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Sector feature - UAE: DFM issues new standard for issuing, acquiring, and trading Sukuk

Sector feature – UAE: DFM issues new standard for issuing, acquiring, and trading Sukuk

April, 2014
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The Dubai Financial Market (DFM) published its ‘Standard for Issuing, Acquiring, and Trading Sukuk’ on the 2nd April 2014. Rima Mrad takes us through the details.

After researching and reviewing the existing Shariah Sukuk standards with Islamic scholars and various regulatory bodies, the DFM issued the Standard to ensure Shariah compliance in the owning and trading of Sukuk. The Standard outlines the definition, purpose and tradability of Sukuk. The DFM emphasizes that all Sukuk elements must be Shariah compliant, from the underlying contract to the income derived from the Sukuk.

The types of Sukuk covered by the Standard are: Sukuk of ownership of tangible assets; Sukuk of usufructs (leases); Sukuk of leases of services;
Sukuk Mudarabah (investment by a third party, Mudarib); Sukuk Musharakah; SukukSalam; and Sukuk Muharabah and Bay’Bethaman Ajel.

The general principles and Shariah parameters outlined in the Standard are:

1) the Sukuk must be issued based on Shariah law;

2) the Sukuk are not allowed if the issuance of realized funds is meant to be used in unlawful activities;

3) the return on the Sukuk must be based on actual asset investment and not a fi nancial liability on the issuer to use the funds;

4) the funds mobilized through subscription must be used for the same purpose as in the prospectus during the entirety of the investment;

5) the prospectus must include a clause for a Shariah committ ee to oversee the Sukuk;

6) the Sukuk may be nominal or given to the bearer in a change of hands situation; and

7) the sale of a Sukuk must be genuine, transferring both title and liability.

Forbidden Sukuk instruments include bonds and other interest/Riba-bearing instruments; stocks of companies whose primary activity is prohibited by Shariah law; stocks of companies whose interestbased lending comprises more than 30% of its total assets; stocks of companies whose income from unlawful sources comprises more than 10% of its total income; derivatives; and securities based on non-Shariah contracts.

The Standard does allow for Special Purpose Vehicles (SPVs) to act as trustees of the Sukuk, but it should be noted that the SPV must not be owned by the Sukuk issuer and must remain in compliance with Shariah law in its trusteeship over the Sukuk. Further, the Standard states that it is permissible for Sukuk managers to receive monetary incentives in their management of the Sukuk and also allows managers to issue prizes for reaching certain Sukuk milestones.

Overall, the Standard streamlines the Shariah compliance requirements of Sukuk and indicates an upcoming broader expansion of the use of Sukuk as an investment and security tool in Dubai.

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Published: April 2014
Publication: Islamic Finance News
Title: Sector feature – DFM issues new standard for issuing, acquiring, and trading Sukuk
Practice: Banking & Finance, Corporate and M&A
Authors: Rima Mrad

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