Secondary Markets in Islamic Finance 119
and Arabian Gulf countries, and corporate issues with their massive
infrastructure projects has led to their taking up nearly 80 per cent ofsukuk
issues. The record was set in 2006 of $9 billion issued, and by July 2007,
London had listed 15sukukraising nearly $10 billion. There are now four
Islamic banks operating in the UK, and 20 conventional ones also offer
Islamic finance services. France is somewhat trailing behind with only four
providers and none ofthem Islamic.
The growth is dramatic and as the Islamic mortgage or home finance
market in the UK alone has grown to £500 billion−more than a 50 per cent
increase over the previous year−and with the rest of the world, especially
the Islamic countries, driving the demand for Shari’a-compliant products,
critical mass will develop.
Demand is outstripping supply and few global investment banks or
investors can get sufficient exposure to the sukuk issues due to issuance
sizes and the demand from local Islamic institutionsfor Shari’a-compliant
products, as they need to park the massive liquidity being caused by the oil
price surge. Most issues are well oversubscribed, but there has been a lull in
issues after the controversy set off by the statement of a senior Shari’a
scholar who commented that a lot of thesukukwere non-compliant mainly
due to the purchase undertaking in some of thesukukstructures. Ahmed
Abbas, CEO of Liquidity Management Centre (LMC) inBahrain recently
had the following comments:
Illiquidity here is not your typical illiquidity as in the
conventional markets. If you look at the size of the marketvis-a`-
visassets, there are around $500 billion of Islamic assets and
currently only around $11 billion insukukin the Middle East.
When you say it is illiquid, normally it means you have stuff you
cannot dump or dispose of. But here, it means you want stuff and
you cannot locate it.
According to Moody’s, assets of banks in the United Arab Emirates (UAE)
are more than 144 per cent of gross domestic product (GDP) at $150 billion,
while in Bahrain, that ratio climbs to 908 per cent of GDP at $109 billion.
This can only mean that investors insukukare unlikely to trade on the
secondary market – cash is something they do not need.
Standardization and harmonization
Of course, another limiting factor in the global roll-out of Islamic finance is
the variance between the schools of Islamic jurisprudence and the lack of
standardization in the sector. One can appreciate themarket jurisdictional
issues and the tax regimes, but the need to have standard products and level
playing fields is paramount.
