(MENAFN Editorial)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 themed, The Role of Sukuk and Securitisation to Support New Financial Regulations on 30 April 2017 in Dubai, United Arab Emirates.
The Joint 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. At a time of tightened financial regulations, the Joint 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.
Ian Johnston, Chief Executive of the DFSA welcomed the IFSB and the Joint Seminar’s participants in his welcoming remarks. He discussed the need for the industry to think laterally to address the shortage of liquidity management tools at Islamic institutions, including consideration for assets in adjacent markets.
“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.”
In his welcoming remarks, Zahid ur Rehman Khokher, Acting Secretary-General of the IFSB, welcomed the participants to the Joint Seminar and expressed his thanks to the DFSA for co-hosting the event and meetings of the three IFSB working groups. Noting that “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”. Zahid 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 half-day Joint Seminar was chaired by Prof. Volker Nienhaus, University of Bochum, Germany.
The first panel discussion on The Role of Shariah-Compliant Instruments in the Islamic Capital Market featured Dr. Mohamed Damak, Senior Director, Global Head of Islamic Finance, S&P Global Ratings, Moosa Tariq Khoory, Head of Shariah, Dubai Islamic Bank, Debashis Dey, Partner, White & Case, UAE and Mohamed Dagher, Manager and Head of Account Management (Middle East, Africa & CIS), Euroclear Bank SA/NV, UAE.
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. 70bn USD 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 panelists also observed that from a structuring perspective, there is a small volume of assets which are readily available for securitisation in a Shariah-compliant manner. The lack of suitable Shariah-compliant alternatives to repo market is an issue for the Islamic finance industry on which some developments are currently taking place. For example, some securities settlement companies are taking initiatives to offer segregated pledge account services for bilateral fund raising and reduce counter-party credit risk. The discussion also emphasised the need for centralised Shariah boards in the jurisdictions and the availability of more market makers for Islamic capital markets products.
The second panel discussion, themed Securitisation of Islamic Assets saw the participation of Khalid Howladar, Managing Director & Founder, Acreditus; Basheer Ahmad, Senior Manager, Dubai Financial Services Authority; Ismail Dadabhoy, Islamic International Financial Market (IIFM), Bahrain and Gregory Man, Norton Rose Fulbright (Middle East) LLP, UAE.
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. Similarly, the “originate to distribute” securitisation model has not taken off in the Islamic finance industry, likely due to the challenge Islamic banks have in replacing assets on their balance sheet. The panel noted however, that for the GCC region, car financing was a substantial business for all banks, including Islamic entities. This could be the asset of choice to help grow securitisations.
The Joint Seminar ended with the panel emphasising the need for liquidity generation initiatives to be supported at the regulatory and government levels in order for the challenges to be addressed. Similarly, the role of the private sector was emphasised to offer and experiment innovative structures.
More than 40 delegates from among the IFSB member and non-member organisations – representatives from market players, regulatory bodies, and international agencies attended this Joint Seminar.
For more information of these and other IFSB’s events, please visit www.ifsb.org.
The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets, and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions, and market players. The members of the IFSB comprise regulatory and supervisory authorities, international inter-governmental organisations, market players, professional firms and industry associations. For more information about the IFSB, please visit www.ifsb.org.
About the Dubai Financial Services Authority (DFSA)
The Dubai Financial Services Authority (DFSA) is the independent regulator of financial services conducted in or from the Dubai International Financial Centre (DIFC), a purpose-built financial free-zone in Dubai. The DFSA’s regulatory mandate covers asset management, banking and credit services, securities, collective investment funds, custody and trust services, commodities futures trading, Islamic finance, insurance, an international equities exchange and an international commodities derivatives exchange. In addition to regulating financial and ancillary services, the DFSA is responsible for supervising and enforcing Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) requirements applicable in the DIFC. The DFSA also exercises delegated enforcement powers under the DIFC Companies Law. These include powers to investigate the affairs of DIFC companies and partnerships where a material breach of DIFC Companies Law is suspected and to pursue enforcement remedies available to the Registrar of Companies (Roc).