Regulators aim to overhaul sukuk

New standards urged for sukuk investment to make them more transparent

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 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. 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 Malaysiabased Islamic Financial Services Board (IFSB) drafted its own guidelines for disclosure related to Islamic capital market products, mainly focusing on sukuk.

Conventional debt issuance nearly doubled in the Gulf Arab region during 2016, reaching over $140 billion (Dh514 billion), but sukuk issuance dropped by 6 per cent 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 advisers realise that the lack of volume is due to the complexity of the process,” said Mohammad Damak, global head of Islamic Finance at S&P.