LONDON, 19 February 2007 — If 2006 was a watershed year for the growth of the Sukuk (Islamic trust certificates) market, then 2007 promises to be an even bigger bumper year. All the signs suggest that the global debt markets are taking the Sukuk seriously as an alternative financing instrument to raise funding or to refinance existing more expensive debt.

Three imminent developments underline the dramatic growth of Sukuk. Japanese government, for one, as reports said, is preparing to launch a debut benchmark sovereign Sukuk. In the UK, the Treasury is in the process of drafting laws which will govern the tax treatment of Sukuk. Chancellor of Exchequer Gordon Brown will include enabling legislation for Sukuk in his finance bill in March 2007.

“Our intention,” confirmed Ed Balls, the Economic Secretary to the Treasury in January, “is to set out in the budget what a tax framework for Sukuk will look like and what the consequences would be for any London market. Detailed legislation will follow in the finance bill. Alongside this statement on Sukuk, HMRC (Her Majesty’s Revenue and Customs) will be publishing guidance on how Diminishing Musharaka products will be treated for capital gains (tax) and capital allowances. This will provide certainty of interpretation.”

At the same time, Indonesia is also preparing to launch its debut sovereign Sukuk; and reports from Istanbul suggest that Islamic bankers there are in talks with the Erdogan government to issue Islamic securities both as a benchmark and also for the country’s five participating (Islamic) banks to invest into manage reserves.

In Pakistan, a State Bank of Pakistan (central bank) official confirmed to Arab News that two utilities — the Heavy Engineering Shipping Company and the South Sui Gas Company — have mandated Dubai Islamic Bank (Pakistan) to lead arrange two Sukuk issuances totaling Rs4.2 billion. He expects more Pakistani corporates to access the Sukuk market during 2007.

All these developments follow a flurry of activities in the Sukuk market at year-end 2006 and into the New Year. In December 2006, Sanad Investment Company Limited, a Cayman Islands registered entity, launched the Sanad Sukuk Fund, which the promoters claim to be “the world’s first open-ended GCC-oriented Sukuk Fund”.

At least 75 percent of the fund’s assets would be invested in GCC originated Sukuk and other Islamic syndication transactions.

In December, Dubai’s premier real estate development company, Nakheel, mandated Barclays Capital and Dubai Islamic Bank to lead arrange a $3.52 billion pre-IPO equity-linked Sukuk, destined to become the world’s largest Sukuk exceeding the $3.5 billion Sukuk closed for PCFC (Dubai Ports) in January 2006 to partly finance the acquisition of British shipping giant, P&O.

“The Sukuk is another step forward for investors in Shariah-compliant issues toward being prospective participants in the enterprises they finance rather than mere creditors. The Sukuk market is growing rapidly and equity-linked features sit very well with the ethos of Islamic Finance,” stressed Denton Wilde Sapte, the City law firm acting for Nakheel.

In Abu Dhabi, the local Abu Dhabi Islamic bank announced in December 2006 a record $5 billion Sukuk issuance program — the largest such program to date. The issuances will be listed on the London Stock Exchange — the first Sukuk to be listed in London.

In January 2007, Saudi Arabia’s leading residential real estate developer, the Riyadh-based Dar Al-Arkan Real Estate Development Company, launched its debut 3-year $425 million Sukuk Al-Ijara. The issuance marked the first international Sukuk for a Saudi corporation, and was underwritten by the five joint lead managers — ABC Islamic Bank, Arab National Bank, Standard Bank (London branch), Unicorn Investment Bank, and WestLB (London branch). WestLB also confirmed that it is working on two further Sukuk mandates from GCC-based entities.

However, for sheer complexity of structures, the project financing for the RM950 million Mukah Coal-fired Power Station promoted by Sarawak Enterprise Corporation Berhad (SECB) in Malaysia takes the prize.

The financing for the project due for completion in November 2008 comprises the issuance of a RM665 million Senior Mudaraba Sukuk; a RM285 million Junior Mudaraba Sukuk; and a RM215 million Musharaka Sukuk complemented with a further Istisna facility.

The senior Sukuk has a tenor of 15 years and the junior Sukuk a tenor of 22 years — making the issuances the longest tenors to date. The lead arranger and primary subscriber to the Sukuk issuances is RHB Islamic Bank.

The Mukah Power Generation Sdn Berhad (MPG), the issuer of the above Sukuk, wholly-owned by SECB, will generate 270MW of electricity when completed. Construction is expected to take 35 months with the first 135MW unit completed in November 2008 and the second 135MW unit in April 2009.