kuk still have further to go to reach the asset-backed Shari'ah ideal
DIFC, May 06, 2009 -- In a new Special Report, Moody's Investors Service looks at the future direction of 'sukuk' or Islamic bonds, emphasising the need to focus on substance over form. Moody's examines these issues, relevant Islamic principles and structural features from an analytical perspective. The report focuses on credit risk but with reference to the Accounting Auditing Organisation for Islamic Financial Institutions (AAOIFI) recommendations made last year.
"As Sukuk issuers begin to face distress, it is important that investors focus on the substance and not the form of their risk, which is a concern in Islamic Finance" explains Khalid Howladar, Senior Credit Officer for Asset-Backed and Sukuk Finance at Moody's and author of the report. "Most Islamic market participants are aware that sukuk should grant the investor a share of an asset or business venture along with cash flows and risk commensurate to such ownership. While this is indeed the Shari'ah 'ideal', most current sukuk structures are designed to replicate conventional fixed income instruments." The assets in the structure are commonly there for Shari'ah compliance purposes only, and ultimately have no bearing on the risk or performance of the sukuk investments, particularly in a distress situation.
In the new report, entitled "The Future of Sukuk: Substance over Form?", Moody's considers the goals of the sukuk market and looks closely at the issue together with the AAOIFI recommendations. The rating agency also looks at recent events and securitisations in the Islamic sector.
The disparity between the 'substance' and the 'form' of sukuk was highlighted by AAOIFI when it published six recommendations in February 2008. However, Moody's believes -- as discussed in a recent Special Report on sukuk issuance volumes in 2008 -- that the decline in sukuk market volume has been due more to prevailing global credit market conditions than as a direct reaction to the AAOIFI statements.
In the rating agency's view, AAOIFI's s constituted a positive effort towards improving transparency and trying to bring the 'substance' of sukuk products closer to the tangible and risk-sharing principles on which there is indeed a broad consensus. "It is in the implementation of these principles that matters become complex for investors," Mr Howladar notes. A number of terms such as 'mudarabah', 'musharakah' and 'ijarah' are widely applied for all types of sukuk, but the actual legal structure and risk characteristics can vary significantly even within a single type. "Until there is some broad standardisation, investors will need to look at each structure individually to understand the risk/return profile irrespective of the type of sukuk structure used," says Mr Howladar.
Moody's Investors Service was voted "Best Islamic Rating Agency" -- that is, best rating agency for Islamic finance ratings -- by the readers of Islamic Finance News in the publication's annual 2008 Awards poll. The award recognises Moody's superior ratings coverage of Islamic financial institutions and Sukuk transactions during 2008.
-Ends- London Benedicte Pfister Managing Director Structured Finance Group Moody's Investors Service Ltd. JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 DIFC Khalid F. Howladar VP - Senior Credit Officer Structured Finance Group Moody's Middle East Ltd. Telephone: +971-44-01-9536 Copyright 2009, Moody's Investors Service, Inc. and/or its licensors and affiliates including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved.
© Press Release 2009 omar 1.1:zy
