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Lower oil prices help growth of sukuk market

Hassan Ali Mansoor

Although the world is faced with geo-political and geo-strategic challenges that are destabilizing markets and economies across the globe, to its credit, the U.A.E. banking sector continues its march towards growth.  One of the essential hedges or stabilizing pivots for the banking sector besides the across the sector positive reforms carried out by the UAE Central Bank are sukuks which are Islamic bonds.

Put simply, a sukuk is an Islamic financial certificate.  It shares similarities with the bond under Western financial systems.  However, unlike the bond, the Sukuk is in compliance with Islamic financial system which prohibits interest paying bond structures. The issuer of sukuk sells an investor or a group of investors certificate, which then allows the purchase an asset from the proceeds. The investor or group of investor then assumes partial ownership of that asset. The issuer of the sukuk in turn also covenants with the purchaser of the sukuk to but back the bond at a future date which is at par value.

The sukuk market has generally seen a decreased interest due to the increasing liquidity and credit crunch across the globe.  However, despite these challenges, UAE banks are continuing to foray down the road of issuing sukuks.  This has been helped, in part, by the lower oil prices.

Sukuk is part of the larger Islamic finance market in the UAE which, in itself, has shown exponential growth over the past few years.  Over the years, Sukuk, has garnered substantial interest among both Islamic and non-Islamic investor.

What makes sukuk of particular interest to the investors is the risk-return ration. Despite the positive growth of the sector, the area is largely untapped and can benefit from further growth.

What sets sukuk apart from other Islamic finance assets / products is that it is a growing fixed income asset class with an attractive risk-return profile. It is less volatile in nature i.e. not subject to fluctuations and gives attractive long-term yields and remains unaffected by the fluctuations in oil prices and other commodities. In other words, Sukuk could provide the much required stability that mitigates against the risk of an uncertain global economy.

It is pertinent to note that as reported in the media, large financial conglomerates such as JP Morgan included Sukuk in their Asian emerging market indices.  It should therefore come as no surprise that sukuk represents the future of the UAE banking sector.

At the same time, UAE banks should remain mindful of the fact that the economy is a two way road.  Whilst the UAE Central Bank has provided the stimulus for growth, there has to be a robust effort by banks to ensure sukuk develops further as a viable Islamic finance product. The pushers of the growth of this market will need to make sure that the sukuk product offered offers the best financial package to the investors.

The author is a senior professional with the banking industry.  Email: [email protected]


Also published on Medium.