The Islamic Financial Services Board (IFSB) and the Dubai Financial Services Authority (DFSA) successfully organised a joint seminar on liquidity generating innovations in Islamic finance in Dubai, UAE.

Themed “The Role of Sukuk and Securitisation to Support New Financial Regulation”, the seminar was designed to encourage broad interaction among the delegates in exploring Shariah-compliant Islamic capital market instruments, in particular sukuk and securitisation of assets, to generate liquidity in the Islamic finance industry.

The seminar also discussed the readiness of Islamic financial institutions to meet the new liquidity requirements, while also highlighting opportunities available to various bodies (e.g. regulatory authorities, capital market players, legal firms) to support the industry’s liquidity management needs.

“The forum aimed to address the very real challenges around the shortage of liquidity management tools that institutions continue to face, with some relying primarily on cash and central bank placements. It was encouraging to see such active engagement and innovative thinking by the practitioners over the course of the day’s programme,” said Ian Johnston, chief executive of the DFSA.

In his welcoming remarks, Zahid ur Rehman Khokher, acting secretary-general of the IFSB, said: “Liquidity management has been a long pressing concern in the Islamic financial services industry”, he mentioned that “these difficulties also present opportunities for ‘exciting innovations’ in the industry amidst an evolving global regulatory framework.”

He noted the slowdown in corporate sukuk issuances over the previous four years but also noted a tightening in spreads between sukuk and bond pricing, with some recent issuances even being priced at a discount to their conventional counterparts. He also reiterated the importance of promoting securitisation of assets by Islamic financial institutions to aid liquidity, a move which has been recommended in several IFSB standards and other publications.

The panel offered insight into sukuk instruments and the Islamic capital market developments from the viewpoint of their respective fields. A panelist mentioned that there is expected to be c. $70 billion of new issuance during 2017; however this is not enough to keep up with the projected growth of the Islamic finance industry as the demand is much higher.

While there has been some new sovereign issuances recently, the added complexity of structuring sukuk was a disincentive for governments wishing to raise capital quickly. To resolve these impediments, the industry needs more standardisation in terms of both legal documentation and Shariah interpretations. In this respect, the IFSB’s new standard on Disclosure of Islamic Capital Market Products (IFSB-19) can help the industry to enhance harmonisation in the sukuk market.

In terms of developing the liquid markets for Islamic finance industry players and offering them high quality liquid assets, the role of sovereign and central bank sukuk issuances was highlighted, as it will simultaneously promote Shariah-compliant money markets and support the availability of Shariah-compliant lender of last resort facilities to Islamic banks, a facility which is not all available in most jurisdictions. Similarly, secondary market trading in the sukuk market needs to be promoted through various incentives and infrastructure development.

The session focused on securitisation, product development and innovation in the Islamic capital market sector with a way to looking beyond the typical products for liquidity management. A panelist cited some innovative structures that had been developed by various market players, such as an issuance in the UAE which was structured on revenues generated from future ticket sales. A panelist emphasised the need for regulation of the Islamic finance industry to focus on substance rather than form as many sukuk are not particularly differentiated from conventional counterparts in risk and return characteristics.

The panelists also observed that the covered bond market stayed relatively robust during the global financial crisis, and that equivalent structures in the Islamic market using securitisations should be seriously considered by Islamic finance industry. Some of the main challenges in promoting this market concern the negative perception of securitisation post-crisis, as well as Shariah impediments to tranche structures and general investor appetite. - TradeArabia News Service