Islamic finance has grown significantly over the past few decades, positioning itself as a vital segment of the global financial system. Indeed, this area has drawn increasing attention from regulators, investors, and market operators alike. A sukuk is a Shariah-compliant financial certificate which is similar to a bond in Western finance.
Despite the global momentum, Malta’s regulatory framework has historically lacked clear and tailored guidelines for the issuance or structuring of Islamic finance products within its financial and capital markets. Recognising the growing relevance of this sector, the Malta Financial Services Authority (“MFSA”) has identified Islamic finance as a priority area for strategic policy development.
Understanding Sukuk
Sukuk are financial instruments that represent undivided ownership in tangible assets, usufructs, services, or a combination thereof, in accordance with the principles of Shariah (Islamic law). Islamic law prohibits “riba”, which is a similar to “interest” in the West. Therefore, sukuk were created in order to link the returns and cash flows of debt financing to a specific asset being purchased, effectively distributing the benefits of that asset. An investor in a sukuk, therefore, does not own a debt obligation owed by the bond issuer, but instead owns a piece of the asset that’s linked to the investment. This means that sukuk holders receive a portion of the earnings generated by the associated asset.
The most common type of sukuk comes in the form of a trust certificate. The organisation raising funds first creates an offshore special purpose vehicle (“SPV”) which then issues trust certificates to qualified investors. It then puts the proceeds of the investments towards a funding agreement with the issuing organisation. The investors earn a portion of the profits linked to the asset.
Introducing Specific Provisions in Relation to Sukuk
As part of its commitment to enhancing Malta’s financial market offering, the MFSA has taken a landmark step towards supporting Islamic finance through the introduction of sukuk-specific provisions. These changes are aimed at facilitating the listing of Sukuk on the Institutional Financial Securities Market (“IFSM”) and providing legal and regulatory certainty for issuers and investors alike.
1. Integration into the Capital Markets Rules
The newly introduced sukuk provisions have been incorporated into the revamped Capital Markets Rules applicable to the IFSM. These changes are strategically structured to align with existing regulatory standards while accommodating the unique features of Shariah-compliant instruments. The provisions are distributed across key areas of the Rules, including:
· Conditions for admissibility to listing – These conditions outline the structural and Shariah-compliant nature of Sukuk, the requirement for underlying asset ownership, and the role of the issuer/SPV.
· Approval of prospectuses and admissibility to listing – Specific disclosures relating to Shariah compliance, details of the underlying Islamic contract, and the certification by a recognised Shariah Supervisory Board are now required.
· Continuing obligations – Sukuk issuers are required to maintain ongoing Shariah compliance, disclose material developments affecting the Shariah structure, and ensure the integrity of the asset base throughout the lifecycle of the sukuk.
2. Recognition of Shariah Principles
The MFSA’s approach acknowledges the distinct legal, ethical, and operational features of Islamic finance. The new rules ensure that the integrity of Sukuk structures is preserved, while also integrating them into the broader capital markets framework without compromising investor protection, market stability, or regulatory oversight.
3. Strategic Outlook
This regulatory initiative is only the beginning. The MFSA is actively consulting with stakeholders and exploring further reforms to support Islamic financial instruments, products, and services. By introducing a dedicated framework for sukuk within the IFSM, Malta aims to attract new market participants and position itself as a credible hub for Shariah-compliant finance in Europe.
Conclusion
The introduction of tailored sukuk provisions within Malta’s Capital Markets Rules signals a progressive step towards diversifying the country’s financial services landscape. As demand for ethical and Shariah-compliant investments continues to rise, Malta’s regulatory readiness will play a crucial role in tapping into this growing market. The MFSA’s commitment to Islamic finance not only reflects global trends but also aligns with a broader vision for inclusivity and innovation in capital markets. With the right regulatory and advisory support, sukuk can serve as a bridge between traditional finance and the values of the Islamic economic system.
