DFSA, Malaysia sign Islamic finance MoU

DUBAI — The Dubai Financial Services Authority (DFSA) and the Malaysian Securities Commission (MSC) yesterday signed a Memorandum of Understanding (MoU) to commit to a project designed to remove regulatory barriers to Islamic finance transactions between Dubai and Malaysia.

By Lucia Dore (Senior Correspondent)

Published: Wed 16 Aug 2006, 10:09 AM

Last updated: Sat 4 Apr 2015, 2:14 PM

Signed in the Malaysian capital, Kuala Lumpur, the MoU also commits the two sides to broad based cooperation and information sharing.

Speaking to Khaleej Times, chief executive of the DFSA, David Knott said: "This is an important initiative in terms of Islamic finance because Malaysia has established itself as the leading Islamic finance centre in Asia and the DIFC aspires to become a leading centre of Islamic finance in the Middle East. As the most modern finance centre in the region we have all the frameworks necessary to enable funds management and capital markets transactions to be developed in the Islamic finance area."

The project with the MSC commits the two sides to looking closely at the way Islamic finance transactions and capital markets and funds management more broadly are regulated, to try and harmonise the approaches.

"The objective is for capital markets transactions that originate in Dubai to be sold into the corresponding jurisdiction with the least possible additional regulatory compliance costs," said Knott.

"The objective is for capital markets transactions that originate in Dubai to be sold into the corresponding jurisdiction with the least possible additional regulatory compliance costs."

This means that cross border transactions will be able to be undertaken with optimum efficiency and minimum replicated compliance cost. "We have a specific project to work through to try and generate a passport for crossborder transactions between the two jurisdictions and it is just one further step in building the capacity of Dubai and of this centre," he said.

He also said the initiative could be seen as part of a broader picture. "I paint this initiative against the broader backdrop of having recently introduced a managed funds regime, which is the leading regime of its type in the Middle East, and a Real Estate Investment Trusts (REITs) regime for property trusts," said Knott.

"Taken together, I am confident that you will see out of this centre in the foreseeable future some very large managed fund transactions both in property and non-property sectors and Islamic finance is part of the bigger picture - which is the growth of this centre for managed funds."

One of the reasons why Knott is so positive about Dubai's future as a significant centre for Islamic finance is that the regulatory structure has been designed to meet with internationally accepted standards and principles — with variations only as required to reflect Shari'a compliance — from day one.

"We have a huge advantage in this respect because, in many other places, there simply isn't the framework," he said. "In many cases regulators have had to bolt onto the existing regime which is a hard thing to do, whereas we've been able to start with a clean sheet of paper and build the Islamic finance regulation cohesively into our whole framework. Plus of course we have western style and market conduct rules," he added.

The regulatory framework is based on the principles of IOSCO, Basel, IAIS and FATF, making it easily recognisable to the major capital markets.

This latest initiative is as significant for non-Islamic transactions as it is for Islamic ones, and any differences in Shari'a interpretation are only part of the issue.

Knott explained: "If we take a non-Islamic transaction we would still have the same issue — how to regulate funds in Malaysia and how to regulate funds in Dubai. Are we close enough together to allow our funds to have a passport from one jurisdiction to the other?"

He continued: "We don't know the answer yet. Part of this project will be to undertake a stock take of the areas of regulations: what they do, what we do. That might take some months."

The DFSA will not be involved in the interpretation of Shariah law. "We judge the firms by the adequacy of their procedures and processes and whether they continue to comply with those, rather than becoming involved directly with Shari'a interpretation," said Knott. Regulations focus on the process for setting up the board, for assessing the competence of the scholars, and the procedure that separates Shari'a rulings from the management of the company.

He added: "It will clearly be very helpful to the internationalisation of Islamic finance if interpretations gather a reasonable degree of consistency." As it stands, "Malaysia has a somewhat less conservative approach to some interpretations of Shari'a requirements" than the Middle East."

Another DFSA objective is to see Islamic finance become part of the mainstream capital markets. "If that happens the benefits for the Islamic communities will be reduced. Their capacity to fully enjoy the benefits of the international capital markets is to become fully involved as a partner in them," said Knott.

To achieve that, however, there is still a great deal of work to be done. "You can't just do what we are doing with Malaysia and think you automatically have a thriving business in capital markets," said Knott.

"You have to have an environment in which those capital markets can be properly traded in the market with proper transparency, governance and the like. "The advantage we have is that we can offer these things in the centre," he continued.

Although there are very few crossborder transactions now, Knott believes this will soon change. Sukuks (Islamic bonds) "are the most likely products [to grow] and there is clearly a very big appetite for them, as has been demonstrated by the success of the issues that have been made in both places."

He added: "If you look at the next 12 months and what is coming up the majority by value is coming out of the Middle East." He anticipates that some of these Sukuks will be listed on the Dubai International Financial Exchange (DIFX).

He also said: "There is absolutely no reason why some financial institutions could not be looking at coming into the centre as authorised firms, to do business here. We'll make it easier for them. Why not form a presence here and become a direct participant in this market? I think there are a lot of opportunities and I think we are well placed to help this development."

Demand for Islamic finance shows significant growth

The largest Sukuk to date has been the $3.5 billion issue by Dubai Ports World earlier this year; and there was also the $1.6 billion issue, part of the Jebel Ali airport financing.

Last months' new issues included the Saudi issue of $800 million for a petrochemical company — the first ever 20-year-long Sukuk structure and a $200 million issue by a UAE air cooling company.

According to the address given by David Knott at the Malaysian Finance Forum, Moody's recently reported that the Gulf has experienced a 45 per cent annual growth rate in the issuance of Sukuks and similar products over the past five years, and that number is set to increase further.

The DIFC has forecast around a further $9billion of issues in the Gulf before the end of this year. And the Gulf accounts for more than 80 per cent of announced issues by value for the next 12 months. "With some $200 billion of projects planned for public and private development in Dubai alone over the coming years, Shariah compliant financing is a major growth industry," said Knott. He also said: "While the Dubai Ports issue tops the current Islamic debt league tables, the list of current issuers reflects the leadership role that Malaysia has played in introducing these products to the world. Dubai is therefore still a fairly young player in this league, but it is learning fast and is eager to benefit from the experience and expertise of others.

"There are many reasons to be positive about the future in the Middle East for Islamic finance generally and capital markets in particular. He said: "The commitment to infrastructure development, involving both public and private sectors, is at unprecedented levels. But just as importantly, there is a growing recognition of the need for structural and regulatory reform that will foster the growth of capital markets and enable their interface with established centres. In the Middle East, the DIFC and the DFSA are perhaps the leading examples of this; but the trend is tangible throughout the UAE and the wider region."

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