AAOIFI's proposed standards for governance of Sukuk might open the door to unforeseen risks

S&P Global Ratings said today that it believes the latest proposal by the Accounting and Auditing Organization for Islamic Financial Institutions for sukuk governance

  

DUBAI: S&P Global Ratings said today that it believes the latest proposal by the Accounting and Auditing Organization for Islamic Financial Institutions for sukuk governance, if implemented, can help boost the credibility of sukuk and minimize some of the risks, particularly those related to noncompliance with Sharia. But some proposals could open the door to unforeseen risks, said S&P Global Ratings' Global Head of Islamic Finance analyst Mohamed Damak in a report published today, "AAOIFI's Proposed Standards For Governance Of Sukuk Might Open The Door To Unforeseen Risks."

In the article published today, S&P Global Ratings responds to a draft standard by the Accounting and Auditing Organization for Islamic Financial Institutions, approved by their Governance and Ethics Board on Nov. 8, 2018, and communicated to us on Dec. 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. 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.

© Press Release 2019

Disclaimer: The contents of this press release was provided from an external third party provider. This website is not responsible for, and does not control, such external content. This content is provided on an “as is” and “as available” basis and has not been edited in any way. Neither this website nor our affiliates guarantee the accuracy of or endorse the views or opinions expressed in this press release.

The press release is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Neither this website nor our affiliates shall be liable for any errors or inaccuracies in the content, or for any actions taken by you in reliance thereon. You expressly agree that your use of the information within this article is at your sole risk.

To the fullest extent permitted by applicable law, this website, its parent company, its subsidiaries, its affiliates and the respective shareholders, directors, officers, employees, agents, advertisers, content providers and licensors will not be liable (jointly or severally) to you for any direct, indirect, consequential, special, incidental, punitive or exemplary damages, including without limitation, lost profits, lost savings and lost revenues, whether in negligence, tort, contract or any other theory of liability, even if the parties have been advised of the possibility or could have foreseen any such damages.


More From Press Releases