The continuing volatility in bond and equity markets combined with the uncertainty surrounding the Eurozone has opened up the Islamic finance industry to a new segment of potential investors looking to diversify away from their traditional investments.
High net worth investors and their wealth advisers are primarily concerned in the current environment with wealth preservation, and many are looking to reduce their exposures to the Eurozone and to conventional financial institutions.
The Islamic finance industry currently stands at an estimated $1trn with Deutsche Bank forecasting that the Islamic market will almost double in size over the next four years to $1.8trn in assets. There are several drivers contributing to this growth; the sukuk (Islamic bond) market and the Takaful (Insurance) industry. We also expect to see the Islamic finance market continue to mature and expand on the back of increased awareness among investors of the benefits of Islamic finance. This increased awareness is particularly evident in the high net worth individual and advisor community, so Islamic wealth management will be a particular area to watch.
According to Zawya, the leading online business intelligence platform focusing on the Middle East & North Africa, there was a record number of sukuk issues in November 2011, totalling $8.86bn. 2011 was therefore a record year for the sukuk market with over $79.5bn issued in the first 11 months of the year.
2012 has had an equally strong start and is set to be another bumper year for a number of reasons. The first reason is the need to refinance the $7bn of existing issuance due to mature in 2012. Not all of this debt will require refinancing of course, as some will be repaid from available resources, but much will need to be rolled-over.
Over the course of the first half of 2012, sukuk have outperformed most conventional bonds and have become an increasingly attractive investment and fund raising tool for both conventional and Islamic institutions. According to market reports, the most recent sukuk issues by First Gulf Bank, Emirates Islamic Bank, Majid Al Futtaim, which totalled $1.4trn, were oversubscribed by at least four times, a strong indicator of the level of demand for sukuk currently.
Finally, many corporations are looking to take advantage of the investor demand for US Dollar Sukuk. In May 2012, Saudi Electricity Company issued a $500m five year sukuk and $1,250m 10 year sukuk. This is the first Saudi corporation to issue a US dollar denominated sukuk with a term in excess of five years. These corporations are finding sukuk an attractive alternative to conventional funds as the credit markets continue to tighten, increasing the need for businesses to diversify and expand their funding streams. Sukuk has therefore proven to be an effective source of funding for both conventional and Islamic institutions in recent years in particular.
It is also important to recognise how the sukuk market has recovered after the Dubai debt crisis in 2009. At the time there were concerns that many Sukuk would not be repaid. However recent events suggest otherwise and have further buoyed the market. One such issuance was Dar Al-Arkan, which recently announced that having sold land to Saudi Basic Industries Corp (SABC) for 742 million riyals it had sufficient resources to repay its sukuk in full. In June we also expect to see other sukuk mature and repay in full that had previously been trading significantly below par due to fears surrounding its ability to repay.
Due, in part to the performance of the Sukuk market, there has been increased interest in sukuk funds such as BLME’s High Yield Fund that contains approximately 90% Sukuk and US $ Income Fund, which is comprised of just over 50% sukuk.
The sukuk market is only half of the story when it comes to growth of the Islamic finance industry. The Takaful, or Islamic insurance, industry has seen unmatched growth in recent years and has expanded significantly, continuing to grow in the GCC as well as in new markets such as Egypt, Jordan and Lebanon.
Ernst and Young predicted that the takaful industry would reach $12bn by the end of 2011. This is in comparison to 2009 when Takaful contributions were $7bn. In this report they also forecast the global Takaful market to reach $25bn at the end of 2015. While arguably ambitious, the growth projections again serve to demonstrate the demand for Islamic products and moreover suggest that the Takaful industry will remain a powerful growth catalyst for the Islamic asset management over the next decade.
Nigel Denison is head of treasury and wealth management and Bank of London and the Middle East