IKBAL: Ijarah sukuk to remain popular with risk-averse investors

It is Bahrain-based Islamic investment bank Unicorn belief that 2009 will be characterised primarily by the increasing popularity of ijarah as a mode of financing in the sukuk market. At Unicorn, it has already been focusing on ijarah, primarily because of its actual and perceived stability among alternatives in the Islamic bond market, writes Ikbal Daredia is head of capital markets and institutional banking at Bahrain-based Islamic investment bank Unicorn.
In an article written for news agency Reuters, he said that the sukuk market was already showing indications of contraction in the period between 2007 and 2008 mainly due to global economic conditions.
According to the Islamic Finance Information Service, he writes, in 2007 total sukuk issuance stood at approximately US$46 billion but this contracted to $15 billion in 2008. Expectations in the market this year mark the total sukuk issuance to be less than $10 billion.
"This is not a huge surprise considering the massive turbulence every sector and market experienced last year, but what is surprising is the percentage of this total which was based on the ijarah mode of financing," he wrote.
At Unicorn,e Ikbal says they believe ijarah products will therefore continue to grow and we expect to see an even higher percentage of sukuk issuance based on it, adding that it could also be the case that the rise of ijarah sukuk is due to the debate surrounding the compliance of other forms of sukuk with shariah, or Islamic law.
"Governing directives on mudarabah and musharakah sukuk suggest that there could be technicalities involved in these structures implying that they are more akin to equity-like issuances and therefore there cannot be a par value assurance that the face value is paid back at maturity.
"In Unicorn's experience, we have found that the tendency of investors is to veer towards stability and longevity, and this is proving to be a welcome development for issuers given the climate in which we find ourselves.
"Although 2008 saw a contraction in the sukuk market, it is important to recognise the growing importance of ijarah based products, as this highlights the market's lower risk profile. Other riskier products will return to the market, but at the moment risk is something investors want to reduce," he wrote.