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Islamic bond issuance set for long-term growth

Jonathan Kitchen | Photographer's Choice RF | Getty Images

Islamic bond issuance is set to continue its long-term growth trend, fueled by increasing investor appetite for Islamic banking assets, according to a report by ratings agency Moody's.

Despite an expected slowdown in Sukuk issuance in 2013 to $51 billion from $81 billion in 2012 due to fears over the U.S. Federal Reserve tapering its asset purchases, Moody's expects issuance to hit $61 billion in 2014.

Sukuk is a form of debt that complies with Islamic Shariah law, which forbids interest-bearing bonds. Instead, a Sukuk pays investors a share in the returns generated by an underlying asset, such as property.

"The strong growth and high likelihood of continued Sukuk issuances reflects the growing investor comfort with these instruments as well as the increasing funding needs of sovereigns, corporates and banks particularly in Islamic countries across the Gulf and Asia," Khalid Howladar, a Moody's senior credit officer and co-author of the study said in a press release.

(Read more: Dubai, Abu Dhabi exchanges could merge by year-end)

Sukuk issuance remains concentrated in Muslim populated countries. Malaysia is the biggest market accounting for about $168 billion, or two-thirds, of all Sukuk issued and it is mostly denominated in the ringgit.

But new countries are entering the Sukuk market in a bid to tap wealthy Islamic countries like the UAE and Saudi Arabia.

The U.K. announced it is to become the first non-Muslim country to issue an Islamic bond in October.

Islamic finance is growing 50 percent faster than traditional banking, according to Britain's Treasury, with global Islamic investments set to grow to £1.3 trillion by 2014, making the sector an attractive market to tap for debt capital.

"There is more cash in the Islamic finance market and it is cash that is looking to be invested, so it is a positive story going forward," Farmida Bi, head of Islamic finance in Europe at Norton Rose Fulbright, told CNBC in a phone interview.

Bi added that it "makes sense" to issue a Sukuk in order to access capital from wealthy Muslim countries such as the UAE and Saudi Arabia.

(Read more: Dubai stocks in steep decline but volatility seen short-lived)

The U.K.'s lead could open up other non-Muslim countries to the idea of issuing a Sukuk, according to Salman Ahmed, head of Islamic finance for the Middle East and Africa at Trowers and Hamlins.

"If the U.K. can issue a Sukuk it is a good indication in the market that this does not have to be issued by an Islamic country and it will open countries up to the idea that Islamic finance is much broader than just Muslim countries," he told CNBC in a phone interview.

But Moody's warns that the future Sukuk market is likely to be fragmented due to increased competition for a share of the global Islamic financial services business from financial centers such as London and Hong Kong.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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