S&P: Issuance of Islamic bonds to drop sharply in 2015

The Islamic sukuk or bond market is set to drop sharply this year after Malaysia's central bank, one of the largest global issuers, stopped doing so, Standard & Poor's said Tuesday.

"In the first half of 2015, the Central Bank of Malaysia's pullback saw total sukuk issuance drop by 42.5 percent compared with the same period a year earlier," said S&P Global Head of Islamic Finance Mohamed Damak.

The country's central bank alone issued $45 billion of sukuk in 2014 out of a total issuance of $116.4 billion, he said.

The drop in sukuk comes after years of double-digit growth in the Islamic sharia-compliant bonds.

S&P said in a report that part of the reason behind the bank's decision was that its sukuk were subscribed to by a broad array of investors, preventing them from reaching their intended end-users, primarily Malaysian Islamic banks.

As a result, the central bank decided to switch to other instruments restricted to banks, it said.

Accordingly, S&P revised its forecast for total sukuk issuance this year to about $50-60 billion from $100-115 billion, it said.

"Excluding this effect, the market performed relatively well despite the decline in oil prices," S&P said.

Kuala Lumpur and London have been the main centres for sukuk followed by the oil-rich Gulf states.

The global value of outstanding sukuk was $269.4 billion at the end of 2013.

Unlike conventional bonds, which give ownership of debt, sukuk are asset-based securities that give investors a share because Islamic sharia law prohibits interest-bearing debt.