DUBAI: Dubai aims to become a top global centre for Islamic bonds by introducing more detailed standards that ensure issuance and trading obey not only the letter but also the spirit of Islamic rules, a securities market official said.
The emirate hopes the new standards will reduce disputes between scholars, issuers and investors over what types of debt structures are permissible and attract more business to its market.
Mabid Ali Al Jarhi, a member of the board overseeing Islamic business at Dubai Financial Market (DFM), said the rules would provide assurances for sukuk holders and traders.
“In this manner, Dubai and DFM will set the tone for financial instruments’ standards all over the world,” Jarhi said in an interview via email late last week.
Last month DFM, which runs Dubai’s securities markets, published a draft of its proposals and gave the industry until February 28 to comment. DFM plans to hold a hearing in early March and then issue the final version of the standards later that month.
That schedule is lightning-fast compared with the slow pace of discussions on reform in most of the Islamic finance industry — a sign that Dubai sees a business opportunity in the strong growth of the global sukuk market.
New issues of sukuk, which under religious principles are structured to avoid the payment of interest, jumped to about $121bn worldwide in 2012, according to Thomson Reuters data, from around $85bn in 2011. Kuala Lumpur and London are major trading centres.
Early last month, Dubai’s ruler Sheikh Mohammed bin Rashid Al Maktoum said he was launching a drive to develop the emirate’s Islamic business sector.
Jarhi said other sukuk standards, such as those of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), were issued when the global market had not built up much experience.
Those standards focus largely on classifying various types of sukuk, rather than clarifying whether they conform to religious principles, he said.
For example, sukuk based on tawarruq would be automatically excluded from Dubai’s new standard, he said. Tawarruq, in which one party buys an asset from a vendor with payment deferred and sells it to a third party for cash, has been criticised by some Islamic scholars because of its weak link to real economic activity.
Since Islam prohibits interest payments, sukuk investors earn their returns from real assets. Jarhi said Dubai’s standards would insist that there was a “true sale” of these assets - a real transfer of title to them. This would prohibit practices such as securitising assets which could not be sold.
In these areas, Dubai is offering a solution to some of the thorny doctrinal disputes that have plagued the industry for the past few years.