| April 3
April 3 Dubai's main bourse has published new
standards for structuring Islamic bonds, seeking to clarify
their legal status and attract a wider pool of issuers to the
The Dubai Financial Market's (DFM) new rules are
part of broader efforts to develop Islamic business in the
emirate, which is increasingly competing with other Islamic
finance centres such as London and Kuala Lumpur.
Sukuk structures are generally well understood among issuers
and investors but some details lack clarity, such as what
happens in case of default, and what the rights of investors are
in relation to underlying assets.
The DFM's standards aim to reduce such uncertainty by
detailing how sukuk should be designed to conform to religious
principles. A draft of the standards was circulated for public
feedback in January last year and the final version includes
additions on how sukuk holders' rights should be protected, and
the liability attached to special purpose vehicles.
The DFM appears be seeking a balance between introducing
more prescriptive rules which could deter some issuers, and
being too lax, which would limit the effectiveness of its
For example, the document stipulates that sukuk based on
tangible assets or usufructs should not involve fictitious asset
transfers; real and legal transfers of ownership must occur.
Depending on how this rule is applied, it could push some
sukuk structures used at the DFM closer to the original
equity-like nature of Islamic bonds. At present, some popular
sukuk structures used globally resemble conventional bonds,
though payment of interest is banned by Islam.
Contracts should not remove sukuk holders' right of recourse
to the underlying assets; such rights must be clearly stated
from both sharia and legal perspectives, the document says.
The standards stress that special purpose vehicles used for
sukuk should be independent from the issuer. Sukuk holders
should bear losses unless there is misconduct, negligence or a
breach of rules by the guarantor.
However, the standards allow for a reserve account to
protect sukuk holders from investment risks, financed through
the deduction of a certain percentage of realised profits.
Sukuk contracts should indicate factors that could trigger
early maturity of sukuk, and describe the treatment of cases of
default and the settlement of sukuk holders rights, the
But they do not specify the nature of that treatment, nor do
they indicate what governing law should be used for sukuk. At
present, British law is often used for international sukuk
The standards stipulate what guarantees can be attached to
sukuk, a sensitive issue because Islamic principles say
investors should bear risk related to the underlying assets.
Holders of certain types of "investment" sukuk can obtain a
binding promise from a third party to purchase the sukuk, while
other types of "finance" sukuk can obtain pricing guarantees
from the originator.
The final version of the standards increases the allowable
percentage of cash and debt in underlying sukuk assets to 90
percent, from 70 percent proposed previously.
Areas which are not covered in the DFM standards would be
handled with reference to sharia and accounting standards issued
by the Bahrain-based Accounting and Auditing Organisation for
Islamic Financial Institutions.
The DFM said that beyond their application to sukuk issued
in its own market, it hoped the new standards would be a point
of reference for issuers and investors around the world,
encouraging more issuance of sukuk rather than conventional
bonds, and spurring development of new sharia-compliant
(Editing by Andrew Torchia)