More issuance, players needed for ‘secondary sukuk market’

July 2008:

HONG KONG: Sukuk issuance isn’t yet voluminous enough to kickstart active secondary market trading but even when it is, a wide variety of players need to participate to keep trading volume high, Islamic finance professionals have said.

Although primary issuance of Islamic bonds has soared over the last five years or so, secondary market activity has remained extremely low, meaning valuing outstanding paper is difficult and true benchmarks are virtually nonexistent.

“The size of the primary market has to get higher,” said Khalid Yousaf, vice president of investments and capital markets at Siraj Capital Ltd, an investment company.
Khalid was speaking, along with other experts, at the recent Fourth International Finance Forum in Hong Kong.

Around $70bn worth of international Islamic bonds is now outstanding. Many have said that when outstanding issuance reaches $100bn, there will be a critical mass that will make investors willing to relinquish paper knowing they will be able to pick up more later if they want. Others such as CIMB Islamic chief executive Badlisyah Abdul Ghani pointed to the need for market makers that would spur activity.

Even issuers of hefty international sukuk such as Nakheel and DP World have, in the past, spurned setting aside paper to allow for market making because their offerings were so heavily oversubscribed.

But getting players into the market who are willing to take a risk on either side of the market is key, several experts said.

And ultimately investment banks as well as insurers, pension funds and other funds need to become active participants, they added.

Meanwhile, they agreed that the UK could set a precedent for the rest of the market. The government there is looking to sell an Islamic gilt and a series of short-term paper which could become market benchmarks. Indications that the government will also set up a trading window for the paper would also be a positive step, said Siraj Capital’s Khalid. – Dow Jones Newswires.