The Dubai International Financial Centre (DIFC) has started to create 'Dubai docs', a standardised document for anyone who wishes to list or raise a sukuk from the centre, a move that is aimed to reduce the cost of sukuk documentation.
The centre will use the International Finance Corporation (IFC) sukuk listed on Nasdaq Dubai to set a benchmark for new issuances. The $100 million (Dh367.3m) sukuk, the first Islamic bond by the World Bank in the region, is a dollar-dominated non-amortising issue with a five-year maturity.
"What we are trying to do is to build on the IFC sukuk and make it a standard model for the issuance of those types of sukuk," Dr Nasser Al Saidi, DIFC chief economist told Emirates Business on the sidelines of a sukuk symposium yesterday.
"Instead of each issuer having to do the work all over again, they will take the standard Dubai doc. There will be something specific for a particular project, but the basic document will be unchanged," he said, declining to give a specific time frame for the project.
Because of the relative infancy of the product, sukuk documentation is often highly negotiated and based on no existing template, making the process costlier than conventional bonds and other securities.
The industry estimates that to justify the cost structure, the ideal size of a sukuk needs to be at least $500m. This is because documentation cost tends to be fixed at $100,000-250,000 per issuance, a negligible cost if the issue is sizeable.
"If you are raising $1 billion, how much is that for you?" a senior banker told this newspaper on condition of anonymity. "But if you want to issue a $200,000 or $100,000 sukuk, the cost of documentation is still around $250,000 because all the legal work is the same. Is sukuk the right product for $50m? I say, no."
Standard & Poor's (S&P) confirms that the costs of structuring and issuing sukuk remain high relative to conventional bank loans and bond issuance. Legal and accounting fees contribute to this higher cost structure, as does uncertainty regarding the perceived risk associated with these instruments.
In addition, the lack of standard structures, perceived differences in approach to Shariah compliance, and a relatively illiquid secondary market also tend to discourage investors.
IFC, itself had spoken of the relative difficulty in the whole sukuk process. Nina Shapiro, IFC Vice-President for Finance and Treasurer, told this newspaper in October that structuring the instrument was "more expensive" and "more difficult".
The lack of standardisation is just one of the many hurdles in Islamic finance. "Because there is no standard documentation, the set-up and transaction costs are high. You see, there is nothing that says this is a sukuk," Saidi said, stressing that Saudi Arabia's interpretation may be different from those in Malaysia.
These two countries have the lion's share of the global sukuk market. Data from S&P show that new sukuk issuance in 2009 increased to $23.3bn from $14.9bn in 2008. Despite the crisis, the geographic spread of sukuk issuance showed a marked resurgence in Asia in general and Malaysia in particular with 54 per cent of the total volume. Saudi Arabia also saw an increase to $3.1bn in 2009 from $1.7bn in 2008.
Meet for industry consensus
The DIFC and The Graduate School of Management at the University Putra Malaysia yesterday hosted a symposium to discuss various approaches for ?establishing industry consensus on the key characteristics of sukuk.
Titled 'Sukuk: Theory, Practice and Issues', the symposium formed part of DIFC's and University Putra Malaysia's joint efforts to promote standardisation and the development of academic literature on Islamic Finance issues.
Dr Nasser Al Saidi, Chief Economist of DIFC Authority, said: "Over the past few years, sukuk has gained wider interest beyond the Islamic world as a tool for raising finance and securitisation. With the global financial crisis reducing the appetite for risk and volatile asset classes, investors are increasingly looking at sukuk as a safe investment option. However, one of the key concerns investors have with sukuk is the lack of ?industry consensus on what constitutes a Shariah-compliant ?product."
Peter Casey, Director, Policy and Head of Islamic finance at DIFC, said: "At present, most issues in the sukuk market, whatever their form, are structured to have a similar economic effect to conventional bonds. In this situation, the regulatory issues are relatively straightforward. For the future, there may well be ?challenges posed by novel structures, especially if these involve real elements of asset or business risk."