Unlock Editor’s Digest Lock for Free
FT editor Roula Khalaf will select your favorite stories in this weekly newsletter.
Issuance of Islamic ties could be deprived of a new and controversial set of proposals from religious clergy, credit rating agencies say.
The majority of Saudi Arabia and other Muslim states have announced the accounting and auditing authority (AAOIFI) of Islamic Financial Institutions, the industry’s leading standard setting body, regarding plans for Islamic bond issuers to transfer legal ownership. ) awaits the outcome of the consultations by investors of the assets that support them.
Aaoifi says the move is necessary to harmonize issuance in several jurisdictions and to more closely adhere to the Islamic principles of risk sharing in contracts. The bodies said at this month’s hearing that they would introduce measures known as Standard 62 this year, but the issuers are expected to be given between one and three years to implement them.
Analysts warn that the proposal represents a change in the earthquake that adds the enormous legal complexity of Islamic bonds known as Sukuks and increases transaction costs. They say this could put off investors and the issuance of Stymie, leading to different countries according to different standards.
“It will have an immediate impact,” said Rezabakir, former governor of Pakistan’s central bank and managing director of Sovereign Advisory Services at Alvarez & Marsal. “There is a risk of stratifying the market and delaying the (wideer) adoption of Sukuk.”
Some content could not be loaded. Please check your internet connection or browser settings.
The Sukuk avoids the ban on Muslims by joining in transactions with interest by placing the borrower’s assets in an independent trust and paying them to investors a pre-determined income rather than a fixed coupon. Provides.
According to S&P Global, the market for equipment such as these bonds is growing rapidly, with the issuance forecast forecast to reach $200 million this year. Foreign currency issuance has risen 24% over the past year as borrowers begin to tap US and European investors.
However, Aaoifi scholars are concerned that the current form of markets does not adhere to the spirit of Islamic financial law. Many clergy want to see something similar to stock investments where ownership of the underlying assets is transferred over the length of the contract.
Islamic law is open to interpretation and there is no set of rules agreed to. AAOIFI provides guidance based on the consensus views of 21 senior scholars in Islamic law and finance.
In 2008, at a critical moment for the industry, Aaoifi Chairman Sheikh Muhammad Taqi Usmani said that by not properly sharing risks between debtors and lenders, 85% of the key principles of markets are important principles of Islamic law. He said he had violated the This has led to the transition to more asset-backed securities.
Moody’s bond investors at rating agencies S&P Global and Moody say that the new structure will no longer mimic traditional bonds, and will be temporarily or permanently postponed due to Aaoifi’s proposal. The latter also states that if adopted in the proposed format, it could “significantly” attenuate the Sukuk publication in 2025. Fitch says further movement towards a quasi-equilibrium structure could negate the instrument.
“If Sukuk stops becoming bonds, we’ll lose investors,” said Mohamed Damak, Head of Islamic Finance at S&P Global.
Analysts also say rules that prevent foreigners from owning land and property in the Middle Eastern state could make it difficult to transfer ownership as part of debt issuance temporarily .
Saudi Arabia is currently the largest issuer of Sukuk and is seeking foreign investment to help fund Crown Prince Mohammed bin Salman’s ambitious Vision 2030 plan to modernize the kingdom. Islamic debt accounts for approximately 60% of total debt issuance, according to data provider Dealogic.
Several lawyers involved in building Islamic Sukuk contracts should apply the rules based on a loose interpretation of Islamic law, rather than splitting the market in accordance with Aoifi’s strict interpretation. He said he is hoping for this.
“If you interpret the rules in the strictest, black and white way, it will shrink the market, so it will become your own goal,” said Devasis Day, partner at the law firm White & Case.
Dey added that Standard 62 could lead to the creation of a variety of structures, including equipment such as covered bonds. This is an ultra-safe debt that investors can rely on both the issuing bank and the underlying assets. – Like the other instrument.
Despite the Aaoifi Standard 62 being laid out as guidance, religious scholars are wary of the various routes practitioners are adopting to bypass intended changes.
“Sukuk is no different from traditional bonds, and the market (needs) will return to trade rather than debt,” says Deutsche Bank’s Islamic finance director and founder of Cordoba Capital. Harris Irfan said. .
“There’s a painful transition period. Some sovereigns might say, ‘We’re not playing this new game.’ . . (However) there is no reason why institutional investors can’t participate,” Irfan added.
