Development in the Middle East, and the Gulf Cooperation Council countries in particular, is being fueled by the growth of Islamic finance.

Author: Darren Stubing

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The Islamic finance sector is set for further growth in 2015, with much of this expansion to take place in the Middle East—and the Gulf Cooperation Council (GCC) states are central players. The size of the Islamic finance market is now over $2 trillion, nearly all of it deriving from Islamic banking assets and the sukuk sector.

Growth in Islamic assets and activity in the Middle East over the past five years has come from both the retail and wholesale sectors, as households and companies are benefiting from new and innovative Islamic financing techniques. The first is for the purchase of homes and vehicles, the second to expand corporate growth.

Takaful services—Islamic insurance—continue to expand in the region, particularly in the large market of Saudi Arabia, with banks and insurance companies increasing their distribution channels. In the Middle East, the demand for shariah-compliant investment services is also growing, as both the breadth and sophistication of products increase.

The cost of sukuk financing is approaching that of conventional bond financing, but for many issuers the price is higher.  Borrowers using sukuk need assets to underlie the debt. In addition, there is the cost of structuring the securities, which involves legal counsel and often requires significant input. Shariah scholars must also be hired to analyze the structure. Unfamiliarity with complex sukuk structures can translate into higher advisory fees for prospective issuers, while investors demand higher yields because of limited trading activity in secondary markets. 

The Middle East, together with Malaysia, remains the epicenter of sukuk issuance. Sovereign and corporate funding needs continue to be serviced by Islamic finance, through both the banking industry and capital markets. GCC sovereigns and companies have been very active in sukuk issuance. Many large projects and economic developments are being supported by syndicated and bilateral Islamic financing, and this will continue to be the case in 2015. The Saudi-based Islamic Development Bank remains an important institution for financing and support. Infrastructure projects in the Middle East remain substantial and numerous, and the issuance of sukuk to fund these projects is growing. 

Sovereign sukuk issuance is widening, with many non-Islamic countries seeking to tap this funding avenue to increase liquidity sources. With new countries issuing sukuk, benchmarks are being created, contributing to a growing appetite for further issues. A number of sovereigns, including the UK, South Africa and Luxembourg issued sukuk in 2014, and blue chip institutions such as Goldman Sachs also tapped the market. Middle East institutions have been actively involved in managing, arranging and placing sukuk deals, and many have also invested in sukuk assets.

The average yield on 10-year Malaysian sovereign sukuk tends to be around 20-30 basis points higher compared to non-Islamic notes of the same maturity. By comparison, Goldman Sachs’ five-year notes wyield around 20 basis points more than similar maturity non-shariah compliant debt the firm issued.

The average gap between issuance costs for sukuk and conventional bonds in the GCC, however, is very small or nonexistent—and in some cases, it has proved to be cheaper to issue sukuk than conventional bonds. This is because sukuk have become mainstream in most Gulf countries, with demand from liquid institutional investors often exceeding supply.


Islamic banking assets in the GCC region now approach $600 billion and continue to grow at around 15% annually. The proportion of Islamic banking assets to all banking assets is above 50% in Saudi Arabia, 45% in Kuwait and 25% in Qatar.Islamic banking in the UAE and Bahrain  is experiencing strong growth. The percentage is rising sharply, although from a small base, as it currently stands at just 17% and 13%, respectively, of Islamic banking assets in those countries. The push to develop local currency bond and sukuk markets in the region will help to increase liquidity while lowering borrowing costs. Regulators in the area are designing rules to make it faster and cheaper for companies to issue Islamic and conventional bonds.

Moreover, more international banks are underwriting sukuk as markets become more familiar with this type of financing.  However, the large banks in the Gulf and wider Middle East region remain very important to the success of sukuk issuance. In Goldman’s case, its success was very much due to the involvement of banks such as Abu Dhabi Islamic Bank, National Bank of Abu Dhabi, Emirates NBD and National Commercial Bank.

The financing focus varies among the GCC nations. In Saudi Arabia the corporate and commercial sectors dominate, while in Kuwait the key focus is household financing, particularly real estate.