UAE’s Sharia requirement for sukuk partially adopted but not tested, Fitch says

DUBAI, Sept 7 (Reuters) – Fitch Ratings said on Wednesday that the Shariah compliance standard for Islamic bonds adopted by the Central Bank of the United Arab Emirates (CBUAE) has been adopted “to some extent” by the wider market Its actual impact is “untested”.

Emirati investors are major players in the global sukuk market, and Dubai, one of the seven emirates in the UAE, has long sought to establish itself as a major global hub for sukuk or Islamic bond issuance.

Reuters reported last year that the central bank’s 2018 adoption of Shariah standards from the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) led to a slowdown in sukuk issuance.

Global sukuk issuance slowed in the first quarter of 2021 before returning to normal due to complexities related to requirements set by the Islamic finance industry standard-setting body AAOIFI, Fitch said in a report.

A key issue revolves around AAOIFI’s requirement for a “tangible ratio” on certain debt instruments, which relates to assets that need to be used as collateral in order for the sukuk to remain Shariah-compliant until maturity.

Fitch said several sukuk rates issued since last year had enough Sharia-compliant assets to provide room for collateral to fall below required levels.

However, this risk remains for others with limited tangible assets – mainly non-sovereigns – which could expose them to rising liquidity risks and could have implications for their issuer default ratings.

The rating agency added that how much money an issuer can raise through sukuk may be limited by the value of its tangible assets.

Fitch said that while sukuk investors may have an advantage over traditional bondholders in some areas, such as faster repayments before maturity, “this remains untested in practice”.

“The lack of standardization is a long-term challenge for sukuk,” it added.

Reporting by Youssef Saba; Editing by Jane Harvey

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