Innovation & Opportunities In Islamic Finance
As the global recovery begins to take hold and confidence returns to financial markets, Islamic Finance has returned to prominence. A number of entities, often from markets and industries that had not previously considered Sharia-compliant funding structures, are exploring the opportunities that Islamic finance may present - most notably the UK government. However, there is a perception that Islamic structures are costly to implement and that without an extensive land-bank or other inventory of assets available to an issuer, Islamic finance is not a viable option. Recent developments in both the Sukuk market and more broadly within Islamic finance may prove these assumptions to be incorrect. There continues to be a supply/demand mismatch in Sharia-compliant asset classes arising from a lack of both assets and diversification within the classes of asset that are available. This has led to problems such as a "hold-to-maturity" culture and the inevitable valuation inaccuracies that this creates. However, there are also benefits as commercial tension has put pressure on pricing and driven down yields in favour of issuers. Abu Dhabi Commercial Bank (ADCB) benefitted from this particular phenomenon in 2012 when it converted its proposed conventional bond issuance to a Sukuk in order to benefit from more attractive pricing. Traditionally, Islamic finance has focussed on Sukuk and, owing to the need to have real assets underpinning the issuance, issuers have tended to be restricted to those with a land-bank to support such issuance. Much of this was as a result of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) pronouncement in early 2008 which criticised a number of Sukuk outstanding at that time. Criticism focussed on the valuation mechanic used to calculate the repurchase price for the assets underpinning the Sukuk and, therefore, the amount available to redeem such Sukuk. AAOIFI was of the view that where Sukuk are based on assets such as equity securities which have a fluctuating market value, it is artificial to fix the repurchase price for those assets five years prior to the date of re-purchase (in the case of a five-year tenor). This contrasts with land or moveable property which is always sold at the price agreed between buyer and seller when required. The net effect of this was to restrict issuers of Sukuk to those entities that had land or other tangible assets available to them and to focus almost...
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