IslamicFinance.de

In the conventional finance space asset-backed financings have proved a successful method of funding social and civil infrastructure. However, in Islamic finance, asset-backed sukuk have not yet taken off. The majority of sukuk are more dependent on the creditworthiness of the sponsor, rather than the performance of the assets. The concept of securitisation of assets, limited in recourse solely by the performance of the assets underpinning them, has only enjoyed limited application in the Islamic finance space so far. For asset-backed sukuk to succeed, investors have to go beyond simply looking at the credit standing of government and quasi governmental entities and start looking at the actual cash flow and exposure to asset values.

The long anticipated UAE Federal Commercial Companies Law no. 2 of 2015 (the “New Companies Law”) was issued on 25 March 2015 and will be in force by 1 July 2015 to replace the existing UAE Federal Commercial Companies Law no. 8 of 1984 (the “Former Companies Law”). The New Companies Law implements a number of important changes to the existing positions under the Former Companies Law, and in some cases, clarifies a number of issues that existed under the Former Companies Law. Article 31 of the New Companies Law confirms the existing position that only a Private Joint Stock Company or a Public Joint Stock Company may issue bonds and sukuk.

While the sustained demand for sukuk is widely acknowledged, challenges relating to restrictive legal regimes, standardization and default mechanics could potentially impede its anticipated growth. Latham & Watkins partner Nomaan Raja discusses the challenges the developing global sukuk market faces. The majority of Shari’ah scholars agree that a guiding set of principles should be developed for future sukuk issuances. Increasing standardization stabilizes the market and safeguards investor confidence. The development of a mature market requires that sukuk investors understand their rights and remedies in default scenarios. The AAOIFI is seemingly encouraging a move towards asset-backed structures, in which the investors have actual recourse to the assets in the event of a default.

The credit crunch in the US and Europe, coupled with the ongoing Eurozone crisis, has resulted in more companies turning to the increasingly liquid sukuk market. Besides, countries in the Gulf Cooperation Council (GCC) are set to host world events in 2020 which is fuelling investment in infrastructure. Despite the plummeting oil price, GCC countries — such as the United Arab Emirates and Saudi Arabia — enjoyed strong economic growth in 2014, which led to an increase in the liquidity of local and regional banks. This considerable liquidity has enabled regional financial institutions to become important investors in the growing sukuk market. Global sukuk issuances will be driven by relatively limited levels of supply coupled with the continued level of liquidity within the overall Islamic investor base, in particular from Islamic banks.