Default resolution regimes untested in most Islamic finance markets - Fitch Ratings

Fitch Ratings-Dubai/London-17 November 2020 - The economic volatility caused by the coronavirus pandemic highlights the need for an effective bankruptcy resolution system in most Islamic finance markets, Fitch Ratings says. This includes the need for better protection for sukuk and bond holders' rights, providing remedies, and making recovery prospects more predictable.

However, the restructuring of sukuk could be more challenging due to structure complexity and sharia requirements. We might see the bankruptcy systems tested once the regulatory flexibility and financing deferral programmes are withdrawn, and if sukuk and bonds face default or are in distress, and go through resolution processes.

Bankruptcy regimes in key sukuk-issuing jurisdictions are at various stages of development, but in general they are still in the early stages, remaining largely untested and under-developed. Many of these jurisdictions have updated their bankruptcy laws in recent years, but it remains to be seen how bankruptcy courts treat sukuk defaults compared to bond defaults in such events, whether investors will have full recourse to the issuers, and if sukuk certificate holders will be able to enforce their contractual rights in local courts.