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 Sukuk.
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 those assets.
“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 Acreditus.
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 restructuring.
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.—Reuters
