The Islamic Financial Services Board (IFSB) has proposed a new standard covering the regulation of sharia-compliant capital market products, posing a challenge for regulators, issuers and intermediaries working on Islamic bonds, or sukuk.
The exposure draft from the IFSB, one of the main standard-setting bodies in Islamic finance, represents the most detailed effort to rein in claims of sharia non-compliance and clarify resolution of disputes in sukuk deals.
Such issues have gained prominence over the past year after a company in the United Arab Emirates stopped payments on a $700 million sukuk, arguing the transaction no longer complied with Islamic principles. That triggered a legal dispute in both the English and UAE courts.
The Malaysia-based IFSB has previously issued guidelines for disclosure of Islamic capital market products, but the new standard extends responsibilities to national regulators.
Sukuk should be subject to specific disclosure requirements to clarify all aspects of sharia compliance, including remedial processes, governing laws that guides disputes and courts where cases will be heard.
This is important for investors wishing to gauge the legal treatment of such contracts, specifically on how courts will handle sharia-related arguments, the IFSB said.
Issuers of sukuk and the financial intermediaries that market and distribute them should be required to disclose material changes affecting the sharia compliance of a product.
Regulators would also have to ensure cooperation arrangements with other jurisdictions to manage cross-border cases in which there may be differing interpretations of Islamic principles.
“In jurisdictions where courts are not bound to apply sharia in interpreting contracts, disclosure should state that courts would be expected to apply the relevant national law rather than sharia principles in interpreting the sukuk contracts,” the IFSB said.
The new standard stipulates that disclosures should extend to the sharia review process of sukuk, any rulings issued by scholars and clarify any deficiency or limitations in the underlying assets of the sukuk.
They should also provide sufficient clarity on the flow of funds and any mechanism for the transfer of assets at the time of issuance and at redemption.
The IFSB also issued an exposure draft covering Islamic insurance and a revised standard on disclosures for Islamic banks, setting a two month public consultation period.— Reuters