Sukuk in focus The necessity for global common practices Deloitte Islamic Finance Insights Series Leading by engaging Sukuk in focus | The necessity for global common practices Contents 04 05 06 07 Foreword from Deloitte Foreword from ISRA Acknowledgments Executive summary 09 10 12 17 Introduction: Strategic Shariah governance and Practice and market Regulatory capabilities and practice approach sustainability institutions market development 40 41 Sustainability in focus Thinking further ahead: Practice and policy considerations 03 Sukuk in focus | The necessity for global common practices Foreword from Deloitte Dear Islamic finance practitioners, For Islamic finance practitioners, this will require re-thinking and re-modelling of For nearly two decades, many financial their governance frameworks and regulators and investment institutions business operating channels. Most around the world have been committed importantly, practitioners need to harness to strengthening practices in Islamic their Islamic finance corporate culture capital markets, and leverage standards and embrace a ‘back to basics’ approach for Sukuk as a key investment asset class. and adhere to designing products and Embedded within this has been an services in line with the ‘equity-base’ equally strong commitment from industry differentiator to fund real economy standards setters and other business projects. supporting institutions (BSIs) to address practice differences and inconsistency. Clearly, this can be streamlined in the first place, with Maqasid Al Shariah, which It is with great pleasure that we produce reflects values and practices of social and Dr. Hatim El Tahir, FCISI this report, and put forward our thoughts economic inclusion and sustainable Director, Islamic Finance Group on a number of business practices community development. Needless to say, Leader, Deloitte ME IFKC relevant to the Sukuk markets this goal can be achieved more efficiently Deloitte & Touche (M.E.) development in Asia, the Middle East and by adopting, for instance, the United Europe. Nations’ (UN) Sustainable Development Goals (SDGs), the Principles of The themes, topics and practice reviews Responsible Investment (PRIs), and social and analysis of selected key markets have impact and green Sukuk, to name a few. been researched in collaboration with ISRA, leveraging our specialist skills and This report is produced under the sector expertise, engaging leading Deloitte Islamic finance series “Leading by industry institutions and prominent Engaging”, produced by the Deloitte thought leaders to reflect on these Middle East (ME) Islamic Finance challenges and opportunities. Knowledge Center (IFKC). One driving theme is the global We hope that you enjoy reading it and do discussion around impact investment and not hesitate to get in touch should you responsible finance triggered by several need any more information. industry initiatives. The extent of adopting these investment guidelines by Islamic finance need is to be assessed and aligned to global capital markets, leveraging on Sukuk as a catalyst for investment projects in several economies. 04 Sukuk in focus | The necessity for global common practices Foreword from ISRA For a Sukuk market to thrive, a conducive Besides, more efforts are required in environment that would support active the aspect of standardization of legal Sukuk issuance, promote corporate documentation for various Sukuk governance, ensure fair, transparent and structures. This standardization will help efficient markets, and safeguard investor in providing simplified documents, which protection is vital. These principles are in will lower Sukuk issuance costs―a key line with international best practices factor pushing issuers and investors promoted by capital market standard- towards conventional bonds. There is a setting bodies such as IOSCO. As core ‘Sukuk standardization’ standard (IIFM Sukuk markets move towards aligning Standard 12) currently being envisaged by their practices to these international IIFM. This will certainly prove beneficial for standards―usually adopted by leading Sukuk to gain further traction. financial centers ―Sukuk will gain firmer ground in attracting the wealth of global This report, developed with the investors. collaboration between ISRA and Deloitte Professor Mohamad Akram Laldin ME, is an attempt at highlighting the Executive Director The adoption of best practices will also go necessity for the adoption of global International Shari’ah Research a long way in boosting market confidence common practices in Sukuk markets. I Academy for Islamic Finance (ISRA) and thus eliminating trust deficit issues, hope the content will be beneficial to all especially after the recent disputes in stakeholders of the Islamic finance some Sukuk issues. Indeed, these industry. disputes have further highlighted the need for the institutionalization of a I would like to seize this opportunity to proper Shariah governance framework to thank all those who provided support to ensure end-to-end compliance of Sukuk produce this report. Special thanks go to to the Shariah principles starting from the the team at Deloitte Middle East and ISRA structuring stage until the time of for their hard work and efforts. redemption. Last but not least, I would like to show The setting up of international Islamic appreciation to the subject matter standard-setting bodies such as the IFSB, experts and industry practitioners of the AAOIFI and IIFM has to some extent two workshops held in Kuala Lumpur and promoted greater harmonization in terms Bahrain as well as the respondents of the of regulation and supervision, Shariah online survey who shared their ideas and standards, and standardization of Islamic thoughts on the practices of Sukuk financial products and contracts, markets. respectively. However, given adoption of these standards is only voluntary, thus far To all readers, I wish them an insightful they have been adopted by a few and rewarding read. jurisdictions. 05 Sukuk in focus | The necessity for global common practices Acknowledgments Deloitte Middle East and ISRA are grateful Project contributors to acknowledge the support of a number Deloitte Middle East team of institutions and their contributions • Dr. Hatim El Tahir, Director towards the making of this report. We • Sajida Ali, Business Consultant salute their courage and spirit to work with us in addressing industry issues, ISRA team which we aim to share with all industry • Associate Professor Dr. Said stakeholders worldwide. Bouheraoua, Director of Research Development and Innovation A special word of thanks and appreciation Department, ISRA is due to three individuals who have • Professor Ashraf Md. Hashim, CEO, ISRA tirelessly continued to support ‘Deloitte Consultancy Sdn. Bhd Sukuk market dialogue’ and generously • Hissam Kamal Hassan, Research Fellow, provided time for our events and ISRA conferences, despite their busy work • Dr. Salma Sairally, Research Consultant, schedules. ISRA • Dr. Marjan Muhammad, Head, Research • Stella Cox, CBE, Managing Director, Quality Assurance Office, ISRA DDCAP Group • Tallat Hussain, Environmental Counsel, Industry experts White & Case • Dr. Hurriyah El Islamy, Executive Board • Peter Casey, Advisor to the IFSB and the Member, Badan Pengelola Keuangan UAE Securities and Commodities Haji, Member of Advisory Council on Authority (SCA) Islamic Finance, Astana International Financial Centre While the report has benefited greatly • Daud Vicary Abdullah, CEO, DVA from their contributions, the views Consulting Sdn. Bhd. expressed herein are solely those of the • Khalid Howladar, Managing Director and authors and do not necessarily reflect the Founder, Acreditus views of Deloitte and ISRA. • Stuart Hutton, CIO, Simply Ethical • Mufti Hassaan Kaleem, Shariah Scholar Industry supporters 06 Sukuk in focus | The necessity for global common practices Executive summary This report discusses the drive to Shariah governance promote efforts to enhance the Shariah governance functionality of Islamic capital markets and sustainability Maqasid Al Shariah & sustainability amidst the increasingly fragmented Priority sectors & SDGs alignment Islamic financial marketplace. In doing so, we believe, the Sukuk market ought to Sukuk structures & investors preference have better common practices globally as Practice and market a prerequisite for building effective Islamic institutions Practice & Shariah challenges capital markets. Development by standard-setting bodies We structured our analysis around three Asia broad considerations: the element of Regulatory capabilities enhancing Shariah governance with noble and market development • Malaysia • Indonesia objectives of the Shariah linked to those • Pakistan of the global sustainable goals, the strategic role of industry institutions to Middle East harness good practices, and current • GCC countries regulatory and policy support initiatives in Europe key markets selected for this study. • United Kingdom • Luxembourg In our view, this approach will not only • Turkey help enhance the functionality of Islamic Regulatory support capital markets but also integrate Sukuk Thinking further ahead: practices more effectively with global Practice & policy Niche, specialized Sukuk investment and financial markets. considerations Serving priority sectors To reflect on global investment practices, we have invited industry experts to share their perspectives on processes and • Daud Vicary Abdullah continues the • Stuart Hutton continues with