UAE reforms aid sukuk market


New rules governing sukuk offerings in the United Arab Emirates (UAE) could support market activity in tandem with other regulatory initiatives, although consistent adoption and implementation remains key to their success, according to Fitch Ratings Inc.

Earlier in the month, UAE’s Securities and Commodities Authority (SCA) had said that issuers of Islamic securities should improve disclosure, including in key areas such as potential disputes relating to Shariah compliance.

Issuers should specify how transaction resources and revenues would be treated if a security were deemed no longer compatible with the provisions of Shariah. Issuers should also specify whether the Islamic securities being issued are tradeable under Shariah rules, the international rating agency said in a statement.

Fitch said the SCA had set out basic provisions for the composition and responsibilities of Shariah boards. It also said issuers should outline how inconsistencies between International Accounting Standards and those of the Accounting and Auditing Organisation for Islamic Financial Institutions would be addressed.

“The SCA regulation provides a general framework for disclosure around these issues, not a detailed template. Moreover, including this information would not eliminate the potential for conflicts with investors, given the lack of legal precedent regarding how Shariah issues might affect UAE commercial court judgements in a distressed situation.

“This issue is likely to remain largely untested after Dana Gas PJSC reached an agreement with sukuk holders on its restructuring and refinancing offer (the company had last year started court proceedings to have its Mudarabah sukuk declared unlawful),” it said in a statement.

Nevertheless, Fitch said the regulation was one of a number of initiatives that, over time, could support the UAE’s sukuk market.

Quoting figures from the Dubai Islamic Economy Development Centre, the report said of the 72 sukuk listings worth US$59.2 billion (RM236.8 billion), 33 are for companies and governments outside the UAE. The local market, however, is less well developed, partly due to the absence of a domestic government debt market.

Along with the SCA announcement, the rating agency also noted that the inaugural meeting of the UAE’s Higher Shariah Authority (HSA) was held in the first quarter of 2018. The HSA is mandated to establish and oversee standards to help Shariah principles be more consistently applied across sukuk, banking activities and takaful in the UAE.

“This could increase standardisation and reduce transaction costs, although again, the ultimate impact will depend on the extent of the HSA’s involvement in the market, and its record in performing its role.

“It is not yet clear whether the HSA will become the sole authority on Shariah matters relating to Islamic finance in the UAE, with courts and arbitrators required to refer to it, as is the case with the Malaysian Shariah Advisory Council. The impact of HSA rulings on UAE banks may vary, depending on whether they increase or limit a specific bank’s product offering,” it said.

It noted that the HSA also has a remit to cooperate with Shariah standard-setters internationally, with standardisation remaining a significant challenge within and between major Islamic finance jurisdictions.

On the standardisation front, Fitch noted that in May, the International Monetary Fund endorsed a proposal on the use of the Core Principles for Islamic Finance Regulation, developed by the Islamic Financial Services Board with the participation of the Basel Committee on Banking Supervision. — TMR