Process of sukuk issue needs to be reviewed

24/7 : Despite the sukuk industry being in its infancy, the current market developments showed the industry needs to re-evaluate the process of issuing sukuk, experts said.

They highlighted the need to create unified and integrated processes of issuing sukuk among different Islamic banks to help reduce costs.

"There are several legal issues related to sukuk issuance, especially compliance with Shariah principles, which requires the work of legal consultants and Shariah scholars. This is increasing the cost of issuing sukuk, compared to conventional bonds. We need to unify efforts of Islamic banks to agree on the main framework of issuing sukuk, while leaving room for innovation," said Khalid Al Saeed, Senior Director of Treasury at Saudi Arabia-based Samba Financial Group.

"Every religion has pluralism and the same is applied for Islam. There are different opinions and to achieve a unified structure of Islamic financial products, including sukuk, this will support the industry. We need agreement on documentation and legal areas concerning compliance of the genuine Islamic financial rules. However, we should leave some space for innovation in the industry," he told Emirates Business.

He stressed the sukuk market was still a very promising market that could add value to capital markets. "Unfortunately, the global financial crisis happened during the early stages in the sukuk industry, which led to a severe slowdown in sukuk issuance. We need now to re-evaluate issued sukuk and their performance as well as the whole industry before planning to expand after the crisis. Sukuk can unlock global markets and can introduce very promising asset class to the markets during this critical time."

Al Saeed voiced concern over the increasing trend towards Ijarah sukuk products, which are prominent in the market since the start of the credit crisis. "Most sukuk issues are going to Ijarah sukuk which are guaranteeing the return of investment by undertaking re-purchase at maturity deal. We should not focus on this area and we should go for Musharakah and Mudarabah sukuk that have more compliant with Islamic financial principles. Such contracts are compliant with Shariah principle, and also incorporate principles of benefiting both investors and issuers. Sukuk should not be a mimic of traditional bonds and they should have their true identity.

Mark Waters, Head of Debt of Capital Markets in the Middle East at PNB Paribas, expected that the sukuk market would return to function during the second half of 2009. "The decline in sukuk industry is a functional reaction to the credit crunch. The market dynamics are very weak and there are no investors interested in buying these products. When market confidence returns, the GCC market will return, but the fist half of 2009 will continue to decline. The market may return during the second half of 2009. Also, investors want to see a constant approach to the sukuk industry, especially to avoid differences and increase transparency."