Sept 2 A new screening method for sukuk (Islamic bonds), developed in cooperation with Saudi Arabian financial institutions, aims to reduce the cumbersome approval process that these instruments often require.
Islamic finance is now a $1.7 trillion industry but its growth has exposed weaknesses, such as the lack of a clear consensus on what products are permissible; the sharia boards of individual banks and investment firms can issue conflicting rulings.
San Francisco-based IdealRatings, which provides screening services to fund managers and compilers of indexes, said its product addressed compliance hurdles faced by sukuk investors contending with multiple structures and disparate opinions.
"Investors drift away from investing in sukuk primarily due to lack of transparency (in) the acceptability or not of the structure deployed by the issuer," the firm said.
The product reviews and categorises sukuk to allow Islamic banks to adhere to their own guidelines more efficiently, reducing the time and costs of due diligence in each deal.
The service was developed over the past two years in consultation with Islamic financial institutions, in particular Saudi firms which are increasingly active in the sukuk market.
"Compiling, analysing and screening sukuk documentation is indeed an enormous effort...This new platform helps ease the process," said Yasser Al-Marshde, general manager of the sharia group at Riyadh-based Alinma Bank, which helped to develop the service.
Other backers include Riyadh-based Jadwa Investment and Al Rajhi Capital, the investment banking arm of Al Rajhi Bank - Saudi Arabia's biggest listed lender - and Abu Dhabi Islamic Bank.
The service will help to reduce the turnaround time for screening and approving sukuk, which in turn will facilitate investment decisions, said Anas Al Eissa, head of the sharia department at Al Rajhi Capital.
This could encourage the use of sukuk by Saudi firms. At present, the local stock exchange lists only five mutual funds dedicated purely to sukuk out of a total of 169 Islamic funds.
In June, Al Rajhi Capital received regulatory approval for its first sukuk mutual fund, while Riyadh-based Alkhair Capital launched its own sukuk fund in the same month.
Over the past two years, issuance of sukuk in Saudi Arabia has expanded because of increased liquidity, comparatively low borrowing costs and a desire to diversify beyond bank loans.
Sukuk issuance in the country rose to the equivalent of $15.2 billion through 20 deals last year, compared to $11.2 billion through 18 deals in 2012, according to data from Zawya, a Thomson Reuters company. Year-to-date, there have been 12 sukuk issues worth $9.9 billion. (Editing by Andrew Torchia)