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West turning to sukuk as debt markets dry up

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Points of Essence:
  • Western companies had found relief in Sukuk being an alternative funding as the credit crunch left many established financial institutions in tatters. However, it may not provide panacea to the plight of those companies as the market for Islamic bonds is declining with the value of issuances shrunk nearly 40 % year-on-year in the first eight months of 2008.

Western companies unable to secure debt from conventional lending sources are turning to Islamic bonds, or sukuk, for alternative funding, the secretary general of the Association of Southeast Asian Nations (ASEAN) said on Wednesday.

Surin Pitsuwan, former Thai foreign minister, was speaking at a summit held by eight ASEAN finance ministers in Dubai, who were discussing the economic outlook for Southeast Asian countries.

“I think foreign companies realise there are alternatives and they will explore more, and look at new initiatives at Islamic banks to draw more capital and resources to service their clients. This is certainly growing,” Pitsuan told Arabian Business on the sidelines of the conference.

However, the market for Islamic bonds has dropped off significantly this year, with the value of issuances falling almost 40 percent year-on-year in the first eight months of 2008.

Ratings agency Standard & Poor’s said in a report in September total issuances worldwide stood at about $14 billion in the year to Aug. 31, down from about $23 billion during the same period in 2007.

Analysts have attributed the slowdown to a combination of factors.

The global credit crunch has put a halt to lending from conventional banks, which also offer Islamic services. The Sukuk market is also reeling from a decree issued in February by a group of influential scholars.

The Bahrain based Accounting and Auditing Organisation for Islamic Financial Institutions has ruled that as much as 85 percent of sukuk failed to meet religious requirements.

Source: http://www.arabianbusiness.com

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Written by Suapi Shaffaii

October 10, 2008 at 11:37 am

Posted in General Issue

Tagged with ,

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