Are sukuk prospectuses too complex, other product needs in Islamic finance, possible Dubai sovereign sukuk

The head of the Islamic Financial Services Board, which is based in Malaysia, says that there should be greater investor protection in Dubai and other regional financial centers. Rifaat Abdel Karim, the IFSB's secretary general, pointed specifically to the uncertainty over the ability of investors to have recourse to the underlying asset citing the "200 pages of documents, which most investors don't [read]". While the complexity of sukuk and the dichotomy between asset-based and asset backed structures could provide some confusion, most sukuk prospectuses that I have read clearly delineate whether the investors have recourse on the underlying assets (versus being unsecured creditors in a default). It is incumbent, I believe, that investors use the information presented in the documentation to make an informed decision about whether the risk-reward relationship is acceptable. The head of Islamic finance at Simmons & Simmons, Muneer Khan, said in an interview quoted by Emirates Business 24/7 that the sukuk defaults were "not a Shariah issue" and that the investors had legal and financial advice sufficient to distinguished between secured and non-secured deals adding that "I think some of the claims have been a bit disingenuous".

There are other issues that have more bearing on whether sukuk will work out well in cases of default like the legal environment where the assets are located that are equally as important and less certain than the structure of the sukuk. If there are material misstatements in the prospectuses, that is a different matter, and greater investor protection for this possibility are definitely needed.

The IFSB held a seminar last week on sukuk market prospects in London, on which Mushtak Parker provides an interesting overview. Many of the issues I have raised (and others have as well) were covered in the seminar. CIMB-Principal Islamic Asset Managemenet Bhd recently said that the issuance of sukuk has failed to keep pace with industry growth. Other areas of Islamic finance like money markets and a more diversified asset base for Islamic financial products are needed according to a different article discussing the World Islamic Banking Forum Asia, which quoted the central bank heads of Bahrain and the UAE as well as Islamic financial industry practitioners. The heads of those two central banks called for greater reform within the Islamic finance industry including a "standard formula to calculate profit in an equitable and fair way at all Islamic Banks". At the same WIBC conference, the UAE central bank governor Sultan Bin Nasser Al Suwaidi said that the development of short-term liquidity management tools represent a "challenge". The UAE central bank is expected to finalize an Islamic CD product for Islamic banks in the next week.

Following a non-deal roadshow, Dubai may issue a 7-10 year sukuk in the next few months with "more generous pricing than a conventional bond" according to fund managers quoted by Arabian Business. If the issue were successfully brought to market, it would reflect a vote of confidence in Dubai despite the continued uncertainty about the final approval of the Dubai World restructuring plan. In addition to being a follow-on sukuk to Dubai's sukuk that was issued shortly before the Dubai World crisis began, it would be notable because there are few issues (much less sovereign sukuk) from the GCC longer than five years. One would hope this would lead to other longer-dated sukuk from the GCC and elsewhere if this sukuk issue succeeds.

Other News

• WealthBriefing has a good article on the lack of diversification options open to ultra-high net worth investors. If these products are not available for ultra-high net worth investors, it is no wonder that there is a lack of options for less wealthy Muslim investors.
  
• An article in Malaysian newspaper The Star touts the recent Malaysian sovereign sukuk. Maybank Islamic recently complained about the lack of scholars "who are well-versed in banking practices".
  
• Moody's estimates that Islamic finance will pass the $1 trillion mark this year. However, accurate statistics about the size of the Islamic finance industry are generally not available, so it is likely an educated guess.
  
• BNP Paribas is expanding its Islamic unit's staffing by 50%, with most of the growth occurring in Asia. The fund management arm of BNP Paribas said it favors sukuk from sovereign issuers in the GCC based on their debt ratings and the oil-generated wealth.
  
• CIMB Niaga, the Shari'ah-compliant subsidiary in Indonesia is planning to expand its lending.
  
• The National Bank of Kuwait's latest ijara fund was fully subscribed in a day.
  
• Ireland wants to capture EUR40 billion in Islamic finance business.
  
• Singapore wants to expand its existing strength as a financial center to expand its role in Islamic finance, although DBS shrank its Islamic unit in Singapore, which was reported to be based on a slow growth in the industry in the city-state. The deputy chairman of the Monetary Authority of Singapore, Lim Hng Kiang, spoke at the World Islamic Banking Conference, Asia Summit.
  
• Edcomm Banker's Academy, a training organization in banking has partnered with the Ethica Institute of Islamic Finance, which offers the Certified Islamic Finance Executive certification.