Gulf Arab Sukuk Dominance Fades as U.K. Leads Next Wave

As Islamic bond issuance heads for a record year, nations making up the six-member Gulf Cooperation Council are losing share to new borrowers such as the U.K., Hong Kong and South Africa.

Global sales of Shariah-compliant debt reached $36.7 billion in the first nine months, 31 percent higher than last year and more than in 2012, the previous record, according to data compiled by Bloomberg. GCC market share fell to about a third of total issuance in 2014, down from more than 50 percent a year earlier, the figures show.

With non-Muslim countries being lured by the growing Islamic investor base, new borrowers have issued at least $3.7 billion of sukuk in 2014, data on Bloomberg show. Global assets of Shariah-compliant financial institutions may double to $3.4 trillion by 2018 from last year, according to Ernst & Young LLP estimates.

“Given the GCC is a huge saver and the rest of the world tend to be massive debtors, you’d expect that international issuance would exceed domestic issuance handily, as international companies and governments try to attract this cash,” Emad Mostaque, a London-based strategist at Eclectic Strategy, said by e-mail yesterday. Eclectic offers analysis on emerging and frontier markets to both institutional and individual investors.

Luxembourg Debut

GCC sukuk issuance grew more than 50 percent faster than global sales in the decade through 2013, data compiled by Bloomberg show. The borrowing surge was led by predominantly Muslim nations, including Malaysia and those in the GCC. Newcomers including non-Islamic states will help drive sovereign sales to a record $30 billion this year, Moody’s Investors Service said last month.

Luxembourg raised 200 million euros ($252 million) of sukuk due 2019 this week at a profit rate of 0.436 percent. The U.K. sold the first sovereign issue from a non-Muslim nation when it issued 200 million pounds ($324 million) of the notes in June.

“Having more sukuk issuers means there’s more appetite and recognition of the asset class,” Dubai-based Michael Grifferty, president of the Gulf Bond & Sukuk Association, said by telephone Oct. 1. “So even though the Gulf accounts for less, it’s to the advantage of borrowers in the region that there’s a larger market.”

GCC borrowers raised $12.5 billion from sukuk in the first three quarters, compared with $15.4 billion a year earlier, according to data compiled by Bloomberg. More than $17 billion of international Islamic bonds were sold, versus about $11 billion in 2013.

“The indication for this quarter is that there will be additional borrowers from a variety of sectors,” Grifferty said. “We’ll end the year on a high note. Next year we’ll probably continue to see new issuers emerging in a solid pipeline of financial institutions.”

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