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Bond Market News
New Set of Proposals Could Disrupt Sukuk Issuance
February 21, 2025
The issuance of Islamic bonds (sukuk) may face significant disruptions due to a new set of proposals from religious clerics, according to credit rating agencies. The proposed changes, driven by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), require issuers to transfer legal ownership of assets underlying the bonds to investors. Sukuk are designed to avoid interest-based transactions by using assets to provide income instead of fixed coupons. AAOIFI’s scholars argue that the current market structure doesn’t fully adhere to Islamic principles, and they seek to shift sukuk towards equity-like instruments. The proposed changes could alienate bond investors and deter sukuk issuance, especially since the new structure would differ from conventional bonds, while AAOIFI argues this would harmonize issuance and align with Islamic risk-sharing principles. Saudi Arabia, the largest issuer of sukuk, may choose to apply more lenient rules, which could further fragment the market. The potential transition to a quasi-equity model may lead to a period of uncertainty and rise in cost of issuances. Despite this, some believe institutional investors can still participate in the market, though the transition could be challenging.
Markets have recently seen a flurry of sukuk issuances, with the Damac 7% 2028 sukuk priced yesterday trading at 100.48, yielding 6.84%.
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