Sukuk Market Will Likely Have More Time To Adopt AAOIFI Standard 62, Report Says
At the beginning of February, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) held a couple of public hearings on Sharia Standard 62. In S&P Global Ratings' view, this standard will shape the future of the sukuk market. (See 'Sukuk Brief: More Time To Adopt AAOIFI Standard 62')
The AAOIFI will likely give issuers more time to implement Sharia Standard 62. In its public hearing over the weekend, the AAOIFI mentioned that it is likely to approve Standard 62 in 2025, and that issuers will likely have between one and three years to implement the new requirements, depending on the AAOIFI's final decision.
'Depending on the final timeline that the AAOIFI gives the market, this development could give sukuk structurers more time to develop structures that strike a balance between complying with the new requirements and making the sukuk attractive to fixed-income investors, if this is still possible,' said S&P Global Ratings credit analyst Mohamed Damak.
'However, the adoption of the standard could cause a decline in sukuk issuance,' Mr. Damak added.
If adopted as proposed, Sharia Standard 62 will, in our view, result in the sukuk market shifting away from structures in which the sukuk sponsors' contractual obligations underpin their repayments, to structures in which the underlying assets have a more prominent role.
Notwithstanding the fact that issuers will have more time to adjust to the new requirements, investors will likely face new risks relating to asset performance and value.
We continue to believe that if the standard is adopted as proposed, some investors and issuers may choose alternatives to the sukuk market, as issuing sukuk might become more onerous from a risk/reward perspective. This could also encourage some adopters to transition away from the standards if their ability to tap the capital markets is significantly restricted.
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