Hawkamah/IIFM sukuk template

Speaking at a conference in Dubai, Nasser Saidi, the CEO of the Hawkamah Institute of Corporate Governance, said that they would issue a template for ijara sukuk (with the International Islamic Financial Market) this year. In contrast to my last post on the prospects for a GCC-wide Shari'ah council, I think this is a fantastic idea.

Ijara sukuk are based on selling an asset to an SPV and leasing it back with the SPV raising funds by issuing sukuk to fund the purchase price. They are the staple of the sukuk market today and are easily understandable to investors, even those without expertise in the workings of Islamic finance. They are usually designed to create an unsecured obligation of the issuer (the company, not the SPV). In situations where the issuer has conventional secured debt, it is often required to fit within the negative covenants on their secured debt (from what I am told; I am not a lawyer).

The importance of a template to the sukuk market is that it would dramatically lower the cost of issuing new sukuk when compared with the expensive process of re-creating relatively standardized documents for each sukuk issued. This matters because it puts an ijara sukuk on a level playing field with conventional debt from a cost perspective to the issuer and could attract new issuers who have avoided issuing sukuk because of the additional costs.

For the Islamic finance industry as a whole, this could have the beneficial effect of increasing the supply of new issuers, which provide more opportunities for sukuk funds to develop. It could also help the secondary market liquidity of sukuk through the increased supply because holders of sukuk would have more opportunities to replace sukuk they sell with new sukuk or other sukuk trading in the secondary market.

There will never be a full "plug and play" template because different issuers have different needs and their investors have different demands as well. There are also differences due to diverse legal and tax environments that sukuk issuers operate within. However, removing one major factor that adds cost (drafting new legal documents for the ijara part each time) should lower costs and have a beneficial impact on the sukuk market.