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Talking about Sukuk.

Standard & Poor's recent report, Global Crisis Boosts Growth in Lively but Fragmented Sukuk Market raised a lot of questions about the industry. Islamic Business & Finance asked Mohieddine Kronfol, Chief Investment Officer of Fixed Income and Sukuk at Franklin Templeton Investments, for some answers

Does the Sukuk market's relatively small base (one per cent of global bond issues) make last year's growth seem more impressive than it really is?

I don't think so. The Sukuk market is young and growing faster than other segments of international finance which is a positive attribute for the industry. Also, part of the 64 per cent increase in issuance, are important transactions representing new markets and additional avenues for growth. For example, we can now confidently look to Turkey and Saudi Arabia to issue more in proportion to their economic weight.

Do you think GACA's Sukuk will pave the way for more sovereign issuances from KSA?

The GACA Sukuk is not a pure sovereign Sukuk and not such a landmark transaction, in our view. It is a Government-Related Entity with an explicit Government guarantee. Other government-related and government-owned entities have already tapped the domestic market and additional issuance is expected to increase and continue to tap abundant domestic liquidity. Our hope is that Saudi Arabia encourages international issuance as well as foreign investment in its local Sukuk market, similar to recent developments in their domestic equity markets.

What impact, if any, do you expect the Arab Spring to have on the Sukuk market next year?

We expect many of the new democracies and elected institutions to be more supportive of Islamic finance and work towards developing their domestic Islamic banking markets. Policy makers in Egypt, Libya, Tunisia and Morocco have recently expressed their intention to draft legislation for Islamic banks and issue Sukuk. By next year, Egypt, Tunisia and Morocco could theoretically issue debut Sukuk.

Do you think there will be a return to USD-denominated Sukuk, or is the trend for issuances in local currencies here to stay?

The trend of local currency issuance and, more broadly speaking, the development of domestic Sukuk and bond markets, are here to stay and a strategic initiative that regulators in the GCC have become acutely aware of. We expect USD issuance to remain substantial in the short and medium term, but a conscious move towards the currencies of Asian trade partners and the development of local currency markets is inevitable, in our view.

Do you think it is likely that a greater and more diverse volume of paper will become available? What factors might trigger this to happen?

There are three principal drivers for this. First, companies need to, and increasingly want to, diversify their sources of funding. Second, liquidity at Islamic financial institutions is substantial and there is an increasing demand for Sukuk. Third, government spending on infrastructure in the GCC and Southeast Asia is increasing and outpacing the ability of domestic banks to finance projects.

Mohieddine Kronfol is one of the founding members and member of the board of Algebra Capital, now known as Franklin Templeton Investments (ME) and has been with the firm since its inception in November 2006. Kronfol sits on the investment committees of all Franklin Templeton Investments (ME) Limited Funds and is a member of Franklin Templeton's Fixed Income Policy Committee, Global Asset Allocation Committee and Local Asset Management Team. Kronfol has 14 years of experience in financial services including a six-year track record in regional fixed income markets and founding roles in three start up businesses.

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Publication:Islamic Business & Finance
Article Type:Interview
Date:Feb 26, 2012
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