Interview: Mazin Al Nahedh
What challenges do banks face in leveraging and developing new Islamic instruments?
MAZIN AL NAHEDH: Acceptability of new product documentation among banks is one of the key challenges faced by Islamic banks. Each bank prepares documentation for a new product in accordance with the acceptability of its sharia board. However, this approach has resulted in different sets of documentation among banks, which consumes time and resources. The International Islamic Financial Market has played a very significant role in standardising product documentation such as Treasury bonds, hedging and swaps, and risk participation, among others. However, there is still a significant time lapse between the launch of a new product and the standardisation of its documentation.
How can the regulatory framework support growth in the sukuk (Islamic bond) market?
AL NAHEDH: The sovereign issuer is generally the starting point to promote the sukuk market in a given country. Sovereign issuance not only creates a pricing benchmark for corporations and banks in the relevant jurisdiction, but also sets up a regulatory framework to structure the sukuk market for such corporations and banks. Accordingly, our key focus is on countries that have not yet issued a sovereign sukuk but are looking into it. We are encouraging them to launch a debut issuance, as we strongly believe this approach will open doors for the development of dynamic sukuk markets for both corporations and banks in those countries.
From a regulatory standpoint, supporting development and growth in the sukuk market first requires that regulators focus on the core nature of the underlying instrument: the senior unsecured paper, and therefore the asset base for structuring purposes. The issuer should have to identify and ring-fence some assets to support issuance of the sukuk, but it is not required to mortgage assets, as is typically done in asset-backed financing. For instance, if a country is issuing a sukuk based on certain assets, such as toll roads, the general perception is that the country would have sold such toll roads in order to secure sukuk funding. The fact is, that in no circumstance – including in the event of default by the country – would the sukuk holders be able to take possession of such a toll road or sell it to a third party for the recovery of their sukuk amount. The only recourse to sukuk holders is to force the government to buy back such assets from the sukuk holders, and they will be in line with any other unsecured conventional bondholders.
In what ways are Kuwaiti Islamic banks pursuing internationalisation, and what challenges are they facing in the current economic climate?
AL NAHEDH: Islamic financial centres play a certain role in the internationalisation of financial markets, and the global Islamic finance industry has witnessed steady double-digit growth in assets over the past few years. Islamic finance assets are now estimated to surpass $3trn in value, with further growth expected in the coming years.
Banks are facing challenges in a number of areas. While oil remains the dominant force and the single most important economic lever, prices have become more volatile due to the geopolitical context. For that reason, governments need to accelerate the diversification of their economies away from reliance on oil exports for revenue.
With regards to the challenges that the banking industry faces, financial technology is a main disruptor. It challenges the sector in terms of regulatory compliance since standards have to be applied to digital solutions, and in terms of management of information and customer experience by overhauling legacy systems and requiring quick adaptation.
