Sukuk is gaining momentum

The Islamic bond market broke another record last month with a $3.52 billion deal - yet most investors barely raised an eyebrow.

A multi-billion dollar sukuk issue, as Islamic bonds are known, no longer has the capacity to shock, illustrating the market's development from almost nothing five years ago to a significant financing tool today.

Under Islamic law, companies are allowed to make profits but using money to create more money through interest payments is not acceptable.

Indeed, when Dubai property developer Nakheel Group raised its record $3.52 billion, most analysts showed more interest in the large amount of the bond bought by European investors rather than the size of the deal.

The 40 per cent taken by Europeans, higher than the slice allocated to traditional buyers in the Middle East, was evidence of the sukuk becoming more than just a niche product for Muslims.

Arul Kandasamy, head of Islamic financing at Barclays Capital, believes sukuk will go from strength to strength as it is an ideal way of spreading risk away from the bilateral loans of the past, with many more investors able to take the strain should a deal go wrong.

He forecasts global sales to grow as much as 30 per cent to reach $22 billion in 2007, propelled by the booming, oil-driven economies of the Middle East.

However, with outstanding sukuk debt estimated at $45 billion by Moody's Investors Service, the ratings agency, the market is still tiny when compared with conventional bond issuance, which saw sales rise to $6,220 billion in 2006, according to Dealogic, the data provider.

Zafar Alam, head of private investor products at ABN Amro, said: "Sukuk is going to grow but it does need a secondary market [once an issue is priced, traders then buy and sell it in a secondary market place] to help it really take off, but eventually there will be one."

- Financial Times