Islamic bonds (sukuk) have staged a massive comeback since 2011, after several gloomy years in which even Muslim bankers and religious scholars questioned their religious credentials and issuance of bonds dipped to dangerous market lows.
There have been $10.4bn of sukuk sales in 2012, the strongest start to a year on record, and more than twice the amount issued over the same period last year.
The figures are even more pronounced for the Persian Gulf region. Islamic bond sales in the Persian Gulf so far in 2012 are up to $7.9 billion from a mere $1.53 billion during the same period last year.
This rapid increase follows 2011 being a record-breaking year for sukuk sales worldwide.
A new report from the UK Islamic Finance Secretariat [UKIFS] indicates that Islamic finance assets worldwide continued a long run of growth to reach an estimated $1.3 trillion in 2011 â 150 per cent up over the previous five years.
The bonds, known as sukuks, are structured to comply with Muslim law, or sharia, and pay a profit rate rather than interest, which is banned in Islam. Doubts expressed by some religious scholars about the bonds, Dubai's debt crisis and the global financial crisis had combined to send issuance tumbling.
However, sukuk sales rebounded strongly in 2011, hitting a record $32.6bn, according to Dealogic. Issuance has continued at a robust pace this year as borrowers have sought to capitalise on the relative health of Islamic banks, which cannot invest in conventional debt instruments.
"We chose to issue a sukuk because of strong demand from Islamic regional accounts," says Daniele Vecchi, head of group treasury at Majid Al-Futtaim, a Dubai-based mall group that sold a debut $400m Islamic bond in February. "Pricing also compared well with conventional paper."
"I think that that trend is going to continue through this year as long as global market conditions are relatively stable," says Abdul Kadir Hussain, chief executive officer of Mashreq Capital, an investment bank and asset manager.
While the main buyers of sukuk remain in the Gulf and Malaysia, the spectrum of issuers has broadened in recent years. More fgirst-time issuers from new markets are expected in 2012.
South Africa and Nigeria have recently voiced interest in selling sukuk. Countries including Australia, Turkey and Hong Kong have announced plans to make their laws more conducive to domestic sukuk issuance, with National Australia Bank already considering an inaugural sale.
Perhaps the most significant new member of the "sukuk club" is Saudi Arabia. Although several Saudi companies have sold Islamic bonds, the oil-rich kingdom this year sold its first sovereign- guaranteed sukuk, a SR15bn ($4bn) offering to finance an airport expansion.
Despite the sukuk market's resurgence, many issues surrounding the instrument highlighted by the financial crisis remain unresolved - not least how the instruments are treated in a bankruptcy.
Dubai managed to avoid defaulting on one of its Islamic bonds in late 2009 thanks to aid from Abu Dhabi, but the legal uncertainties it brought to light remain. Indeed, the outcome of the restructuring of a prominent $650m sukuk in Saudi Arabia remains murky, several years after it went into default.
The global sukuk market also remains relatively narrow, despite the issuance from new companies and countries. The vast preponderance of issuance remains from Malaysia, despite Saudi Arabia's $4bn sukuk pushing the statistics slightly more towards the Gulf this year.
Moreover, there are still some industry insiders who worry that the constant evolution of the Islamic bond market means that it risks eroding its credibility with devout investors if it strays too far from its roots.
Muslim scolars who specialise in Islamic financial law have to give approval to all sukuk, but the industry's increasing size and the limited number of suitably qualified Islamic legal scholars means that they are overstretched.
A warning from one scholar in 2008 that some structures had diverged from Islamic principles contributed to the market's post-financial crisis slowdown. Goldman Sach's plans to sell a sukuk have also been clouded by uncertainty about some Islamic legal questions.
"There is a conflict between the demands of the market - both from the borrowers and lenders - and what sharia demands," says Khalid Howladar, a senior analyst at Moody's. 'There's always an issue that certain instruments evolve into something too similar to conventional bonds defeating the purpose of Islamic finance."
Robin Wigglesworth and Camilla Hall, "Islamic bonds stage comeback from crisis slump" " Financial Times March 28, 2012
Dana El Baltaji, "Saudi British Bank Raises $400 Million in Sukuk Placement" Bloomberg News March 28, 2012
"Islamic Finance Assets Continue To Grow" Bernews March 28, 2012
Reproduced with permission from Islam Today