The plunge in issuance is attributed to lower financing needs for some countries and corporates in the MEASA region due to high commodity prices. However, more issuers are tapping the conventional markets where it is easier and quicker to get the funds. Sukuk instruments remain more complex and time-consuming for issuers than conventional bonds. Most Sukuk issuers are facing the challenge of implementing Standard 59 of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) without changing the credit characteristics of the transaction. With the adoption of Standard 59, the traditional Murabaha structure is no longer held to be Shariah-compliant by the Bahrainbased organisation and compliance became an obligation throughout the lifetime of the transaction. S&P Global said that the market for hybrid Sukuk that combine a commodity Murabaha with tangible assets almost froze in early 2021 when the standard came into force in the UAE. The risk of tangibility events is present for Sukuk issuers (mainly non-sovereigns) with limited tangible assets and low headroom. “The amount that can be raised through the issuance of Islamic bonds can be capped by the value of an obligor’s tangible assets,” Fitch Ratings said adding that a built-in cap on leverage could be negative for issuers with limited tangible assets, asset-light firms and highly indebted issuers—for whom it could restrict access to funding. While gaps remain, some standardisation has been achieved in language relating to tangibility events, delisting events, indemnity payments and partial-loss events. Standardisation is expected to make Sukuk issuance comparable with conventional instruments from a cost and effort perspective that it will gain prominence among both issuers and investors. AAOIFI and Malaysia’s Islamic Financial Service Board (IFSB), two institutions that have traditionally worked independently on their respective mandates in the past, signed an MoU in 2018 to create a level
ACCESSING BANK SERVICES DIGITALLY, ISSUING SUKUK ON A DIGITAL PLATFORM USING BLOCKCHAIN TECHNOLOGY AND ENHANCING CYBERSECURITY WILL BE THE THREE MAIN FACTORS TO HELP IMPROVE THE INDUSTRY’S RESILIENCE – S&P Global
playing field and foster harmonisation and standardisation of regulations. The UAE took the first step towards the standardisation of Islamic finance in May 2020 by launching the Higher Shariah Authority while Malaysia’s central bank, Bank Negara Malaysia, also started implementing a revised Shariah Governance Framework in 2021 to strengthen board oversight and the responsibilities of Shariah governance. Moody’s lauded UAE regulators saying the move is credit positive for Islamic finance institutions because it addresses the sector’s main impediment to growth—the complexity and diversity of legislative frameworks and practices across regions and geographies, which creates additional risks and uncertainty in case of litigation.
ESG alignment The majority of Islamic finance countries are exposed to climate transition risks, and several are developing or implementing transition strategies, including significant investment in clean energy. There has been an increase in the issuance of dedicated social Islamic finance instruments and green Sukuk as the industry realises and leverages its alignment with ESG values. “Islamic finance does not relate only to the use of proceeds, but Islamic products also have to be structured in a way that complies with Shariah. The global ESGlinked Sukuk market has flourished in recent years, and we expect growth to continue in the medium term,” said
Bashar Al-Natoor, Global Head of Islamic Finance at Fitch Ratings. The energy transition agenda across the MEASA region is expected to create opportunities to expand social Islamic finance instruments and green Sukuk products. However, adoption will likely remain slow due to additional complexity related to these instruments and a shortage of ESG-focused investors and issuers in key Islamic finance markets. Though not mutually exclusive, Shariahcompliant financial instruments offer a framework that embodies the social and ethical values of ESG investing— offering investors in the Middle East and Southeast Asia the opportunity to adopt more sustainable and conscious investment strategies while tapping into the potential value of impact investing. The Islamic finance sector continues to gain momentum with borrowers and investors globally, driven by an increasing understanding of the asset class and a strong alignment of Islamic Shariah core principles with ESG principles. Islamic finance has gained prominence over the last 50 years, but the industry remains a collection of local industries rather than a truly globalised one and there are no major changes in the distribution of Shariahcompliant financial products over the past decade. The lack of competitiveness for some Islamic finance products and Sukuk issuance-related complexities remain some of the major factors that are deterring the industry from moving more quickly into non-Muslim jurisdictions. mea-finance.com
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