Kuwait's financial regulator has released rules covering issuance of Islamic bonds in a move that could facilitate sales of sukuk by both the government and corporations.

Corporate issuance of sukuk in Kuwait has dropped off in recent years, and the vast bulk of issuance has been in U.S. dollars rather than in Kuwaiti dinars. The government has not issued sukuk.

Bankers blame the lack of a specialised legislative framework covering Islamic bonds; two defaults on Kuwaiti corporate sukuk during the global financial crisis in 2009-2010 made investors wary of new issuance without such a framework.

Rules issued by the Capital Market Authority (CMA) this week aim to provide a legal basis for issues. The rules outline conditions that sukuk must meet to be tradeable, and describe specific formats such as instruments with perpetual tenors and those which can be converted into shares.

Sukuk issues must be approved by both the CMA and the central bank, according to the rules, which set out the obligations and powers of custodians of the instruments.

The government could be an early user of the rules because low oil prices have strained its finances. Finance minister Anas al-Saleh said in September that Kuwait planned to issue local-currency sovereign debt by the end of this year to cover its budget deficit.

Mazin al-Nahedh, chief executive of Kuwait Finance House , one of the world's oldest and largest Islamic banks, told an Islamic finance conference in Kuwait that lack of regulation meant KFH previously had to issue sukuk in foreign jurisdictions.

The new CMA rules will help to encourage corporate issuance of sukuk within Kuwait, allowing borrowers to tap ample investor demand inside the country, he said.