The adoption by the United Arab Emirates of certain sharia-compliance standards has slowed the issuance of Islamic bonds from the Gulf, adding to a chronic supply-demand imbalance, market sources said.
Dubai, one of the UAE’s seven emirates, has long aimed to establish itself as a major global centre for issuance of sukuk, or Islamic bonds, that constitute the backbone of the $2.2 trillion global Islamic finance industry. UAE investors are also key players in the global sukuk market.
But compliance standards adopted by UAE central bank body the Higher Sharia Authority, and confusion around them, are preventing local banks from buying some sukuk, prompting investors to request clearer rules as the UAE’s flow of new issuance ebbs, market sources said.
“The market is going through a teething period as it seeks clarity on how to find ways to comply with the regulations,” said Bashar Al Natoor, global head of Islamic finance at Fitch Ratings.
The Higher Sharia Authority (HSA) adopted the sharia standards of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the standard-setting body for the Islamic financial industry, in 2018.
However, issuance programmes created prior to that were exempt from the new rules, sources said, meaning the effect has taken some time to become apparent.
Investors also said disagreement among scholars at UAE institutions over whether Saudi Arabia’s National Commercial Bank’s AT1 sukuk issuance in January was AAOIFI-compliant, and thus adhered to HSA regulations, had rattled potential buyers.
A key issue is around AAOIFI requirements for certain debt instruments’ “tangibility ratio”, which relates to the assets that need to be used as collateral for sukuk to remain sharia-compliant until maturity.
“All this is causing a logjam in issuance and in my view is becoming an existential threat to the long-term viability of the market,” Abdul Kadir Hussain, head of fixed income asset management at Arqaam Capital, wrote in a note. “Standardisation remains an elusive dream,” he added.
Dollar sukuk issuance from the UAE so far this year totals just $1 billion, compared with $6.35 billion through all of 2020 and $7.9 billion in 2019, according to Refinitiv data. Despite expectations of an acceleration in global issuance in 2021.— Reuters