Dubai Chamber study highlights the city’s developing Sukuk market

140dubaiDeveloping Dubai into a hub for the Islamic economy and Sukuk will require the adoption of an ecosystem that resolves standardisation alongside market efficiencies, competitiveness and sustainability concerns, latest research by Dubai Chamber of Commerce and Industry states. According to the study, Sukuk activity continues to gather pace in other less familiar markets west (Turkey, Jordan, Egypt and Sudan) and east (Indonesia, Hong Kong, Singapore, Bangladesh, Pakistan and China) of the GCC, while centres as far afield as Bermuda are now supporting Sukuk.

Using the experience in the UAE, Dubai-based institutions are potentially well positioned to harness organic growth in these markets where Islamic products can appeal to the predominantly Muslim indigenous population, the research stated. The study added that investors concerned with Shari’ah compliance in the GCC are increasingly looking to Asian markets, with particular interest in real estate and equity funds. Singapore and even China are increasingly willing to accommodate Shari’ah compliant finance from the GCC, and India has a Shari’ah-compliant infrastructure fund.

According to the study, the strongest growth in the Islamic economy is likely to occur in previously untapped markets outside the GCC such as Turkey, the Levant and South East Asia where the large Muslim population provides a good base for growth. For example, there are numerous markets emerging in Africa in countries which were previously considered under-banked.

Issuing Sukuk is becoming more common place. This is being assisted by the issuance of banking licences and pent-up demand. Last year, Nigerian authorities issued a licence to an institution to operate as a full-fledged non-interest financial institution (NIFI), while other conventional banks were allowed to open a non-interest banking window. Nigeria aspires to be the hub of Islamic finance of Africa despite the strong appearance of South Africa and Kenya into the fray.

These developments pose a challenge to operators, regulators and investors alike. Making Dubai a hub for the Islamic economy, and markedly the exchange for Sukuk may be a possible growth avenue, however, it is likely to be met with competition from other countries such as Malaysia who are also operating in the Islamic Economy foray, the study finds. Approximately, half of all the Sukuk issued in 2012 originated from Malaysia.


According to the research, one of the key components to allow exchanges and transactions to function smoothly are agreed standardisations. Streamlined regulations for the sector can lead to more confidence for borrowers and these will come into being over the long-term, the study states. Over time, the need for more cost-effective financing will put pressure on Sukuk issuances to perform better. Short-term challenges, however, are likely to come from conventional bonds where the challenge involves outlining a strong value proposition and product differentiation sufficient to attract more customers to use Sukuk.

Further, unlocking dormancy and facilitating Sukuk exchange will inevitably require making Sukuk accessible not just to High Net Worth Individuals (HNWIs) but also the general public.  Reaching out to the end-user is therefore a key component of building a successful Islamic economy hub. Fortunately, Dubai has a strong position in the marketing of Sukuk.


According to the study, amassing the right blend of skills for the Sukuk industry critically rests on attracting and retaining the correct mix of professional manpower to Dubai. In Dubai’s case the competitive offering for labour thus comes from a wider work-life balance as well as progression for career driven individuals. The financial benefits are clear. Dubai and the UAE have effectively no corporate and personal tax regime. Other factors make this a favourable location such as the quality of life and the relatively cost effective operational environment,  relatively low occupancy costs and smooth functioning business infrastructure. Further, Dubai and the UAE are not subject to natural threats such as hurricanes or routine flooding.

Consumer Awareness

In the same way conventional bond markets rely on the presence of a liquid aftermarket, Sukuk are likely to require some confluence, the research finds. Behind this precept is the notion that secondary markets are generally only available to institutional or accredited investors. The development of the Sukuk depends how efficiently traders are allowed to register, how many customers are amendable to the primary and secondary market, and the likelihood of extracting a viable return from their investments.

The challenge of reaching scale is also reflected in the absolute dearth of transactions where the Sukuk have not been ostensibly honoured.  While this bodes well for confidence in Sukuk, in extremely complex Islamic transactions, observers note that the shortage of trained legal personnel may delay the adjudication of transactions. Testing the judicial environment cannot be understated.

Regulatory Regime and Governance

According to the study, there are plans to have a single board for the region’s Islamic financial institutions. In theory this would seek to harmonise some scholastic ambiguity and regulations concerning legitimacy and address the loss in confidence over Shari’ah compliance.  Five out of the six GCC states host Islamic financial institutions which bode well for the industry on a firm-level. Each institution has its own Shari’ah board but apart from in Bahrain, there are no national boards.  Further, on a region-wide basis, however there are often conflicting decrees reflecting different interpretations of Shari’ah. In contrast, in Malaysia both the Central Bank and the Securities Commission have Shari’ah boards which alone have the power to issue decrees. Banks in Malaysia have their own Shari’ah boards, but there role is to ensure the agreed decrees are implemented rather than making independent pronouncements. The GCC could do well to develop a comparable system. Competition is useful but rival centers in the Gulf could create a fragmented Islamic finance industry leading to expensive, inefficient markets that do not substantiate economies of scale or scope.


Investors’ expectations regarding reporting and transparency have been profoundly changed by experiences leading up to, during, and in the aftermath of the 2008 financial crisis.  There is sense of belief that the insufficiency of disclosure led to high-profile financial institution failures. According to the study, transparency on exposures, risks, uncertainties, and leverage are becoming the norm. Issuing Sukuk where transparency is expected on the institution may necessitate a lock-step disclosure on other assets and interests.

Transparency proposals should demonstrate how they would at least obviate the recurrence of the recent financial crisis (undisclosed risks, judgments and estimates, off-balance-sheet items, and going-concerns). By establishing such a connection, Dubai would gain credibility by showing that it is working to address investor concerns.  Although the amount of financial reporting information available can be extensive, investors would most likely welcome useful information as they then have the tools to assist them in managing their portfolios.


According to the study, Sukuk issuance till now has been convened by voluntary attribution to the standards of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), an autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari’ah standards for Islamic financial industry.

The more serious challenge is not the exacting specification of the standards but how to garner enforceable compliance across territories.  Compliance here means that there are feasibly enforceable penalties with tangible consequences. For example, non-compliance in other accounting standard systems can lead to financial penalties.  In some financial exchanges, it can lead to the asset be de-listed or suspended.


For Dubai to become a hub for Sukuk there has to be substantial difference to issuing the same Sukuk offering in other capitals or financial centres, the study states. Issuing in London is relatively cost effective due to an array of factors (availability of skilled personnel, access to international financial markets, business infrastructure, access to customers, unified work culture and relatively low operational costs).  Dubai’s key proposition thus rests firmly with the litmus test of long-run time and cost competitiveness. Issuers will be watching these comparators keenly given the recent flurry of announcements.


According to the research, continuing the meteoric pace of growth set by the industry in 2012 will require a broader assessment of the sustainability vis-a-vis the absorption capacity of the local economy. Does Dubai have the capacity to increase its residential population many fold to compete with other financial centres? How would the roads and transport systems fare as result of a ramping up? What should the near-final architecture look like?  The movement from relatively small-scale boutique issuance to highly connected financial markets is a higher value proposition in terms of sustainability and most of the capability is required at the government execution-level.

Presence of Supporting Initiatives

As argued earlier, standardisation could prove to be a red-herring if scale is breached, according to the study. Volume is therefore key to tackling confidence in the market. Volume can be achieved if some of the perceptions over Sukuk can be allayed give the presence of institutions, education and research, and a well-defined regulatory system.

Other initiatives may also be required. For example, creating free zones for Islamic economy such as Islamic commerce and Shari’ah advisory centres, or supporting Shari’ah associations to prepare standards for entry, educational standards and certification standards in collaboration with industry professionals. The Malaysian government’s pivotal role in assisting the industry is an example of what is possible in just a decade provided there is willingness to assist the sector.

De-Risking Sukuk

Most of the Sukuk issues in 2012 were evidently oversubscribed, the research finds. In the region, HNWI typically operate on a buy and hold preference.  Because of this facet, the Sukuk value chain with a secondary market has been slow to emerge. This risk conservative stance is corroborated by recent empirical studies.  GCC Islamic banks were found to be risk-averse and GCC conventional banks to be risk-neutral.  (The study also estimates the welfare effects for Islamic loans and deposits to be welfare-neutral).  The biggest gains for Sukuk market development would therefore go to players that are able to manage the conservative, risk averse approach of GCC participants.

Sukuk are by their nature controversial in that some more conservative Islamic scholars believe that Sukuk infringes the riba principle by effectively putting a time value on money. Issuers should therefore take advice from Shari’ah experts on how best to avoid compromising the risk and profit/loss sharing requirements to ensure the widest possible investor base for their issues.

Source: CPI Financial

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