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The rise and automation of Islamic finance with new rules and new standards

In the last decade, Islamic finance has become a $2 trillion dollar industry. Two recent developments point to an even brighter future for Islamic finance.

UAE new rules

Fitch Ratings-London believe that the new rules issued by the United Arab Emirates' Securities and Commodities Authority (SCA) could help the country become a regional hub for bond and sukuk issuance by smaller corporates. If successful among UAE companies, the new regime could attract issuers from Qatar, Oman and Kuwait that want to diversify and extend the duration of their financing, and also spur other regional markets to make their own reforms.

Corporates in the UAE and other Gulf Cooperation Council Countries mostly depend on short-term bank loans for their funding. Local-currency bond issuance is limited and currently only blue chip corporates can afford to issue bonds in the international market.

The new rules attempt to open up bond and sukuk markets to smaller issuers by cutting the minimum issue size to 10 million dirhams (USD2.7m), down from a previous floor of 50 million dirhams. The SCA also plans to shorten the time it takes to review and approve issuance applications to five days, while private placements of bonds not listed on the UAE securities exchanges will not need SCA approval. Issuers of bonds and sukuk now only need to make financial statements annually, instead of quarterly. This relaxation of reporting requirements will make the process more efficient but reduces the information available to investors. 

However, as Fitch point out, “the effectiveness of the new rules, which do not apply to government bodies or state-owned companies, will depend on successful implementation and building a track record in this segment.”

 

SWIFT new rulebook

SWIFT’s development of a new set of MT messages for Islamic finance, see, is vital for the automation of the current paper based Islamic finance procedures and processes. This is not simple standards development process because even within a single jurisdiction, Sharia interpretations can vary considerably. The new rulebook, which will clarify the use of financial messaging in Islamic Finance has now been agreed and is set to become available to the Message User Group (MGU) at the end of the year.

Future development

SWIFT plan to standardise other financial instruments – Murabaha flows, the Sukuk, Takaful and Wadia. If SWIFT can hammer out agreed standards on these instruments, corporates can only benefit as it will enable the integration of all important Islamic financial centres such as Bahrain, and the UK.

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