The Gulf's once red-hot Islamic bond market is coming back to life after a nine-month lull as sellers look to benefit from talk of Gulf currency revaluation and rock-bottom interest rates, bankers said.

Still, with more of the bonds priced in local currencies - potentially limiting interest from foreign buyers - the pace may not be quite as feverish.

Islamic bonds, or sukuk, are highly sought by both Muslims - who are increasingly seeking investments that comply with their beliefs - and non-Muslim investors seeking exposure to booming Gulf Arab economies.

A global credit crunch triggered by defaults on US home sales last summer prompted several companies to scrap sukuk sales as borrowing became more expensive.

But firms cannot postpone borrowing indefinitely and some sense the time may now be right to look at sukuk again. Activity is on the rise with a slew of companies planning issues or completing new issues, including property developer Nakheel and air-conditioning firm National Central Cooling Company in the UAE as well as mammoth chemicals firm Saudi Basic Industries Corporation and Kuwaiti real estate firm Gulf Holding Company.

Ras al-Khaimah, part of the UAE federation, announced a sukuk programme on Sunday worth up to $2 billion, the first tranche of which is likely to be in dirhams.

"Local currency sukuk are coming back to life and I think that will continue because there's huge liquidity in the system and issuers really want to take advantage," said Jaafar Badwan, a managing director at Bahrain's Unicorn Investment Bank.

All but one of the new sales are in Gulf currencies, which investors hope will eventually be allowed to strengthen, increasing the value of future bond returns. Most sukuk were previously priced in US dollars.

Aside from the Kuwaiti dinar, Gulf Arab currencies are pegged to the falling dollar and, despite official statements to the contrary, there is constant speculation central banks may revalue to stave off soaring inflation in the region.

Forward rates on Monday indicated the UAE dirham could appreciate 4.6 percent in two years. A nearly six-fold rise in oil prices since 2002 has flooded the Gulf with cash that bankers are scrabbling to invest.

Global investors have been piling into assets denominated in Gulf currencies since last year, snapping up stocks and property, and the same appeal exists with Gulf currency bonds.

A key driver behind recent sukuk issuance has been falling benchmark interest rates in the region, which help keep spreads looking attractive.

Spreads on the HSBC-DIFX US dollar Gulf sukuk index were 66.1 basis points over the benchmark three-month London Interbank Offered Rate when the credit crunch first hit last June. By May, they had soared to 220.79 basis points, or about 1.55 per cent.

But a series of rate cuts by the US Federal Reserve in recent months has seen Gulf Arab states also slash rates to maintain their currency pegs.

Three-month interbank rates in the UAE and Saudi Arabia have fallen 346 basis points and 296 basis points, respectively, since September 17 - the day before the Fed first started slashing interest rates to ward off recession.

Since then, the Fed has cut its benchmark rate by 3.25 percentage points, driving down rates across the Gulf Arab region. The UAE's three-month interbank rate is now 1.93 per cent and Saudi Arabia's is 2.15 per cent.

"The rise in spreads has been offset by the fall in interest rates," said the head of Standard Chartered's Saadiq Islamic division, Afaq Khan.

"Spreads may have gone up 200 basis points but interest rates have gone down 200 basis points, so overall you're getting the money at the same price."

Islam bans interest, and sukuk are typically based on physical assets that pay a rent or dividend to bondholders. However, the returns are compared to benchmark interest rates.