Mar 06 2013

Dubai aims to be top destination for global sukuk

By Mahmoud Abdul-Hakim of Dar Al Shari’a Dubai aims to be top destination for global sukuk Photo Credit:REUTERS/ Nikhil Monteiro
Thirty-eight years after it first ventured into Shariah-compliant finance (with the launch of Dubai Islamic Bank), Dubai is aiming to get a bigger slice of the global Islamic bond market.

On February 27, His Highness Sheikh Mohammed bin Rashid Al Maktoum, vice-president of the UAE and ruler of Dubai, announced a government initiative to transform the emirate into a global center for sukuk. The scheme seeks to further strengthen Dubai's position as a major player in regional and international finance, with a prime focus on supporting the Islamic economic sector.

The move has proven to be timely as international demand for sukuk continues to witness year-on-year growth. In a recent report, HSBC said US-denominated sukuk issuance has doubled from USD 9.5 billion in 2011 to USD 18.4 billion in 2012.

This year is expected to be another bumper year with GCC alone accounting for USD 35 billion of sukuk issuance. By 2017, the global sukuk sector is anticipated to grow to USD 900 billion, according to Ernst & Young's forecast.

In a bid to capitalize on this initiative and renew international confidence in Dubai, Sheikh Mohammed said the government will lay the foundations for future growth by completing the necessary organizational framework and mobilizing a team of industry experts.

But in order for Dubai to stay ahead of the game and prevail against the competition in Southeast Asia and the MENA region, some key areas of developments and logistics must be addressed.

Standardization and legislation

As a prelude to its sukuk initiative announcement, Dubai confirmed in January its plans to create an Islamic finance council to regulate Shariah-compliant equity and fixed-income products.

As it seeks to put Islamic finance at the core of its economy, Dubai also has to look at establishing a global advisory company that specializes in Shariah consultancy and is tasked to draft legally acceptable and commercially viable sukuk documents based on different Islamic structures (e.g. ijarah, salam, musharaka, mudharaba, etc).

This company will likewise be in charge of offering professional services to local and global clients, as well as setting up comprehensive sukuk standards that are acceptable to international Islamic scholars.

Also, to ensure investor confidence and promote global acceptance, a higher Shariah supervisory board must be established to monitor issuance in sukuk and other Islamic financial instruments. The board, which will be composed of globally recognized members, will undertake required Shariah supervisory and audit assignments and issue periodic Shariah compliance certificates.

New laws, special jurisdiction and sukuk arbitration centers should also be created and/or updated to suit all types of sukuk issuance and tradability. This aspect might be relatively challenging as such laws must prove to be acceptable to both local and global investors, and applied in Dubai's free zones as well as non-free zones.

Sukuk as liquidity instrument

Islamic bonds have been considered an effective way for regional and international issuers to tap into strong liquidity. Dubai's plan to position itself as a global sukuk center is expected to also benefit the liquidity position of the local Islamic banking sector and the business portfolios of its treasury, investment companies and other related entities.

The initiative requires the designing of a Shariah-complaint platform based not only on cash sukuk tradability but on deferred tradability and other special products like salam, murabaha and wakala.

I believe that once this plan has gotten off the ground, most Islamic banks will eventually shift their liquidity from Western markets (e.g. liability management exercises) to the Dubai sukuk market.

Promoting awareness of sukuk and other Islamic financial instruments will also be vital in generating wider public interest about the sector. To encourage this, Dubai could launch print and online media dedicated to covering developments and activities concerning the industry.

I also believe that global industry recognitions (such as prizes for best sukuk issuance, project or research paper) will help promote best practices.

Sukuk has grown to become a highly competitive sector with major players such as Kuala Lumpur, London, Tripoli and Cairo. However, I do believe that despite the stringent competition, Dubai has the political will and vision to compete in the global sukuk arena.

A certified Shariah adviser and auditor and Islamic professional accountant, Mahmoud Abdul-Hakim is currently affiliated with DIB subsidiary Dar Al Shari'a as Shariah relationship manager.

© Zawya 2013

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