Dubai aims to become a top global centre for Islamic bonds by introducing more detailed standards that ensure issuance and trading obey not only the letter but also the spirit of Islamic rules, a securities market official said.
The emirate hopes the new standards will reduce disputes between scholars, issuers and investors over what types of debt structures are permissible and attract more business to its market.
Mabid Ali Al-Jarhi, a member of the board overseeing Islamic business at Dubai Financial Market (DFM), said the rules would provide assurances for sukuk holders and traders.
"In this manner, Dubai and DFM will set the tone for financial instruments' standards all over the world," Jarhi said in an interview via email late last week.
Last month DFM, which runs Dubai's securities markets, published a draft of its proposals and gave the industry until February 28 to comment. DFM plans to hold a hearing in early March and then issue the final version of the standards later that month.
That schedule is lightning-fast compared with the slow pace of discussions on reform in most of the Islamic finance industry - a sign that Dubai sees a business opportunity in the strong growth of the global sukuk market.
New issues of sukuk, which under religious principles are structured to avoid the payment of interest, jumped to about US$121bn worldwide in 2012, according to Thomson Reuters data, from around US$85bn in 2011.Kuala Lumpur and London are major trading centres.
Early last month, Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum said he was launching a drive to develop the emirate's Islamic business sector.
Jarhi said other sukuk standards, such as those of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), were issued when the global market had not built up much experience.
Those standards focus largely on classifying various types of sukuk, rather than clarifying whether they conform to religious principles, he said.
For example, sukuk based on tawarruq would be automatically excluded from Dubai's new standard, he said. Tawarruq, in which one party buys an asset from a vendor with payment deferred and sells it to a third party for cash, has been criticised by some Islamic scholars because of its weak link to real economic activity.
Since Islam prohibits interest payments, sukuk investors earn their returns from real assets. Jarhi said Dubai's standards would insist that there was a "true sale" of these assets - a real transfer of title to them. This would prohibit practices such as securitising assets which could not be sold.
In these areas, Dubai is offering a solution to some of the thorny doctrinal disputes that have plagued the industry for the past few years.
For example a planned issue of up to US$2bn of sukuk by Goldman Sachs, announced in late 2011, stalled after a controversy over whether it obeyed Islamic principles.
Jarhi also said that in contrast to sukuk standards in other centres, Dubai's would contain comprehensive rules on what guarantees could be attached to sukuk.
This is a sensitive issue because Islamic principles say investors should bear risk related to assets on which sukuk are based. The draft Dubai standards say issuers or managers of a sukuk cannot guarantee its face value or a certain return on it.
Asked whether Dubai's standards could clash with others, such as those of AAOIFI, Jarhi predicted other regulatory centres would ultimately come into line with Dubai.
"No clash with other standards is expected, as previous experience indicates that older standards attempt to catch up after a period of time," he said.
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