'Public sukuk can help create a stable and regular funding source'

Emirates Business 24/7:Islamic securitisation through the issue of public sukuk could be the answer to the liquidity constraints faced by home financing institutions, says a Dubai-based Shariah consultancy firm.

"Traditionally Islamic institutions have sought funding from institutional investors and banks but have not created any relationship with small investors or the common man," said Sohail Zubairi, CEO of Dar Al Sharia, a subsidiary of Dubai Islamic Bank.

"Most sukuks launched in the UAE and the Gulf have been arranged by conventional banks and taken up by conventional institutional investors. These investors tend to come with borrowed funds and there is always a cost associated with such funds. This is understood by the sukuk promoters and results in artificially structured returns to investors rather than the original return on equity.

"Mobilising public interest in sukuk in the past would have helped reduce these costs and the liabilities that come with them."

He said Islamic financing allowed institutions to securitise their assets from time to time by launching public sukuk, thereby creating a regular and stable funding source.

"Islamic institutions will also have peace of mind since the funding obtained through securitisation will not be like a corporate deposit, which can be withdrawn at short notice," said Zubairi.

Investors in Islamic securitisation sukuk would buy an undivided ownership share in the sukuk assets leased by the company and receive rent.

A stock exchange listing would provide an exit route to the investors, who could sell sukuk at the prevailing market price any time. And the Islamic home finance company would be free from liquidity worries.

"Had such public sukuk been launched in the past they could have continued operating to some extent during the current situation," said Zubairi.

Citing National Bonds as an example, he said, it had established strong grassroots relationships and continued to attract new investors despite the liquidity crunch.

Dar Al Sharia helped Tamweel launch a landmark multi-class Islamic securitisation sukuk last year in Europe just before the global liquidity crisis hit. The product was rated 'Aa2' by Moody's and 'AA' by Fitch.

And the company was engaged to work on the first Islamic real estate investment trust structure in the region. The scheme would have given investors a diversified asset base and, because of its listing on a GCC bourse, a quick exit channel. Work on the product has been suspended because of market conditions.

Zubairi said Islamic financial institutions (IFIs) were not completely protected from the liquidity crisis as they operated in the same market as conventional banks.

"IFIs were insulated from the losses that the conventional banks in the UAE and the Gulf suffered since they were not permitted to invest in toxic instruments, but the fear factor has dried up the liquidity from their system as well."

He welcomed the merger of Amlak and Tamweel, saying it was a positive step and adding: "I believe the move will soon restore to a great extent home financing activities."

And he said a conventional mortgage borrower could use a shariah-approved mechanism to switch to Islamic home financing. "If the title to the property is held by the customer but mortgaged to the conventional bank the customer must give the liability certificate issued by the conventional bank to the IFI. The IFI will arrange for the conventional bank to agree to release the mortgage upon receiving the amount stated in the liability certificate. The IFI will purchase the property at an agreed price from the customer and have the title transferred to it.

"If the IFI's purchase price is higher than customer's liability with the conventional bank the IFI will pay the liability amount directly to the conventional bank and release the balance to the customer. The IFI will start the lease on the day it purchases the property from the customer. The lease rent will be as per the terms agreed in the lease contract. The IFI charges a one-time fee for processing a home finance request, which is standard and reasonable compared with conventional banks' charges. All charges made by an Islamic bank must be approved by the shariah board, which will not allow unfair practices such as commitment fees and penalty payments," he said.

Zubairi said Islamic finance could provide a number of benefits in the current tight liquidity conditions. These included more straightforward and faster amortisation compared with a conventional loan, the absence of compounding and the fact that the rent payments would stop if the property were totally destroyed.

In addition there were no hidden charges and the customer was prevented from over-borrowing against a property – the main cause of the current turmoil – because the IFI held the title.