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As sovereign issues grow, pricing and design stymie corporate sukuk

As sovereign issues grow, pricing and design stymie corporate sukuk

DUBAI: Sukuk issuance by governments around the world is expanding, helping to bring Islamic finance into the mainstream. But in one respect, the sovereign issues are proving a disappointment: they are not encouraging sukuk sales by companies.

Legal and product design issues as well as pricing — it can be considerably more expensive for companies to issue sukuk than conventional bonds — are deterring corporate activity.

Last year saw debut sukuk issues by the governments of Britain, Hong Kong, Luxembourg, Senegal and South Africa. Hong Kong tapped the market for a second time this week with a $1 billion deal.

Demand among international investors has been strong. Large pools of Islamic funds in the Gulf and southeast Asia are hungry for Shariah-compliant instruments. But expectations that the sovereigns would pave the way for companies to issue sukuk, by demonstrating the viability of Islamic bonds and by building a benchmark yield curve, have so far been dashed. Since the five debut sovereign sales, no company has issued sukuk in those five economies.

As a result, sovereign and quasi-sovereign issuers accounted for 85 per cent of the $113.9bn of sukuk deals done globally in 2014, and that proportion shows no sign of changing. Outside Malaysia, Saudi Arabia and the United Arab Emirates, corporate sukuk remain rare.

“In 2015 we will continue to see sukuk issuance, but in the context of the global capital markets I expect that it will remain a niche product for some time,” said Richard O’Callaghan, Islamic Finance partner at law firm Linklaters, which advised Britain and South Africa on their maiden sukuk deals.

Published in Dawn, May 31st, 2015

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