Global issuance of sukuk (or Islamic bonds) has surged over 40 per cent in recent months in a marked turnaround from earlier in the global credit crisis, Moody's Investors Service notes in a new special report.

Amid current economic and capital market conditions, sukuk issuance is starting to become dominated by sovereigns and government-related entities, a development that Moody's believes will foster a more efficient and soundly based sukuk market.

The launch of sukuk funds and various legislative measures in certain countries should also deepen the market and add transparency and efficiency, the report said.

'Global sukuk issuance rose over 40 per cent in the first ten months of 2009 compared to the same period last year,' said Faisal Hijazi, Business Development Manager for Rating Services and Islamic Finance at Moody's and author of the report.

'This marks a clear turnaround compared to the declining trend witnessed in the second half of 2008, when the impact of the global credit crisis started to be felt in many regions, including the GCC and Asia Pacific,' he pointed out.

'Moody's anticipates that full-year growth in global sukuk issuance will reach around 50 per cent this year, offsetting the 55 per cent decline seen in 2008,' Hijazi added.

Given the sluggish economic conditions, new sukuk issuance by corporate entities has declined. In contrast, sovereigns and government-related entities have become the most common sukuk issuers as they face a need to launch a variety of funding programmes amid declining economic activity, fiscal deficits and lower commodity prices.

'The recent surge in sovereign or government-backed issuance - amid continued uncertainty over the timing and magnitude of the economic recovery - is a long-awaited development that should help create a more efficient and soundly based sukuk market.

It should also help the market develop a more detailed yield curve, and hence a risk benchmark across several tenors and credit profiles,' Hijazi explained.

In the longer term, the resulting stronger sukuk market should result in an increase in corporate sukuk issuances that can be more transparently priced, in Moody's view.

Much of the decline in sukuk prices over the past year has been a reaction to negative sentiment related to the global crisis, rather than issuer-specific developments.

Many intermediaries and other asset management houses have seen value in either trading or launching sukuk funds for the more conservative and value investors, including pension, endowment, Takaful fund and other retail investors, which were until recently excluded from this asset class.

The rating agency believes the gradual introduction of such funds will help create a secondary market for sukuk, whereby investors, including banks, can price their sukuk fairly, enhancing both liquidity and secondary market tradability.

'Over the past year, Moody's has received various requests to consider rating some of the recently launched sukuk funds. We are also currently exploring ways in which to share our sukuk analytical knowledge and global coverage with market participants, potentially through the launch of a sukuk market index,' Hijazi added.-TradeArabia News Service