The only thing holding back S&P from jumping into the Islamic bond market is the fact that there is a decided lack of liquidity in the market. Also mentioned as an obstacle is the high default rate on Islamic bonds which we have covered here in the past several months…

S&P may consider launching index for Islamic bonds

Ratings agency Standard & Poor’s (S&P) could introduce an index for sukuk, or Islamic bonds, next year, although liquidity in the secondary market remained an obstacle, a senior executive said yesterday.

“The issue with sukuks has always been that they do not have a secondary market, there’s no trading, and you can’t really have an index unless you have a secondary market,” said Alka Banerjee, vice president of Global Equities within S&P’s Index Services group. “Maybe by next year we’ll be in a place to have a sukuk index.

Christopher O’Brien, vice president for global business development at S&P said in April the ratings agency had been approached by southeast Asian and Middle Eastern institutions.

Sukuk issuance received a double blow last year from the global liquidity freeze and a debate on the compliance of some of its structures with Islamic law, with issuance slumping more than 50% to $14.9bn, according to S&P.

“We know the sukuk market took a big hit during this crisis, and some sukuks have defaulted, which should not have happened, considering the way they are structured,” Banerjee said.

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