OREANDA-NEWS. New rules from the Capital Market Authority of Kuwait (CMA) could reinvigorate the country's stalled sukuk market and open the door for issuance by corporations in 2016, Fitch Ratings says. But it is uncertain how the rules will be received by issuers and investors and how effective the implementation will be.

The lack of a specialised legal framework for sukuk has been a key factor in the limited issuance in Kuwait over the past few years and the new rules could therefore be a significant step. They provide a broad framework, setting out general terms and structure of sukuk, requirements for appointing trustees and setting up special purpose vehicles as well as rules on governance and ensuring sharia compliance. There are requirements for a credit rating for public issuance and the need for approval by the CMA and the Central Bank of Kuwait. The rules also cover perpetual sukuk issuances and update Kuwait's regime for traditional bond issuance.

As well as the lack of a regulatory regime, corporate sukuk issuance has also been limited due to the sector's heavy reliance on bank lending, helped by strong liquidity. This resulted in the almost complete absence of corporate sukuk issuance in 2014 and 3Q15.

The recent decline in oil prices has pushed a few of the Gulf Cooperation Council member states to issue or consider domestic issuance of sovereign debt in 2015. Much of this debt is likely to be long term and would be bought by the country's banks. This could consume some of the liquidity that has helped to make bank lending the primary source of funding for Kuwaiti corporates.

Sovereign debt issuance could also help potential corporate issuers by creating a pricing benchmark. We believe Kuwaiti corporates are more likely to issue sukuk than bonds because there is a wider local and regional investor base for sukuk and because some corporates are restricted to sharia-compliant borrowing by their own rules. Regional and international investors are increasingly happy to invest in sukuk. Corporate sukuk would add a much-needed sharia-compliant investment instrument for the Islamic banking sector, which is not allowed to invest in traditional bonds.

A recent memorandum of understanding between the CMA and the Dubai Financial Services Authority (DFSA) is a step towards allowing Kuwaiti financial institutions into the Dubai International Financial Centre, which is emerging as an international hub for sukuk listing. This could eventually broaden the potential investor base for Kuwaiti sukuk by enabling them to be listed in Dubai. Islamic finance and banking have been present in Kuwait since the 1970s with the first fully-fledged Islamic bank, Kuwait Finance House (KFH), established in 1977.