Sukuk Templates Could End Delays Caused by Sharia Scholar Disagreements

May 13, 2014

The International Islamic Financial Market is working on common templates for structuring sukuk to reduce delays caused by disagreements between Shariah scholars.

The standards-setting body is drafting frameworks starting with leasing contracts known as Ijara, Chief Executive Officer Ijlal Ahmed Alvi said in a May 6 interview in Jakarta. Bahrain- based IIFM is responding to feedback from members including the Islamic Development Bank and the Malaysian and Saudi Arabian monetary authorities, he said.

Worldwide Islamic debt sales have grown by an average of 35 percent over the last five years, straining the ability of religious experts to approve offerings and highlighting the need for common global standards. Indonesia’s government plans to reduce sales of Ijara sukuk as some scholars say the structure the country uses isn’t fully Shariah-compliant, Vice Finance Minister Bambang Brodjonegoro said last month.

“Islamic finance is growing at a good pace, but what we still need is unification,” said Alvi. “Having a unified set of standards would make the market more cost-effective and efficient.”

Disagreements among Shariah scholars resulted in Goldman Sachs Group Inc. delaying a debut sukuk in 2011. The offer, which had been approved by Ireland’s central bank, was postponed after the lender was criticized for not ensuring it would be traded at par value as required by Islamic law.

Mid-East View

Kuwait’s Investment Dar Co. contradicted its own scholars’ assessment after missing a payment on a Wakalah deposit held by Lebanon’s BLOM Development Bank SAL. Dar argued the financing breached Shariah principles because it “was taking deposits at interest,” according to a court document from December 2009.

All of the $13.9 billion of outstanding Indonesian government sukuk as of the end of 2013 used the Ijara structure, according to a March report by the Asian Development Bank. In Malaysia, only around 10 percent of the $163.5 billion of Islamic debt is Ijara-based, according to the report.

“Middle Eastern investors view that some sukuk issued in Southeast Asia doesn’t fully comply with their guidelines, limiting or restricting the number of potential investors,” Abas A. Jalil, chief executive officer at Amanah Capital Group Ltd., a consultancy in Kuala Lumpur, said in a May 9 interview. Common standards will “enable investors to make investment decisions in a more objective manner rather than based on the debatable perspectives of Shariah scholars,” he said.

Scholar Shortage

The templates may also help address an international shortage of scholars. The 20 most-active experts each advised 31 institutions on average and two counseled 85, according to a 2011 report by Funds@Work AG, a consulting company based near Frankfurt.

The central bank of Malaysia, the world’s largest sukuk market, has since 2010 forbidden scholars from sitting on more than one Shariah advisory board for each type of institution, meaning they can only advise one bank or pension fund for example. Most countries don’t impose limits.

Worldwide sales of debt that pay returns on assets to comply with Islam’s ban on interest increased 12 percent this year to $17.2 billion from the same point in 2013, data compiled by Bloomberg show. Shariah-compliant banking assets will double to $3.4 trillion by 2018 from last year, according to Ernst & Young LLP, which will fuel demand for more issuance.

“Enterprises with a global presence may be encouraged to explore sukuk issuance versus conventional if the standards are more widely accepted,” Raj Mohamad, managing director at Five Pillars Pte, a consulting company in Singapore, said in a May 9 interview. “Standardization can also result in cost reduction in terms of legal and documentation cost.”

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