Sukuk Standard 62 hasn't impacted Islamic lenders yet, says Fitch
A proposed change to the directive governing sukuk has not impacted the ratings of Islamic lenders so far, but a lack of clarity hovers around the standard’s final scope and implementation.
The AAOIFI Sharia Standard 62 has not reduced the ability of Islamic lenders to issue, invest in and arrange sukuk, but these remain risks to watch, Fitch Ratings has said. It does not expect the adoption of the standard to have an immediate impact on existing bank sukuk ratings as material changes to the documentation would require sukuk holder approval.
“Many Islamic banks are active sukuk issuers. If the adoption of Standard No. 62 disrupted sukuk issuance, it may affect some Islamic banks’ overall funding and liquidity profiles,” the ratings agency said in a note on Monday.
The adoption could also raise Islamic banks’ cost of funding. Demand, including that from international investors, could be affected if it made sukuk less comparable to conventional bonds.
The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, whose Shariah standards are followed by several countries and jurisdictions, including the UAE, Qatar and Oman, plans to issue the final standard this year.
The rule is part of AAOIFI’s efforts to align sukuk market standards with Sharia principles. However, Fitch adds that AAOIFI and the regulators are likely to give stakeholders a few years to implement it.
Sukuk generally follow asset-based structures in which the lender gains access to revenue with the underlying assets continuing to remain on the obligor’s balance sheet. If the standard encourages a move towards asset-backed sukuk – which would involve the transfer of asset ownership - the derecognition of assets could reduce the balance-sheet size and associated debts for the issuing Islamic bank.
The deleveraging could affect balance-sheet liquidity, profitability and regulatory capital ratios among other factors.
Bashar Al Natoor, head of Islamic finance at Fitch Ratings told Bloomberg this month that the proposed rule could be interpreted so as to avoid alienating issuers and investors.
However, a purist approach that gives equity characteristics to sukuk would be disruptive to the market and could spell the end of the asset class as a financing tool for governments and companies, he added.
