The United Arab Emirates securities regulator has announced new measures to improve sukuk and local currency bond markets for investors.
In a shake-up of rules governing issuance and trading of bonds, the UAE Securities and Commodities Authority (SCA) outlined how the new market will work.
The aim is to make issuing bonds cheaper and quicker for companies, while easing trading restrictions for investors.
The move addresses problems companies outside the oil and gas sector in the UAE have in raising cash to expand their businesses.
Companies wanting to grow tend to rely on bank loans, which can hold back growth as debt finance comes with the costs of arranging and repaying finance from working capital.
Broader investment base
Bonds allow companies cut costs and to structure repayments to investors more favourably.
“The UAE wants companies to have easier access to finance and developing bond and sukuk markets will allow this,” said an SCA spokesman.
“If companies take up this option, the measures we have announced could change corporate finance and let smaller companies that cannot currently issue bonds into the market.”
The SCA also sees corporate bonds as a way of spreading business risk across a broader base of investors rather than leaving banks holding huge amounts of business debt on their balance sheets.
Under the shake-up, private companies can issue a bond for a minimum £1.6 million – down from the current minimum of £8.3 million.
Bonds issued by the UAE government or state-owned enterprises remain unaffected.
Private unlisted bonds will not need SCA approval under the move, while the approval process for listed bonds is cut to five days.
The new rules also do away with quarterly statements from bond issuers in favour of an annual statement and a requirement to have the bond rated by a credit agency is scrapped. These administrative measures are designed at cutting the cost of bringing bonds to market.
A sukuk is an Islamic bond that shares the asset with investors, giving them a cash return.
Sukuks are similar to conventional bonds but are recognised as Sharia’ah compliant. Sharia’ah law forbids charging or paying interest.
Many financial experts see sukuks as a major untapped financial source for companies seeking to borrow funds.
Recently, the first London sukuk £200 million sukuk fund was hugely oversubscribed, demonstrating an appetite from institutions and investors.
These new measures in the UAE are partly aimed at driving forward the development of the country as the key financial centre for the Middle East.