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DIFC offers 'how to' on Sukuk issuance.

The Dubai International Financial Centre Authority's DIFC Sukuk Guide is a comprehensive introduction to various Sukuk structures, and also includes legal and regulatory information on issuing Sukuk from DIFC and listing Sukuk on NASDAQ Dubai. The Guide is the result of a collaborative effort between Clifford Chance, DIFC, Dubai Financial Services Authority, NASDAQ Dubai and Amanie Islamic Finance Consultancy and Education. <p>The Guide reflects the key role that the DIFC aims to play in global Islamic finance. Not only is it home to the largest exchange for Sukuk by listed value, worth more than $16 billion, it provides an operating, listing and incorporating environment that is well-suited to structured Islamic, and non-Islamic, products. <p>"Promoting continued growth and development in the dynamic field of Islamic finance is a key priority for the DIFC and is the reason behind our continued efforts to enhance the legal, regulatory, operating, listing and human capital infrastructure within the DIFC to nurture this sector," said Abdullah Mohammed Al Awar, CEO of the DIFC Authority.<p>COMMON SUKUK STRUCTURES <p>The Guide provides information on the history and current status of Sukuk globally, an overview regarding the issuing and listing of Sukuk in or from the DIFC, and regulatory licensing in the district. Further, it offers detailed technical descriptions of eight common Sukuk structures:<p>Sukuk al-Ijarah

Sukuk al-Musharaka

Sukuk al-Mudaraba

Sukuk al-Salam

Sukuk al-Istisna'a

Sukuk al-Murabaha

Sukuk al-Istithmar

Sukuk al-Wakala

The most commonly used Sukuk structure (based on the volume of issuances during 2008) is the Sukuk al-Ijarah. The Guide says, "The popularity of this structure may be attributed to a number of different factors; some commentators have described it as the classical Sukuk structure from which all other Sukuk structures have developed, whilst others highlight its simplicity and its favour with Shari'ah scholars as the key contributing factors."<p>The Guide also points out that the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) Shari'a Standard No.17 (Investment Sukuk), broadly defines Sukuk as certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services, or in the ownership of the assets of particular projects or special investment activities. Sukuk can, therefore, be interposed on any underlying Shari'ah-compliant structure. In addition to the eight most common Sukuk structures, the Guide also summarises the following:<p>Sukuk al-Manfa'a

Sukuk al-Muzara'a

Sukuk al-Musaqa

Sukuk al-Mugharasa

Farhan Al Bastaki, Executive Director of Islamic Finance for the DIFC Authority, said, "With this Guide, we are providing market participants with a clear understanding of this important sector and the supportive environment for Sukuk at DIFC." <p>WHY ISSUE IN DUBAI? <p>In large part due to the DIFC, the United Arab Emirates is the GCC leader in terms of Sukuk issuance by value, with a total of $26.8 billion from 34 issuances between 2000 and 2008 compared with $4.5 billion from 89 issuances in Bahrain over the same period. The leading role of the DIFC and NASDAQ Dubai was recently highlighted when the International Finance Corporation issued a landmark $100 million Sukuk on NASDAQ Dubai and the Bahrain Stock Exchange, becoming the first non-Islamic financial institution to issue a Sukuk for term funding in the GCC.<p>One feature of the DIFC's infrastructure is the ability to establish special purpose companies (SPCs) in the district, enabling market participants to act as both the issuer and trustee in Sukuk transactions within the DIFC. <p>In the past year Clifford Chance has closed more than $42 billion worth of Islamic finance transactions around the world. Qudeer Latif, Partner and Global Head of Islamic Finance at Clifford Chance, said, "Our global perspective and diverse international experience particularly in Islamic Finance makes it clear that the DIFC is emerging as one of the most important global centres of Islamic finance, not only because of the attractive legal and regulatory environment, and the flexibility it offers issuers, but also the unrivalled access to the tremendous liquidity in the wider region, funnelled through its robust and rigorous operating environment."<p>THE FUTURE OF SUKUK <p>Reviewing the challenges for the future development of Sukuk, the report cites comments by Standard & Poor's that, in their view, the two principal reasons for the recent slowdown in the Sukuk market were the poor global market conditions (which were further exacerbated by the Lehman Brothers collapse) and the consequential drying up of liquidity, particularly in the GCC (a key hub for Sukuk issuances globally). Although at the time of the global credit crisis there was much speculation as to whether the Islamic financing system was immune from the crisis, the reality on the ground proved that any movements in the conventional markets would have an impact on the Islamic financial markets (albeit perhaps to a lesser extent). <p>The Guide goes on to say that, "As the market recovers from the global credit crunch, and structures are more strictly scrutinised than before by Shari'ah scholars, it is expected that Sukuk structures will continue to develop and evolve," adding that the focus forced on the Sukuk market by AAOIFI regarding the market value and the risk that must be taken by investors on the assets "appeared to encourage a movement towards 'asset-backed' structures as opposed to 'asset-based' structures. As the market develops, and in light of recent Sukuk defaults where concerns have been raised with respect to recourse to the underlying assets, a move towards Islamic securitisations similar to the recent Sukuk issuance in connection with a true sale securitisation by Abu Dhabi-based Sorouh Real Estate appears likely.<p>"These structures are likely to be more acceptable to Shari'ah scholars who regard the underlying assets and the risks taken by investors in those assets as a fundamental part of the underlying Shari'ah structures.<p>"When Sukuk first came to the market they were billed as more secure than conventional bonds because they were backed by real assets. However, recent defaults have left investors nervous as to whether they have a claim over the assets underlying the issuance or not. With the exception of Islamic securitisations, the majority of Sukuk in the market are 'asset-based' as opposed to 'asset-backed'. Assets are generally only placed in the underlying Sukuk structures primarily to facilitate Shari'ah requirements and to generate periodic coupon payments.<p>"Typically, Sukuk issuances are structured as corporate credit-risk instruments and in a default and redemption scenario the Sukuk holders would not have recourse to the assets themselves. Redemption is typically affected by the Sukuk holders exercising their rights against the originator under the purchase undertaking.<p>ECONOMIC REALITIES EXPOSED <p>"Essentially, whilst from a Shari'ah perspective Sukuk certificates represent an underlying ownership interest in an asset, the commercial and economic reality is that most Sukuk that are issued are unsecured and equivalent to conventional bonds (i.e. corporate credit-risk instruments). Although historically this had never been a concern, the global financial turbulence has resulted in a number of recent high-profile defaults by originators that have spawned a debate as to whether or not Sukuk holders have any recourse to the underlying assets. This will inevitably result in a better understanding by investors, bankers and lawyers of what would happen in the case of a default and therefore lead to further innovation and development of existing structures."<p>In conclusion, the Guide notes that notwithstanding the recent defaults, Shari'ah concerns and market conditions, a number of jurisdictions, including the UK, France and Japan, have introduced legislation or amended existing legislation to facilitate Islamic financing techniques with a view to promoting Sukuk domestically. The Guide specifically cites recent amendments to the Finance Act in the UK designed to alleviate Sukuk al-Ijara transactions of UK stamp duty land tax.

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Publication:Islamic Business & Finance
Date:Mar 9, 2010
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