| March 23
March 23 Two top standard-setting bodies are
proposing new guidelines for Islamic bonds that could increase
investment in the instruments by making them more transparent
and easier to structure.
Last week the Accounting and Auditing Organisation for
Islamic Financial Institutions (AAOIFI) published draft
accounting standards for sukuk that aim to clarify how they
should be treated on balance sheets and the information which
issuers should disclose.
Bahrain-based AAOIFI, whose standards are followed in whole
or in part by Islamic financial institutions around the world,
said it had also formed a working group to overhaul its sharia
standards for sukuk. Sharia standards cover the instruments'
compliance with Islamic principles.
Late last year, the Malaysia-based Islamic Financial
Services Board (IFSB) drafted its own guidelines for disclosure
related to Islamic capital market products, mainly focusing on
The new standards could make sukuk more popular because both
issuers and investors have complained that the instruments,
which seek to replicate conventional bonds without the use of
interest payments, can be complex and time-consuming to design,
and difficult for investors to understand.
Aligning the market around common, specific standards, and
requiring all issuers to disclose the same information, could
help to resolve these problems.
Conventional debt issuance nearly doubled in the Gulf Arab
region during 2016, reaching over $140 billion, but sukuk
issuance dropped by 6 percent and stood below $20 billion for a
second year running, Standard & Poor's estimated.
"Muted issuance could push the market toward more
standardisation as issuers and advisors realise that the lack of
volume is due to the complexity of the process," said Mohamad
Damak, global head of Islamic Finance at S&P.
The proposed AAOIFI standards cover the accounting treatment
of sukuk by special purpose vehicles, which are often used in
Islamic bond transactions. The standards say when sukuk should
be classified as equity, quasi-equity or a liability.
This could help to resolve a longstanding source of
confusion among investors over whether sukuk are asset-backed,
giving them a share of the instrument's underlying assets, or
asset-based, in which they may only have limited recourse to
"These two terms are too similar and can even mislead
unfamiliar investors bewildered by sukuk jargon," said Khalid
Howladar, managing director at Dubai-based advisory firm
The IFSB draft covers disclosures on the risks involved in
certifying products as sharia-compliant, capital-boosting
structures, underlying assets, limitations on how sukuk can be
traded, and investors' rights in case of default or
The new IFSB standards would allow exemptions from certain
disclosure requirements for governments and multilateral bodies
issuing sukuk, though some in the industry are challenging that.
The General Council for Islamic Banks and Financial
Institutions, a lobby group, said such exemptions should be
avoided as they could complicate cross-border sukuk offers.
"Identification of assets for sovereign or multilateral
sukuk issuances is essential," the Manama-based group said in
written comments to the IFSB. The Islamic Development Bank and
the Malaysia-based International Islamic Liquidity Management
Corp are the main multilateral issuers of sukuk.
(Editing by Andrew Torchia and Gareth Jones)