Ratings agency Standard and Poor’s (S&P) could introduce an index for sukuk, or Islamic bonds, next year, although liquidity in the secondary market remained an obstacle, a senior executive said.

Investor demand for a measure of sukuk performance has been growing as interest in Sharia-compliant investment instruments increases globally, according to a report in our sister newspaper Gulf Daily News.

“The issue with sukuks has always been that they do not have a secondary market, there’s no trading, and you cannot really have an index unless you have a secondary
market,” said Alka Banerjee, vice-president of Global Equities within S&P’s Index Services group.

“Maybe by next year we’ll be in a place to have a sukuk index.”

Banerjee said S&P had received requests for a Sharia-compliant debt index product, but did not elaborate.

S&P vice-president for global business development Christopher O’Brien said the ratings agency had been approached by southeast Asian and Middle Eastern institutions.

Sukuk issuance received a double blow last year from the global liquidity freeze and a debate on the compliance of some of its structures with Islamic law, with issuance slumping more than 50 per cent to $14.9 billion, according to S&P.

“We know the sukuk market took a big hit during this crisis, and some sukuk have defaulted, which should not have happened, considering the way they are structured,”
Banerjee said.

A poll conducted last month said global sukuk issuance may exceed $20bn next year. An increase in issues in the Gulf region as well as investor appetite for Sharia-compliant debt is already becoming more apparent.

The government of Dubai last week placed nearly $2 billion in new five-year sukuk issues, a move which helped boost confidence in the emirate.

A $1 billion sukuk issue by Abu Dhabi’s Tourism, Development and Investment Company last month generated orders worth $6.5 billion and also started trading in the secondary market, highlighting demand.

“We’re in a wait and watch mode,” Banerjee said. Sharia indices made up 3 per cent of S&P’s index portfolio data business at the end of last year.