T here has been record trading of corporate Sukuk on the Malaysian market during 2005, but little trading in the Gulf, where Sukuk are usually held to maturity.

This reflects the shortage of Sukuk relative to the available liquidity, and the fact that Islamic banks have few options for their treasury management and longer term asset holdings. These factors are unlikely to change in 2006.

The lack of trading is also a consequence of most Sukuk being Ijarah based, with the returns moving in line with Libor and other benchmarks similar to those used for floating rate notes. If other alternative benchmarks were used, and more fixed rate Salam and Murabahah Sukuk introduced, which matured over longer periods, there would be greater possibilities for short-term capital gains and losses for those trading on the secondary market, especially for securities that have distant maturity dates. The possibility of such gains or losses would increase the incentive to trade.

In short, unless there is more innovation in Sukuk pricing, 2006 will be little different to 2005. The onus is with those developing and underwriting the Sukuk issues. Much can be learnt from the existing trading patterns in conventional bond markets.

PROFESSOR RODNEY WILSON

Director Durham University

T he volume of secondary market improved in 2005 but still remains low when compared to the levels of secondary debt (conventional) trading.

Despite the lack of trading volume there are a number of important trends developing which are creating the required environment to create and activate an Islamic secondary market.

Primary market volume is in the vicinity of US$10 billion, thus giving prospective investors a viable spectrum of instruments to invest into initially and then trade subsequently.

The number of primary market investors is widening, thus increasing the scope for a less supply-side conscious market. With increased holders of instruments, it is more probable that for a given party looking to liquidate its position, there is another party willing to acquire that position.

The number of corporate institutions looking to use the Sukuk as a means of raising finance is also increasing rapidly.

There is increased direct and indirect market participation by reputable conventional financial institutions and the prevailing trend is towards internationally clearable Sukuk.

Islamic market participants are becoming less geared towards a “hold to maturity” mentality as other attractive Sukuk investments come to market.

Certain organizations, such as Liquidity Management Centre (LMC), are engaging in secondary market development ventures or initiatives such as an online Sukuk marketplace, Sukuk Bloomberg page and a free Sukuk bid/offer display service on its website. The greater accessibility of such services increases the likelihood of higher levels of secondary market activity. In addition, LMC also posts buy and sell side trades that it has acted on in order to give the broader market a visibility of both volume and pricing.

It is almost certain that in 2006 secondary trading volumes will increase significantly on 2005. One could expect that by 2007 there will be well-established mechanisms though which market participants will interact.

DIMITRY BLASI

Liquidity Management Centre