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Saturday, 6 October 2012

Oman: Draft regulations for sukuk finalised

New draft regulations for the issuance of sukuk – the Islamic equivalent of bonds – have been finalised by the Capital Market Authority (CMA) ahead of their proposed publication for public consultation, it is learnt.

According to an expert familiar with preparations for the imminent promulgation of a legal framework for the introduction of Islamic Banking services in the Sultanate, the sukuk draft regulations are expected to be posted on the website of the CMA for public consultation.

 After weighing feedback from the industry, as well as the general public, the regulations will be enacted into law via a Royal Decree, said Khalid Yousaf, Director – Islamic Finance Advisory Services, KPMG Oman.

In comments to the Observer, Yousaf, whose lengthy career as a banking professional includes stints with a number of leading international Islamic financial institutions, described sukuk as the “mainstay” of Islamic Capital Markets.

“Sukuk provide opportunities to the asset holders to create liquidity for their investment blocked in the asset. At the same time, it offers investment opportunities to investors seeking investments in Sharia-compliant assets. Since sukuk are asset-backed or asset-based, unlike conventional bonds, they provide a secured form of investment for the investor. At the same time, the issuer has to have access to assets whose title can be transferred to the trustee looking after the interests of sukuk-holders.”

Importantly, sukuk also represent an important Islamic Capital Market instrument that enables the channelling of funds between investors and issuers, says Yousaf. “Being asset-backed or asset-based, sukuk are fully secured and provide a much better risk than clean or unsecured conventional bonds or similar instruments. Sukuk can also offer funding at cheaper rates than borrowing from banks. The issuer can also access a wider investor base, increase its market profile and have greater flexibility in the choice of currency and maturity of its obligations.”

According to the expert, sukuk holds particular appeal for infrastructure projects which have a medium-to-long term funding requirement. These projects being backed by strong assets, qualify for the issuance of sukuk.

For example, all major large-size sukuk issued in the UAE, Saudi, Pakistan, Malaysia and Indonesia have been used to finance infrastructure projects like highways, airports, ports, free-zones and bridges. Investors like investing in infrastructure sukuk because of the stronger quality of assets, generally sovereign risk involved and higher yield, said Yousaf.

Given sukuk’s appeal as a source of infrastructure funding, the expert is also confident that the Omani government itself will take the sukuk route to finance its infrastructure projects. “Government and quasi-government institutions take the lead in Sukuk financing. Out of total Sukuk outstanding of $103 billion, $65 billion has been issued by Government institutions. Some governments like Bahrain, Indonesia, Pakistan, Malaysia and now Turkey (proposed) tap Sukuk to sap up liquidity from Islamic banking sector and for managing money supply in the country. With a commitment to $30 billion in infrastructure projects already, the government of Oman is very likely to issue sukuk to finance some if not all of their projects in future,” he said.

Demand for sukuk, says Yousaf, has “piggy-backed” the demand for Sharia-compliant assets in general. While Islamic Banking is awash with liquidity provided by depositors seeking Sharia-compliant products, finding a home for depositors’ funds has been a challenge.

“It takes a long time and a network of branches to build Retail, SME and Corporate asset portfolios. The banks need a safe investment during this period to park their liquidity and also manage their balance sheet more effectively.

(Oman Daily Observer / 06 Oct 2012)

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