Islamic loans from Europe, the Middle East and Africa dropped to a five-year low with banks reluctant to lend amid concerns Europe's budget crisis will roil markets as Arabian Gulf borrowers restructure debts. Shariah-compliant syndicated financing in the region fell 21 percent to $2.96 billion in 2011 from a year earlier, the least since 2006, while total lending jumped 22 percent to $619 billion, according to data compiled by Bloomberg. Sales of Shariah-compliant bonds, which pay returns based on assets, more than doubled this year even as Islamic loans fell. Global issuance climbed to $16.7 billion in 2011 from a year earlier, according to data compiled by Bloomberg on Islamic bonds. Offerings in the six-member GCC rose 51 percent to $3.7 billion, data revealed. However, global sales of Islamic bonds are forecast to rise nearly 60 percent this year to more than $22 billion as economic recoveries and high crude oil prices revive the market, a Reuters quarterly poll said earlier. An upswing in corporate spending, an increase in issuers seeking to diversify their sources of funding and improving investor sentiment in the Gulf are also expected to fuel fund-raising activities, according to the 15 respondents. However, some experts have said global issuance of Islamic bonds would take another year to fully recover, with new markets in Europe and Asia yet to offset the fall in Gulf issuance. Yet "obstacles are pricing and liquidity versus conventional bond issuance (and) potential tax implications for the Western countries surrounding assets in special purpose vehicles for structuring purposes," said Nida Raza, capital markets senior vice president at Unicorn Investment Bank. Sukuk issuance can be more costly than conventional bonds as they tend to involve the transfer of assets that attract tax. The bulk of sukuk in 2011 are expected to emerge from issuers in Malaysia and the Middle East, although some issuance could also come from the United States, Singapore and Indonesia. Banks, governments and companies in the infrastructure, real estate and energy businesses are expected to be the main issuers. Issuance fell 26 percent to $14 billion in 2010 in the aftermath of Dubai's debt restructuring and high-profile sukuk defaults. Issuance of Islamic bonds, or sukuk, all but dried up as the global financial crisis and then regional political upheaval sapped interest in the market. Recent sukuk issuances out of the Gulf from companies such as Sharjah Islamic Bank and HSBC Middle East were oversubscribed and raised some hope that Islamic bonds were poised for a revival. Average yields on global sukuk held at 3.39 percent last Wednesday, the lowest level since January 2005, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between average yields and the London interbank offered rate was little changed at 198 basis points. However, Noor Islamic Bank chief executive Hussain Al Qemzi was quoted as saying Wednesday that the sukuk market right now is not growing, but “I think it is shrinking a little bit in comparison to years before." He added that "I see three years before we see an upward trend in sukuk. We will see a stronger comeback afterwards."
