Sukuk ratings possible in UAE if investors insist on it

Investor faith in sukuk is intact in spite of various economic developments that took place in the recent past. However, investors have grown more cautious and the coming days would see them paying attention to detail in the structure, documentation and also an insistence on rating, says Khalid Ferdous Howladar, Vice-President, Senior Credit Officer, Structured and Islamic Finance, Moody's Investors Service. Investors need to be more educated in order to be clear on where they are putting their money, he said.

The Nakheel sukuk issue, he added, had more to do with Nakheel than with the fundamentals of sukuk. Whatever happened, could have "happened in the conventional sphere as well", not just in the world of Islamic finance.

Do you think investor confidence in sukuk took a hit due to the confusion that prevailed prior to the Nakheel sukuk repayment?

I think the Nakheel sukuk issue is a bit overblown. It was not a sukuk issue; it was a Nakheel issue.

The fact that they had problems is not specific to the sukuk market. It is an important company that has had some trouble, and that could have happened in the conventional sphere as well.

I think people are making too much of a connection. It's a problem in general, but not necessarily for Islamic finance. I think the issues are being mixed.

But how does one ensure that a sukuk is backed by an asset?

That depends on the investor. In all things, it's the person with the money who has power. If the investor says he wants it to be asset-backed, the firm would do so, but if an investor is not worried about that and says he wants unsecured [sukuk], the company would do that. It's the investor that drives the shape of the market.

But do investors usually not presume a sukuk to be backed by an asset and hence feel more confident of repayment?

That is an issue. They are complex structures. Sometimes, it may be difficult for the investor to understand them.

That's why, I do not prefer the terminology 'asset-backed' or 'asset-based'. I think investors do need more education. Those investors for whom it's important, with proper awareness, they can make the right decision. So through events on sukuks, and the research that we publish can help.

If an investor is really serious that he wants an asset-backed sukuk, he can ask a few questions, [and] he will get the answer. It's not very hard but it requires a bit more work on the part of the investor.

In that case, who would ensure a payment guarantee?

Payment guarantees are anyway not Shariah-compliant. We are already in a difficult space, given that it's already not compliant – I don't think it matters who gives [the guarantee], it's not an Islamic issue.

Do you think sukuks should be rated in the UAE, as is the case in Malaysia, which has managed to make its sukuk market a success story?

Again, it's investor demand [that would drive this]. In Malaysia, the regulator insists that all sukuks be rated. So, it's a legislative requirement.

Here, in the GCC, there is no such legislation. It depends on the investor. They have the power, so if they want a rating, they can say they will only invest in a sukuk if it has a rating. That will likely make the company go and get a rating.

About what percentage of sukuks in the UAE are rated?

Initially, it was low, [but] in the past few years, the number of ratings in sukuk have grown.

Do you think more investors would insist on factors such as ratings for sukuks?

Yes, I think so. Because now there are all these uncertainties.

What else do you see happening in terms of investor requirements in the changed economic environment?

I think they will pay more attention to detail in the structure, documents. And try to understand what is happening, the underlying risks.

By when do you see the environment turning positive?

Maybe towards the end of the year, you could see the markets calm down. For me, 2011 is when you would probably see more of recovery.

And when do you see faith returning to sukuk?

I don't think the faith is gone. I think certain people want certain things. In all things, it's the investor that drives, because it's their money.

PROFILE: Khalid Ferdous HowladarMoody's Investors Service

Howladar currently is the Vice-President and Senior Credit Officer of structured and Islamic finance, at Moody's, in charge of Middle East securitisation and sukuk finance. He also helps drive Moody's Islamic finance initiatives globally.

Earlier, Howladar spent four years at Credit Suisse as a senior analyst. He has lectured at Dubai University and authored articles for finance journals across the globe. He has an MSc degree in finance from London Business School, an MSc in information technology and a BEng degree in software engineering, both from the Imperial College of Science, Technology and Medicine.

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