Global sukuk issuance, that saw a 55 per cent decline last year, surged by more than 40 per cent in the first 10 months of this year compared to the same period in 2008, Moody's Investors Service said in a report.

The ratings agency forecast the rise in issuance to touch 50 per cent this year.

Sovereigns and government-related entities have become the most common sukuk (Islamic bond) issuers while issuance by corporate entities has declined, said the report.

"This marks a clear turnaround compared to the declining trend witnessed in the second half of 2008, when the impact of the global credit crisis started to be felt in many regions, including the GCC and Asia-Pacific," said Faisal Hijazi, Business Development Manager for Rating Services and Islamic Finance at Moody's and author of the report. "We anticipate that full-year growth in global sukuk issuance will reach around 50 per cent this year, offsetting the 55 per cent decline seen in 2008."

Sukuk issuance started rising in the second quarter compared to the two previous quarters, in which most of the effects of the crisis had been felt, said Moody's.

The third quarter witnessed a genuine recovery in issuance, the first in nearly 12 months, especially since the collapse of Lehman Brothers and the critical statements by the Accounting and Auditing Organisation for Islamic Financial Institutions on the Shariah compliance of sukuk.

According to Moody's, corporate entities are less likely to be major issuers of new sukuk in the current economic scenario. In contrast, sovereigns and government-related issuers have now become the most common sukuk issuers as they face a need to launch a variety of funding programmes amid declining economic activity, fiscal deficits and lower commodity prices, it said.

"The lingering effects of the crisis and the gradual recovery in oil prices have resulted in fewer GCC governments recording a budget deficit, while several others boasted relative surpluses, for the first time in almost five years, driven by the governments' commitment to strategic sponsored projects, including infrastructure, education and tourism, mainly in Saudi Arabia, Qatar and Abu Dhabi. Moreover, the Dubai Government, through the department of finance, is issuing nearly $2 billion [Dh7.34bn] of sukuk, part of a $6.5bn funding programme. The recent surge in sovereign or government-backed issuance is a long-awaited development that should help create a more efficient and soundly based sukuk market," said the report. It should also help the market develop a more detailed yield curve, and hence a risk benchmark across several tenors and credit profiles.

"Surge in sukuk issuance by governments and government-related issuers is a necessary step towards creating a stronger sukuk market in the longer term, driving more corporate sukuk issuances that can be more transparently priced," said the report.

Negative sentiment in the global capital and credit markets led many sukuk investors liquidate their holdings and instead placing their cash in more defensive commodities and nearly risk-free cash accounts, said Moody's.

According to the HSBC/DIFC sukuk index, yields have declined by more than 50 per cent since December 2008, from over 14 per cent at the peak of the crisis earlier this year to less than six per cent at the end of October.

"Many sukuk price declines have been seen as a reaction to negative sentiment related to the global crisis, rather than company-specific developments affecting the issuer's credit or market profile. Many intermediaries and other asset management houses have seen value in either trading or launching sukuk funds for the more conservative and value investors, including pension, endowment, Takaful fund and other retail investors, which were until recently excluded from this asset class. Underperforming capital markets and weakened investor confidence in risky products have justified the value of such funds. In the first quarter of 2009, some of the earlier launched funds were producing returns in the range of 10 to 15 per cent," said the report.

Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.