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The sukuk (Islamic bonds) market in the oil-rich Gulf and other countries is expected to exceed $100 billion this year to smash the record $85 billion achieved in 2011, Saudi Arabia’s largest bank said.

Despite an expected rise in the six-nation Gulf Cooperation Council (GCC), Malaysia is projected to remain the world’s dominant sukuk market this year, National Commercial Bank (NCB) said.

In contrast, the bond market in the GCC, which controls over 40 per cent of the world’s proven oil wealth, bounced down in the first quarter of 2012 after recording a sharp rise in the fourth quarter of 2011.

"Sukuk issuance this year appears on track for another all-time record with last year’s $85.4bn set to be comfortably exceeded even under the more cautious projects," NCB said in its 25-page study on GCC equity markets.

"In view of current trends it appears likely that aggregate issuance will clearly exceed $100bn this year. Market innovation looks set to continue."

The report noted that the Clean Energy Business Council of the Middle East and North Africa along with the Gulf Bond and Sukuk Association have launched a Green Sukuk Working Group with a view to better aligning the climate change and capital market development agendas in the region.

In Saudi Arabia, the largest Arab economy, sukuk issuance is expected to continue to grow markedly this year.Among the recurrent issuers, SABIC in December gained CMA approval for a sukuk issuance of up to USD5bn, it said.In the UAE, the second largest Arab economy, Abu Dhabi’s Al Hilal bank is issuing a $500mn sukuk this year, NCB said, noting that the unlisted bank is fully owned by the Abu Dhabi Investment Council.

State-run Qatar Petroleum is understood to be considering a corporate sukuk this year in a pioneering move by a regional national oil company, it said.This could potentially trigger issuance by other government-related entities, eg Industries Qatar, as a way of diversifying funding sources, it added.

"As much GCC sukuk issuance has rebounded impressively in recent months, Malaysia remains the undisputed leader in the sector, typically accounting for more than 70 per cent of the global total," the report said.

"This state of affairs has persisted in spite of the fact that, more generally, the GCC countries have generally established themselves as the second major global hub for Shariah-compliant financial solutions. Moreover, in purely GDP terms, Malaysia lags far behind the Gulf: just under $200mn as opposed to some $one trn for the Gulf countries taken together."

According to NCB, Malaysia’s population reached 28mn in 2011, whereas the GCC’s total is around 40mn. The discrepancy is particularly "striking" in view of the fact that the GCC economies are among the leading global spenders on infrastructure, which should in principle open important new opportunities for Shariah-compliant capital market development.

"Nonetheless, GCC sukuk issuance in 2011 totalled $19bn as opposed to $58.7bn in Malaysia. The corresponding figures in 1Q12 were around $30.7bn for Malaysia and nearly $ 8.6bn for the GCC."

Turning to bonds, the report said that after a bumper quarter closed an exceptionally volatile year in 2011, the first quarter of 2012 marked relative normalization for the GCC conventional bond markets with overall primary market activity roughly halving in value from 4Q11.

Its figures showed total issuance in Q1 reached $5.9bn and involved eight corporate issuers and a total of 14 different issues.This compares to aggregate issuance of $11.9bn in 4Q11 (issues with tenors in excess of a year) and $9.4bn a year earlier in 1Q11, the report showed."These figures were broadly consistent with the continued strength of emerging bond markets globally where overall issuance reached $464bn in the course of 2011 and $10bn in the first quarter of this year."

NCB said it expected growing refinancing requirements would likely to be a key driver of market activity during the year."In particular, regional banks are likely to remain active in the bond markets during the year," it said, adding that Commercial Bank of Qatar is meeting with investors having established a $5bn issuance programme in August.

A number of Omani banks have, similarly, indicated interest in tapping the bond markets while in Saudi Arabia, Kingdom Holding is planning a maiden bond issue. The company currently has bank loans of some SR1.5bn.Among the regional utilities, Dubai’s Dewa has ruled out a near-term bond issue, although the company has a Dh1.2bn syndication due this year, NCB said.

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