Sukuk structures set for shake-up

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Malim: Issuers need to enable more quasi-equity based sukuk offerings and move away from controversial structures.

Arrangers need innovative Shariah financing models.

The Islamic bond market is coming back to life following the credit crunch slowdown, but sukuk issuers need to ensure they follow Shariah principles, according to a senior figure at Badr Al Islami, the Islamic window of Mashreq.

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) caused concern when one of its scholars suggested in November last year that certain kinds of sukuk in common use were not Shariah compliant.

"The underlying structures in most of the sukuk, unless it is otherwise specified, carries a purchase undertaking from the issuer by virtue of which the sukuk principal amount is repaid by the issuer to the sukuk holder without exposing them to any loss of capital," said Moinuddin Malim, head of corporate and investment banking, Badr Al Islami.

"However, the recent aggressive structures which included variations of mudaraba, wakala and musharaka sukuk have caused a great concern with Shariah scholars as in these structures the investment manager or issuer cannot provide a purchase undertaking to buy back the sukuk at par value."

These are equity-driven modes of financing, making it difficult to determine a final valuation. Malim says that guidelines by AAOIFI to discourage using these structures with a clear purchase undertaking should help the industry improve standards of Shariah compliance.

He added: "With recent AAOIFI guidelines, issuers as well as arrangers will have to decide whether to continue using the conventional bond platform to offer sukuk, which technically is a certificate of investment, or perhaps start using both equity as well as bond platforms.

"Some bold issuers who are truly looking to explore Shariah-based financing will need to take this to heart and agree to have the right risk/reward parameter to enable more quasi-equity based offerings, rather than quasi-debt based, which currently exists."

The uncertainty over five GCC currencies' pegs to the dollar has also changed the approach of sukuk issuers.

"Some US$10 billion worth of sukuk were postponed between August 2007 and December 2007," said Malim. "Now these sukuk are coming back to the market, but in local currencies."

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