Sharia codification seen fuelling sukuk issuance

Islamic bond issuances in region surged 24% in first 9 months of 2017

The lack of standardisation in Islamic finance is a significant constraint on the industry’s growth, Fitch Ratings said, adding that it expects progress to be slow given the scale of the challenge.

“Greater harmonisation of Sharia codification within and between jurisdictions is often cited as a limiting factor,” Fitch said. “But we believe it is just one of five overlapping areas where greater standardisation and codification will be needed if Islamic finance is to gain wider acceptance among regional and international investors.”

In addition to Sharia codification, the ratings agency has called for greater harmonisation in product structure and documentation, supervisory and regulatory frameworks, law and dispute resolution, and financial and accounting reporting. In some cases, there is still little standardisation even at a local level, while in others, progress would be needed on a regional, or international, basis.

One of the often cited barriers to standardisation is the argument that it may limit innovation, However, Fitch does on subscribe to this view.

Limiting innovation

Malaysia is the most standardised market in the Islamic finance community and remains one of the most innovative. Standards in regulatory and legal areas, which aim to describe rights and obligations under all circumstances, would support consistency, strengthen supervision and enable the industry to move to the next phase of its development.

Fitch argues that standardisation would be particularly important for driving corporate sukuk issuance locally, regionally and internationally.

New sukuk issuances with a maturity of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan totalled $49.6 billion (Dh182.18 billion) in the first nine months of 2017.

This is 24 per cent more than the $40 billion issued in the whole of 2016, driven predominantly by increased sovereign issuance in the GCC.

Sukuk’s share of total issuance in these markets has also risen to 30 per cent this year, from 29 per cent in 2016.

While there is broad agreement on key Sharia principles, their interpretation and the process for assessing compliance can vary significantly.

Malaysia’s centralised Sharia supervisory board warrants that all sukuk are compliant with nationally accepted principles. GCC member states, on the other hand, leave the question of compliance to Sharia boards of individual financial institutions and sukuk stakeholders, which leaves the door open to divergence in Sharia rulings and interpretation.

“There has been progress recently in some GCC countries, most notably Bahrain’s creation of a central Sharia board, which supervises Islamic finance product development and provides guidance to the central bank. However, there is still limited clarity on these initiatives’ mandate and influence,” the ratings agency said.