The default of Kuwait Investment Dar's sukuk and the bankruptcy filing of U.S. sukuk issuer East Cameron have put the spotlight on the extent to which investors are protected when an Islamic bond sours.
Most sukuk have been structured as asset-based instruments, rather than asset-backed securitisation.
In light of the current debate on investor protection, Reuters asked some industry experts if they expect future sukuk to be structured differently, with regards to the legal rights and obligations of issuers and investors?
Also, how can sukuk be structured to give investors more protection?
Issam Al Tawari is chairman and managing director of Rasameel Structured Finance Company based in Kuwait.
The views expressed in this article are those of the author and should not be seen as representing the views of Reuters News.
By Issam Al Tawari
KUALA LUMPUR, Nov 5 - Sukuk are tradable instruments that have facilitated the growth in the Islamic capital markets over the past 6 years and have facilitated the tapping of Islamic pools of funds by non-Muslim borrowers and infrastructure projects in an unprecedented manner.
However, this instrument has been put to the test with the global crisis. I believe that sukuk are no more than collateralised lending with recourse to the borrower.
The defaults by TID and others will only put these sukuk to the test, the result of which will be recognizing that the sukuk part of the documentation was only to facilitate the tradeability of the issue rather than insuring the ring fencing of the assets. Investors found themselves almost at par with other creditors at a time when this should not be the case.
Future sukuk issuance will need to ensure that the assets are transferred to a bankruptcy remote vehicle, not necessarily a securitisation structure, in order to protect and to ensure compliance with sharia as well. Investors need to be informed and aware of the legal implications of these instruments and tighter sharia structures.
Investors' demand continues to be there, especially if reforms to sukuk issuance and clearer yet more extensive requirements are being put in place to insure that sukuk issuance is standardized between the different financial centres.
The BIS requirements will always favour tradeable instruments against direct lending by banks.
Regulators will need to be more involved in the jurisdictions where these papers are issued to ensure that transparency, and certification of bankruptcy remoteness from the issuers' auditors in favour of the investors.
Following which I believe that these issues can be targeted at a retail level for smaller investors who are looking for security and reasonable returns in the current depressed rates environment.
Link: http://www.forexyard.com/en/reuters_inner.tpl?action=2009-11-05T045121Z_01_KLR476759_RTRIDST_0_ISLAMIC-FINANCIAL-RASAMEEL-OPINION
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