The bond issuances by Qatar and Abu Dhabi has sent a clear signal to the GCC sukuk market because rapidly changing market conditions and unprecedented events are playing a key part in reshaping Islamic debts, according to Moody’s.
“Given the long term local need and sizeable Muslim population in Europe, the Middle East, Africa and Asia, it is just a matter of time before growth resumes, although the recent conventional bond issuances from Qatar and Abu Dhabi is an ambiguous signs for the GCC sukuk markets,” Moody’s said in recent report.
The report said rapidly changing market conditions and unprecedented events were all playing a key part in reshaping the sukuk markets. However, at the moment, the sukuk market growth has stalled awaiting some stability in pricing and a return of investor confidence, the report entitled ‘The Future of Sukuk: Substance over Form’ said.
For the long term health and sustainability of the market, Moody’s said it believed that all parties need to be very clear about the ‘substance’ of the underlying sukuk risk to avoid the situation where some parties would be confused/distracted/misled by complex Islamic terminology or legal jargon.
Many of the current sukuk types adhere to AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) in form, but not in substance, it said.
The disparity between the ‘ideal’ and the ‘reality’ of sukuk was highlighted by AAOIFI in February 2008, when it published six principles regarding sukuk structures and initially noted that around 85% of existing sukuk were not in compliance with these principles.
“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,” Khalid Howladar, senior credit officer with Moody’s, said.
If the key features of cash flows, risk and return of certain sukuk are in substance the same as those of an interest-bearing conventional bond, then it may perhaps be best to make this clear to sukuk scholars and investors at inception, the report said.
“One result of such transparency may be that the sukuk market does not grow as fast before, another is that the asset-backed market may take a greater shape of future volume,” it said
