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AAOIFI sukuk standards 'may open door to unforeseen risks'

DUBAI, January 22, 2019

Some proposals by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) for sukuk governance could open the door to unforeseen risks, said a report by S&P Global Ratings.  
 
However, other proposals, if implemented, can help boost the credibility of sukuk and minimise some of the risks, particularly those related to noncompliance with Sharia, said S&P Global Ratings' Global head of Islamic Finance analyst Mohamed Damak in a report published today. The report is titled: "AAOIFI's Proposed Standards For Governance Of Sukuk Might Open The Door To Unforeseen Risks." 
 
In the article, S&P Global Ratings responds to a draft standard by AAOIFI, approved by their Governance and Ethics Board on November 8, 2018, and communicated on December 31, 2018.
 
"While we have a generally positive view of AAOIFI's new requirements for Sharia governance and disclosures, we think three areas might present risks:
• The proposal to keep the special-purpose vehicle (SPV) issuing the sukuk totally independent from the sponsor,
• The requirement for the effective transfer of the underlying assets, and
• The requirements for the valuation of the underlying assets.
 
Most sukuk issued to date are based on contractual obligations of their sponsors. But if AAOIFI's proposal is implemented, the market might depart from this common practice and shift toward sukuk where repayment is based largely on the underlying assets themselves, including recourse to them under scenarios of default, it said. 
 
"However, in our view, the market appetite for such instruments is yet to be demonstrated. Therefore, two points that require clarification, in our opinion, are the mechanisms of recourse of investors in case of sukuk resolution and whether it would still be acceptable to issue sukuk where repayment relies solely on the contractual obligations of sponsors," it said. - TradeArabia News Service



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