The majority of sukuk in the international markets are asset-based, making them dependent on the creditworthiness of the sponsor, rather than the performance of the assets. The concept of securitisation of assets— limited in recourse solely by the performance of the assets underpinning them—has, to date, only enjoyed limited application in the Islamic finance space.

For asset-backed sukuk to succeed, investors have to go beyond simply looking at the credit standing of government and quasi-governmental entities (the sponsors) and start looking at the actual cash flow and exposure to asset values.

One of the most fundamental factors that could determine the popularity of asset-backed sukuk in the Middle East is liquidity. During times of high oil prices, governments have deposited surplus cash with banks who then lend at very competitive rates in the market. Since late 2014, however, low oil prices have prompted governments to withdraw deposits, appearing to lessen regional liquidity.

Markets have changed as liquidity has tightened. Domestic liquidity is still available in the region, but concentration limits and the duration of funding will be an issue for regional banks. This has opened an opportunity to identify a market segment where asset-backed sukuk may fill the need.

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