Abdulkader Thomas began by asking Qudeer Latiff whether or not the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)’s challenge and its Shariah board chairman Sheikh Taqi Usmani’s statements are changing the market substantially.

Quedeer said as a result of AAOIFI’s pronouncement early this year, there were a number of issues but these predominantly concerned Murabahah and Musharakah structures.

As a result of AAOIFI’s ruling, the market has not restricted but rather changed direction. The market has moved closer to the ideal Islamic investment where the investors are actually taking risk on the underlying assets.

Abdulkader then asked Alhami Mohd Abdan about the challenges for issuers in terms of structure and in reaching abroad to investors. According to Alhami, Islamic bonds or Sukuk are the most defensive investment in nature and the primary features that drive most investors is credit quality.

There are three criteria that differentiate bonds from other classes of capital. Firstly, duration, where there is no voting or management rights as its fixed income in nature. Hence, the investors that like the features are mostly institutional investors.

Secondly, because of AAOIFI’s pronouncement in February, Shariah momentum is heading toward more equity-based structures that are on the other end of the capital spectrum and the challenge is in matching these two divergence requirements.

Thirdly, the other challenge in going international is more to do with middle capitalization category of issuers.

Abdulkader then asked Seohan Soo about the important development for the securitization side of the business. According to Soo, asset backed securitization (ABS) is a technique for structured financing and typical ABS involved sale of assets whereas in the case of Sukuk, it needs underlying assets and tangible securities.

In the financial market, the trend is more toward structured financing ideas, not legal true sales but maybe control of assets like stamp duty and taxation issues. Investors and issuers are looking at structures that are tax efficient as well as rated triple A which are attractive of course, in the pricing. For the Malaysian market, there are some cross-border ABS transactions being structured.

Abdulkader then sought the panel’s view on whether Malaysia and the GCC are drifting apart or becoming closer, and whether the AAOIFI situation accentuated differences or created better opportunity to come together.

Qudeer said the divergence within certain parameters is healthy because it encourages innovation and new structures. The vast majority of liquidity is in the Middle East and issuers in this part of the world who want a sizeable transaction will structure it such that it is accepted in the Middle East.

To Abdulkader’s question on what makes a more efficient Islamic market, Megat Hizaini Hassan said there is a need to recognize the products of one particular market in another market and that there should be a reciprocal arrangement for the recognition of products between regulators.

There is also a need to address the issue of Shariah compliance in terms of one’s market with another market. If there is disagreement, it would be difficult to develop a common market.

Qudeer said one of the issues is education, particularly in the Middle East where conventional securitization has never existed as an asset class. And over the last three to four years, while the Islamic capital market has grown exponentially, it has been all corporate credit risk. Now, the corporate credit risk Mudarabah and Musharakah pose is no longer allowed, there is a need to move to more Shariah compliant instruments, but the market does not fully understand what Shariah compliant securitization is.

Alhami said in terms of legal differences, Malaysia has established regulatory infrastructure which facilitate true sale securitization. Hence, to bring an issuer from the Middle East to Malaysia to securitize a property in the Middle East, the legal issues must first be resolved.