Riyadh, Asharq Al-Awsat- The sukuk market is one of the sectors in the Islamic banking industry to be most affected by the global financial crisis. This crisis has resulted in a reversal of the 73 percent growth witnessed in 2007, and there have been losses of 65 percent in 2008 compared to the same figures in 2007.

This is due to a number of factors including; the state of panic that gripped the financial industry worldwide as a result of the global financial crisis and the resulting market troubles, the bankruptcy of a number of the world’s largest and most important finance houses which made it impossible to predict the limits and implications of the crisis. This fear and panic paralyzed the credit market as financial institutes desired to maintain their own [financial] liquidity in order to guard against any [economic] surprises.

This [economic] paralysis has spread to the sukuk market as nearly 80 percent of sukuk bonds worldwide are issued by international financial institutions. These institutes fear that the [financial] crisis will extend into the real economy and then transform the situation into a [global] recession. This will in turn affect [Islamic financial] products such as sukuk bonds as they rely upon income-producing assets, whether these assets are property or cash. In fact the majority of sukuk bonds are reliant upon real-estate assets, especially in Dubai, which was the main force behind the 20007 boom in the issuance of sukuk bonds. In that year alone Dubai issued almost 70 percent of the sukuk bonds issued in the entire Gulf region, this enabled the Gulf to surpass the number of sukuk bonds issued in Malaysia for the first time. In 2007 Malaysia issued sukuk worth $9.7 billion, whilst the Gulf issued sukuk amounting to $13.2 billion, this enabled the Gulf to gain a 55 percent share of the global sukuk market. And so it is natural that any economic factors that negatively affect Dubai’s sukuk market will affect the international sukuk market, and that is what happened in reality [as a result of the global financial crisis].

Another factor affecting the sukuk marker that has nothing to do with the global financial crisis, and in fact took place before the emergence of this crisis, is the emerging doctrinal differences with regards to the [Islamic] legitimacy of the interest in sukuk bonds. Asharq Al-Awsat was the first newspaper to report these growing differences, and in a previous article entitled “The Doctrinal Differences Plaguing Sukuk” I warned that doctrinal disputes would be hazardous for the sukuk markets. Some credit rating agencies contradicted my opinion that doctrinal differences might affect the sukuk market, but these agencies later admitted that doctrinal differences were having an affect on the sukuk market.

Taking into account the decline in growth of the sukuk market as a result of the factors mentioned above, I believe that the Islamic sukuk market has a positive future, and that this market is preparing for an unprecedented boom for the following reasons;

– The [financial] liquidity in the Gulf region is characterized by a high acceptance of Islamic Shariaa-complaint investment, and 90 percent of customers prefer to use investment services that comply with Islamic Shariaa law, even if the [financial] returns are lower [than from conventional financial investment]. Therefore those seeking to make use of this [financial] liquidity should use financial products that comply with the provision of Islamic Shariaa law, the most important of these products is sukuk. And so we see many countries such as France, Britain, Singapore, and Hong Kong using sukuk bonds in order to take advantage of the [financial] liquidity that it offers.

– Many Gulf States are planning on carrying out several large infrastructure projects aimed at helping their economies weather the [financial] crisis, the most important of these states is Saudi Arabia. Due to the shortfall in these countries’ budgets as a result of the decline in oil prices, I expect that some of these countries will resort to issuing sukuk bonds in order to finance these projects. This would make it necessary to create appropriate legislation to govern the sukuk market and the companies that operate in this field. This step has been foreshadowed in Saudi Arabia, and the Governor of the Saudi Arabian Monetary Agency spoke on more than one occasion about the importance of sukuk bonds, the Capital Market Authority also attempts to facilitate the trading of sukuk via the stock exchange, paving the way for new players to step into the sukuk market.

– Many companies, especially in the Gulf region, use the sukuk market in lieu of direct financing from the bank in order to avoid the high cost of bank financing and the excessive terms and conditions imposed upon companies by the banks due to the global financial crisis. This bridges the price gap between sukuk bonds and direct financing compared to the situation in the past where complaints were made as a result of the high cost of using sukuk due to their complex financial structure.

– The decline of jurisprudential differences with regards to sukuk bonds after the Account and Auditing Organization for Islamic Financial Institutions [AAOIFI] issued a statement clarifying this dispute, and issued Shariaa regulations governing the issuance of sukuk bonds.

– The proliferation of Islamic financial institutions that wish to offer alternative and low-risk Islamic investment, such as integrated insurance companies, investment companies, and banks.

– The desire of many Gulf investors to invest in alternative and low-risk products such as sukuk bonds in order to avoid the high risks involved in investing in the stock market as a result of the financial crisis. This also takes into account the uncertainty in [investing] in the local real estate market, and the collapse of the international real estate market.

And so as a result of the above factors I believe that the sukuk market will have a bright future, and that we can name this era, the era of sukuk.