As liquidity returns to the Gulf and demand for sukuk increases with improving capital market conditions, regional players are actively looking for domestic investments to manage their liquidity.
"Bonds play a crucial role in creating a diversified capital market," said Moinuddin Malim, chief executive of Mashreq al Islami, adding that expanding the retail investor base was also key to diversification.
While 53 percent of global sukuk issuances in the first half were ringgit-denominated -- making Malaysia the largest issuer with a sophisticated local debt market -- in the Gulf, local currency issuances were far fewer. Qatar riyal issues accounted for just 8.3 percent of global issues, according to a report by Kuwait Finance House.
Local currencies, which are pegged to the dollar, are stable but dollar-denominated sukuk mainly target Western investors and governments in the region would be able to attract a domestic investor base.
"Domestic markets are key for stability," said Khalid Howladar, senior credit officer at Moodys.
"International markets can become disrupted due to non-local stress events. Having local investors and borrowers provide some buffer against such disruption."
MORE LOCAL-CURRENCY BONDS SEEN
There have been some moves on the part of Gulf governments to develop the domestic market.
Qatar issued 10 billion riyals ($2.75 billion) worth of eight-year conventional and Islamic bonds in June to help launch a local debt market, provide a new vehicle to pool excess liquidity in the banking sector and diversify its funding away from dollars.
Noor Islamic Bank's head of corporate banking Aamer Zaidi said most of the Islamic sukuk issues that the company is working on are dirham-denominated amid growing domestic interest and a tightening of the Eibor-Libor spread, which makes foreign-currency bonds less lucrative.
Demand for sukuk is steadily rising and over the next five years, borrowers and investors will have to decide the shape of the market. executives said.
"We are heading back to stable volumes now after the crisis when global credit markets seized," said Samad Sirohey, chief executive of Citi Islamic.
But a lack of standardization is one obstacle that is holding back the emergence of domestic sukuk, bankers said.
While Malaysia's standards are set by the central bank, the Gulf Islamic banks lack an authoritative centralised body to frame rules. Standardisation bodies do exist but adherence to their standards vary from country to country.
Due to the lack of proper regulations and lack of uniformity in standards, many borrowers find it easier to tap the syndicated facilities of banks, said Mashreq Al Islami's Malim.
"For a vibrant domestic market in sukuks, you not only need more domestic paper to come in but also standardization," he said.