Kuwait rules pave way for more sukuk

Kuwait Times - - FRONT PAGE -

LON­DON: New rules from the Cap­i­tal Mar­ket Author­ity of Kuwait (CMA) could rein­vig­o­rate the coun­try’s stalled sukuk mar­ket and open the door for is­suance by cor­po­ra­tions in 2016, Fitch Rat­ings says. But it is un­cer­tain how the rules will be re­ceived by is­suers and in­vestors and how ef­fec­tive the im­ple­men­ta­tion will be. The lack of a spe­cial­ized le­gal frame­work for sukuk has been a key fac­tor in the lim­ited is­suance in Kuwait over the past few years and the new rules could there­fore be a sig­nif­i­cant step. They pro­vide a broad frame­work, set­ting out gen­eral terms and struc­ture of sukuk, re­quire­ments for ap­point­ing trus­tees and set­ting up spe­cial pur­pose ve­hi­cles as well as rules on gov­er­nance and en­sur­ing sharia com­pli­ance.

There are re­quire­ments for a credit rat­ing for pub­lic is­suance and the need for ap­proval by the CMA and the Cen­tral Bank of Kuwait. The rules also cover per­pet­ual sukuk is­suances and up­date Kuwait’s regime for tra­di­tional bond is­suance. As well as the lack of a reg­u­la­tory regime, cor­po­rate sukuk is­suance has also been lim­ited due to the sec­tor’s heavy reliance on bank lend­ing, helped by strong liq­uid­ity.

This re­sulted in the al­most com­plete ab­sence of cor­po­rate sukuk is­suance in 2014 and 3Q15. The re­cent de­cline in oil prices has pushed a few of the Gulf Co­op­er­a­tion Coun­cil mem­ber states to is­sue or con­sider do­mes­tic is­suance of sov­er­eign debt in 2015.

Much of this debt is likely to be long term and would be bought by the coun­try’s banks. This could con­sume some of the liq­uid­ity that has helped to make bank lend­ing the pri­mary source of fund­ing for Kuwaiti cor­po­rates. Sov­er­eign debt is­suance could also help po­ten­tial cor­po­rate is­suers by cre­at­ing a pric­ing bench­mark. We be­lieve Kuwaiti cor­po­rates are more likely to is­sue sukuk than bonds be­cause there is a wider lo­cal and re­gional in­vestor base for sukuk and be­cause some cor­po­rates are re­stricted to sharia-com­pli­ant bor­row­ing by their own rules. Re­gional and in­ter­na­tional in­vestors are in­creas­ingly happy to in­vest in sukuk.

Cor­po­rate sukuk would add a much-needed sharia-com­pli­ant in­vest­ment in­stru­ment for the Is­lamic bank­ing sec­tor, which is not al­lowed to in­vest in tra­di­tional bonds. A re­cent mem­o­ran­dum of un­der­stand­ing be­tween the CMA and the Dubai Fi­nan­cial Ser­vices Author­ity (DFSA) is a step to­wards al­low­ing Kuwaiti fi­nan­cial in­sti­tu­tions into the Dubai In­ter­na­tional Fi­nan­cial Cen­tre, which is emerg­ing as an in­ter­na­tional hub for sukuk listing. This could even­tu­ally broaden the po­ten­tial in­vestor base for Kuwaiti sukuk by en­abling them to be listed in Dubai. Is­lamic fi­nance and bank­ing have been present in Kuwait since the 1970s with the first fully-fledged Is­lamic bank, Kuwait Fi­nance House (KFH), es­tab­lished in 1977.

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