New sales of Islamic bonds or sukuk, by Asian governments such as Indonesia are revitalising the market, ratings agency Moody’s said in a report published yesterday.

“Sovereign sukuk issuance has already brought significant vitality to the Asian market in 2009. In the medium term this could allow activity to fully rebound,” Moody’s said in its report titled “Islamic Finance: Asian sukuk market faces new but also familiar challenges.”

Last week, the government of Indonesia issued its first international dollar sukuk, raising US$650 million (Dh2.3bn). The bond was seven times oversubscribed. In compliance with Shariah, sukuk pay investors in form of asset returns instead of interest. The strong demand for the Indonesian sukuk by Gulf-based institutional investors shows that regional appetite is returning, experts say. It also highlights the absence of good quality paper in Islamic credit markets.

“Once capital markets stabilise on a global scale and there is renewed appetite for emerging markets, it will reinvigorate the regional sukuk market. But we also need issues from sovereigns such as Abu Dhabi and Qatar,” said Haroon Ahmad, head of business development at EIS Securities, an asset manager.

The credit crunch hit Islamic bond sales last year as the falling price of oil curbed demand from buyers in the oil-rich Middle East. Following rapid growth in 2006, and 2007, sukuk issuance more than halved to around $14bn in 2008 as investors retreated from emerging markets and returned to safe havens such as US Treasurys. When liquidity dried up and credit spreads widened many sukuk were postponed.