Bahrain: New Sharia standard ‘may slow down sukuk market’

Moody’s Ratings has warned that a new Sharia standard could slow down the vibrant sukuk market.

Sharia Standard 62, proposed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), mandates that sukuk be effectively backed by underlying assets, rather than simply referencing them.

This could increase the legal complexity of sukuk structures and raise transaction costs, potentially prompting issuers to seek alternative funding options, Moody’s analyst Abdulla AlHammadi said.

“Encumbered assets on companies’ balance sheets could reduce their financial flexibility,” Mr AlHammadi added. “In a distressed scenario, the issuing company may no longer be able to sell the sukuk’s underlying assets to raise cash.”

The deadline for feedback on the exposure draft of Sharia Standard 62 expired in July, with the final standard expected later this year.

The standard is followed in 12 countries, including Bahrain, which accounted for 13 per cent of total local currency sukuk issuance in 2023.

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