Gulf Cooperation Council (GCC) have been quick to capitalise on rising international interest.

Moody’s Investors Service said the Gulf surpassed Malaysia to sell a record $12 billion in sukuk last year despite the global credit crunch, up from $9 billion in 2006.

The weakening U.S. dollar, which is causing investors to spurn greenback-denominated assets in emerging markets, is also heightening the allure of Gulf-currency sukuk as speculators position for expected currency revaluations in the region.

Kuwait uncoupled its dinar from the U.S. dollar last May and pressure is growing on the remaining Gulf Arab states to follow suit and remove their peg to the greenback as the dollar weakens in the face of successive Federal Reserve interest rate cuts.

Removing the dollar peg will likely mean stronger currencies for Saudi Arabia, the United Arab Emirates, Oman, Bahrain and Qatar, and thus higher returns for holders of local-currency debt from these countries.

“It’s a one-way bet for investors that don’t want U.S. dollar exposure,” said EIIB’s Bitcon.

Bankers say the revaluation play is one reason behind the starkly different market reception given to Islamic bond issues by two Dubai state-owned borrowers in November.

A dollar-denominated $2.5 billion issue by state-owned Dubai Electricity and Water Authority (DEWA) floundered and was eventually cancelled while another, denominated in dirhams, by business park operator Jebel Ali Free Zone, succeeded.

Convertible sukuk, which like their conventional bond counterparts can be exchanged for shares, are also sought by investors seeking to navigate past the region’s foreign ownership limits for increased exposure in some of the world’s best-performing markets.

Many Gulf oil producer states have restrictions on investors from outside the region buying shares, with Saudi Arabia the least open, allowing foreign capital into its market only if the investors are based in one of the other five Gulf states.

“If you are a portfolio manager with a global remit, you cannot avoid an allocation to the Middle East,” said Dubai-based Arul Kandasamy, Barclays Capital’s head of Islamic Financing Solutions.

Not everyone, however, is convinced that Islamic bonds offer the best investment route into the region.

Rising inflation in Gulf countries means sukuk holders are at risk from higher interest rates in the region, argues Abdallah Guezour, a London-based fund manager at Schroders Investment Management.

“Bondholders are exposed to duration risk over the long run. Purely for currency exposure to the region, non-deliverable forwards would be a better option,” he said.