Sukuk are bonds that are structured to comply with Islamic principles and have strictures against interest. Rather than a fixed coupon, the instruments pay a "profit rate".
The average yield has also steadily declined, to a low of 3.58 per cent, according to the HSBC-Nasdaq Dubai sukuk index.
Malaysia has long dominated the market, followed by the United Arab Emirates.However, after years of disappointing activity, Saudi Arabia - the religious focal point for 1bn Muslims around the world - has heartened investors and bankers with a spate of large, well-received deals in 2012.
"It's a big vote of confidence in the sukuk market," says Mohammed Dawood, managing director of Islamic global markets at HSBC Amanah, the British bank's Islamic arm. "Saudi Arabia is the biggest economy in the Middle East and the fact that the government itself is now issuing sukuk is an important signal for other companies and the wider region."The largest deal was the domestic, government-guaranteed 10-year SR15bn ($4bn) sukuk sold by the General Authority of Civil Aviation to finance the expansion of the King Abdulaziz International Airport in Jeddah.
Crucially, given its government guarantee, the sukuk set a local benchmark against which other domestic issuers can price their own potential Islamic bonds. However, it was a $1.75bn debut international sukuk by Saudi Electricity Company that arguably caused the biggest stir. The company received orders of $18bn as investors piled into an international bond that many saw as another proxy for the government, which itself has no cause to borrow given its oil wealth.
While Middle East investors bought about 40 per cent of the SEC sukuk, bankers working on the deal said that there were plenty of "conventional" institutional investors as well. This brought total sukuk issuance from Saudi Arabia to $7.2bn this year, already surpassing the full year peak of $5.7bn in 2007, according to Dealogic.
Further issuance is widely expected, particularly from the banking sector. Banque Saudi Fransi, for example, has filed a prospectus for a $2bn Islamic bond programme in London that aims to raise longer-term funding than is available in the domestic market. The first instalment came in mid-May, when the Riyadh-based Islamic Bank sold a $750m, five-year sukuk, which attracted orders of $4bn and paid a "profit rate" of 2.95 per cent.
"The recent Saudi Arabian sukuk were important milestones for the global sukuk market," Mr Dawood says. "We expect a lot more in the coming year."
There has also been heartening news out of the UAE, where Dubai recently sold a two-part $1.25bn Islamic bond. Aside from affirming the emirate's rehabilitation, after its 2009 debt crisis, the larger $650m tranche had a 10-year tenure. This is a rare duration for the sukuk market outside Malaysia, where investors have typically preferred shorter-term bonds. The largest tranche in the recent SEC sukuk also had a 10-year maturity.
Yet in other areas innovation has taken a back-seat role to more standardisation. After some high-profile and debilitating clerical concerns over some structures, bankers are mainly focusing on three types - ijara, murabaha and mudaraba-wakala.
"The sukuk market is less bespoke and more standardised these days," Mr Dawood says. "We need continual refinements, but in a co-ordinated fashion, with the approval of all parties, scholars, regulators, investors and borrowers."
However, uncertainty about how the instruments would be treated in a restructuring continues to cloud the market.
The Islamic debt market is constrained by its requirement for real, tangible assets to underlie all transactions.
Although many banks have dabbled with structures that either are only "asset based" rather than "asset backed" - with some even backed by revenue streams from intangible assets - scholars generally frown on these.
This means, however, that many potential borrowers cannot tap the sukuk market as they do not have the physical assets required to place the structures, and that sukuk generally cannot be increased in size, no matter how large the order book.
"The requirement for tangible assets is still a big constraint for the market," says one senior banker. "It will still be some time before the sukuk market really hits its stride."