The UAE launched an initiative on Saturday to allow individuals to invest in Sharia-compliant government bonds.
“This represents a strategic step towards advancing financial inclusion and promoting a culture of long-term savings,” Sheikh Maktoum bin Mohammed, First Deputy Ruler of Dubai, Deputy Prime Minister and Minister of Finance of the UAE, said.
Traditional bonds are pure debt obligations in which the issuer raises capital through bond issuance and, in turn, promises periodic coupon payments and repayment of principal at maturity. The issuer is the borrower and the investors are lenders.
By contrast, Islamic bonds denote ownership of the underlying tangible Sharia-compliant instrument, asset or project. More importantly, the returns are a direct result of how the underlying asset has performed or are derived from lease or rental payments or profit-sharing.
They do not constitute guaranteed interest payments, as such payments are prohibited under Sharia. They are structured to resemble asset ownership or lease and, therefore, include risk sharing as well as asset ownership and usage.
How to access these bonds
Investors can use online platforms of several licensed banks operating in the UAE. Several participating banks are associated with this initiative, and the name of the first will be disclosed on November 3. Investors can also use the financial services of firms that operate as custodians or brokers.
The government-backed Treasury Sukuk − T-Sukuk − will be listed on both the Dubai Financial Market and Abu Dhabi Securities Exchange, facilitating easy investment.
Benefits
Digital accessibility, low entry points, security and diversification are among the key benefits. Since these bonds are dirham-denominated, this minimises currency risk and could strengthen the domestic debt market. It could also encourage greater investor participation, as the minimum investment amount is just Dh4,000 ($1,090).
These bonds are also backed by the full faith and credit of the UAE government, and based on high-quality, sovereign-backed assets, providing a safe avenue for residents to build savings beyond traditional deposits.
Risk considerations
The value of these bonds can fluctuate in the secondary market. Therefore, investors who sell before maturity may incur a loss depending on market conditions at the time. Also, since these bonds carry a defined tenure, liquidity might be slightly lower than that of savings accounts with instant access.
Retail investors should also understand that these bonds carry higher exposure to the performance of the underlying assets.
Return structure
Until now, these instruments were available only to institutional investors, banks and prominent funds. However, both residents and citizens, including young employees and novice investors, can now invest in them.
The return profile will align with the Islamic Treasury Sukuk framework set forth by the Ministry of Finance.
The UAE T-Sukuk is a Murabaha sukuk (cost-plus-profit financing), in which the UAE Central Bank establishes a special purpose vehicle on behalf of the Ministry of Finance.
This SPV uses the capital raised to invest in Sharia-compliant commodities or assets, then sells these assets to the Ministry of Finance at a premium. The government, in turn, pays deferred profit payments to the sukuk holders, usually semi-annually.
Government guarantee
These sovereign Islamic Treasury Sukuks are issued by the UAE government through the Ministry of Finance and the UAE Central Bank. Therefore, they are backed by the full faith and credit of the UAE government. Both the periodic profit payments and the repayment of principal at maturity are the obligations of the government.
This offers strong sovereign-level credit protection to investors, making them just as safe as traditional UAE Treasury bonds. Given the UAE’s strong fiscal position and high sovereign credit ratings, the risk of default is relatively low. The government also has strong liquidity buffers in place, with the support of the sovereign wealth funds in the region.
Vijay Valecha is chief investment officer at Century Financial
