By Maurice Bauer, Secretary General, LuxSE
Financial professionals who are familiar with the Islamic finance market and its specific products know that it hides many opportunities. Despite the economic downturn caused by low oil prices, the Sukuk market keeps growing at a fast pace.
Is low liquidity a problem for investors?
The asset-backed structure of Sukuk gives comfort to investors looking for a medium-term investment instrument with minimal liquidity and low intrinsic credit risk. This is why the market has so far attracted a very specific investor profile, unlikely to be deterred by liquidity matters.
There have recently been some efforts to increase liquidity and encourage issuers to list these instruments on stock exchanges. We will see if these measures will have any positive impact on market liquidity.
Standardisation: key for the growth of Islamic finance
The Sukuk market needs more and better standards, but with a balanced approach. One of the main benefits of Islamic finance is its flexibility. Falling into the extreme of too much standardisation could limit this and risk hindering the market’s growth.
A first step could be creating simpler and more uniform documentation. This would help in structuring products and lower the cost for participants. Evaluating the market performance of Sukuk should not be a complicated process. Fintech and digitalization could be a game-changer, bringing automation and efficient processes.
With the standardisation of documentation come transparency and comparability. These elements are essential to build trust in the market and allow investors to make informed decisions.
Shariah-compliant products need a level-playing field
The drive for sustainability could help Islamic finance. The green bond market is growing fast and, therefore, promoting the issuance of green Sukuk could be a good way of boosting the sector.
Islamic finance is, however, not without risks. We should pay attention to elements such as risk management, investor compensation schemes, banking supervision or bankruptcy laws, but avoid over-regulation.
This article was first published in Islamic Finance News, Volume 15, Issue 23, dated the 6 June 2018. Online version available here.