Sukuk and its growth across major islamic financial markets


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One of the most popular instruments under Islamic finance, Sukuk’s issuance accounted for 10% of the global Islamic finance industry in 2010. Sukuk are securities which comply with Shariah principles: (i) prohibition of payment and acceptance of interest and (ii) investment in activities which are speculative, uncertain or unjust.

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Sukuk and its growth across major islamic financial markets

  1. 1. Sukuk and its Growth across Major Islamic Financial MarketsUniversal Banking Solution System Integration Consulting Business Process Outsourcing
  2. 2. Islamic banking has a come a long way from its Sukuk (Bonds), which forms a major part ofinitial focal point of ‘interest free banking’. Today investment instruments of Islamic finance, andit has a diverse range of financial products chart its growth in markets worldwide.flourishing throughout the Middle East, Europeand Asia, with assets of approximately US$1.2 Sukuktrillion as of 2010. The industry is expected togrow at an annual rate of 25 percent. One of the most popular instruments under Islamic finance, Sukuk’s issuance accounted forBy the end of 2010, 63.4 per cent of 10% of the global Islamic finance industry inthe $1.2trn was held in Islamic instruments 2010. Sukuk are securities which comply withsuch as Shariah - compliant bonds (Sukuk), Shariah principles: (i) prohibition of paymentinsurance (Takaful) and equity products; 31.1 and acceptance of interest and (ii) investmentpercent in broader-based assets (mainly in in activities which are speculative, uncertainShariah - compliant bank accounts and or vehicles) the rest was held in -dedicated Islamic funds. Though widely known as ‘Islamic Bonds’ they are different from conventional bonds on various counts. Sukuk represents an undivided ownership in the underlying asset Investment Instructions: and partnership in the risk-returns of the Bonds, Insurance, Equity Products underlying business. Sukuk is asset based; in many cases its structure mandates minimum Islamic Funds percentage of tangible underlying assets. Unlike Broad Based Assets bondholders Sukuk certificate holders do not have a guarantee on their returns. Also, since Sukuk can only be issued for a purpose allowed World Islamic Assets Distribution: 2010 under Shariah law, there is an inherent risk of the issue being declared non-complaint asSource: CIMA FM Magazine there are varying interpretations of Shariah laws by Sukuk boards depending upon the countyIt has been observed and widely debated of issuance.that Islamic banks fared better than theirconventional counterparts during the economic From an issuers’ perspective, Sukuk candownturn. An IMF paper analyzing this says potentially be a cheaper source of financing.“Factors related to Islamic banks business There is a lot of investible surplus in the Islamicmodel helped contain the adverse impact on World which is not being put to productive useprofitability in 2008. In particular, adherence to due to the lack of Shariah compliant investmentShariah principles precluded Islamic banks vehicles. Supply is falling short of demand evenfrom financing or investing in the kind of with record issuance (47.1 billion H1’11), as ainstruments that have adversely affected their result of which Sukuk yields are very low asconventional competitors and triggered the compared with conventional financial crisis." This has led marketplayers to look at the importance of Islamic Popular Structuresbanking. However even though the result of thedebates remain uncertain there is no ignoring Sukuk can be structured into various typesthe burgeoning investor base, both from Islamic based on different Islamic modes of financing.and non-Islamic backgrounds; about 80 percent The Accounting and Auditing Organization forof Shariah compliant investment products in Islamic Financial Institutions (AAOIFI) whichMalaysia are held by non-Muslims. issues standards on accounting, auditing, governance, ethics, and Shariah complianceLooking at the growth expectations of this has laid down 14 different types of Sukuk, theindustry and growing investor base, this paper following are most common; Mudarabah Sukukdiscusses one of the most popular instruments – (partnership / finance trusteeship), Musharaka Sukuk and its Growth across Major Islamic Financial Markets
  3. 3. Sukuk (joint venture), Ijara Sukuk (leasing), Southeast AsiaMurabaha Sukuk (purchase order), SalamSukuk (deferred commodity delivery), Istisna This region continues to hold its principalSukuk (manufacturing or project finance) or a position in the market with Malaysia leading thehybrid of the above. way in Sukuk and equity products. In H2’10, Malaysia’s issuances constituted most of theSukuk Market Worldwide global Sukuk market with total value of USD 23.5 billion, dominating 99% of the periodsThe first global issuance of Sukuk occurred issuance in Southeast Asia and 83% of H2’10with the Malaysian Government Sovereign issuances worldwide. This is a direct result ofSukuk in late 2001. Global Sukuk issuance government’s support towards making Malaysiamarket has grown from USD 600 million in 2001 an Islamic economic hub and the premierto USD 50.5 billion in 2010 and 47.1 billion Islamic capital market. Indonesia is looking atalready in the first half of 2011. issuing USD 1 billion Sukuk in H1’ 11, this is as part of its plan to boost country’s ShariahCountry-wise Breakdown of Total Global Sukuk complaint finance industry.Issuance by VolumeSovereign, Quasi Sovereign & Corporate Issue Gulf Coast Countries(All currency issues), Period 1st Jan 2001 – 31st Due to the lack of large value Sukuk issuance,Dec 2010 there has been a decline in sukuk market in Country Number of Volume % of Total GCC, but it still holds the second position with Issues (US $ Million) Value total issuances of value reaching USD 1.76 billion in H2’10. Malaysia 1592 115393.76 58.51% UAE 41 32201 16.33% Despite the decline, efforts are being made to boost the Islamic bond and equity funds Saudi Arabia 22 15351.88 7.78% business, the - Central Bank of Bahrain has Sudan 22 13057.713 6.62% introduced a new regulatory framework allowing Bahrain 125 6291.69 3.19% a wider range of investment activities, including hedge funds, derivatives and alternative Indonesia 70 4658.5 2.36% investment vehicles. Dubai has also been making Pakistan 35 3447.207 1.75% itself more attractive to foreign users of Shariah- Qatar 6 2500.79 1.27% compliant instruments by setting standards and signing agreements for information-sharing Kuwait 9 1575 0.80% and assistance between regulators, as set Brunei out by the International Organization of Darussalam 21 1175.91 0.60% Securities Commissions. USA 3 767 0.39% The vast difference between success of Sukuk UK 2 271 0.14% in Malaysia and other Arab countries is Singapore 5 191.96 0.10% attributed to the differences in the interpretation Germany 1 123 0.06% of Shariah Laws by Sukuk Boards in these countries. For example, in Saudi Arabia, which Turkey 1 100 0.05% follows the Wahhabi form of Islam, the Japan 1 100 0.05% interpretation of Shariah is strict. Meanwhile, the Gambia 7 2.086 0.00% highly flexible reading of the laws in Malaysia, under the Shafi school of Sunni Islam, has Grand Total 1963 197208.496 100.00% helped to create the world’s largest IslamicSource: IIFM: The International Islamic Financial bond market. The Gulf States generally chart aMarket’s Organization middle course between these two extremes. Sukuk and its Growth across Major Islamic Financial Markets
  4. 4. Europe existing infrastructure and continuously evolve in terms of new regulations, harmonization onIn Europe, there has been no significant Shariah interpretation, liquidity management andgovernment, or quasi-government Sukuk issue, investment in technology to reduce costs andsince the German Sukuk in 2004. Reportedly, improve distribution networks to be able to reachthe UK government scrapped plans for a a wider investor base.sovereign Sukuk as it deemed that an issuewould not represent “value for money”. Though ReferencesLuxembourg also remains uncertain it is wellpoised for this market as no laws or amendments 1. S&P: Islamic Finance Outlook 2010are needed for Shariah-compliant funds to set 2. WFE: World Federation of Exchangesup here; they are not charged any taxes; andthe procedural timeframe is very competitive as 3. IFC: Islamic Finance Councilcompared to GCC. France again is believed to be 4. IMF working paper "The Effects of thea good bet but faces political obstacles. Global Crisis on Islamic and Conventional Banks: A Comparative Study”Cost Impact 5. IFIS Global Sukuk Market H2-2010 ReportApart from political or infrastructural impediments 6. CIMA: Chartered Institute of Managementstart-up costs – Shariah boards, extra auditing Accountantsfees and regulations – is a deterrent to newentrants. But governments across all regions 7. IIFM: The International Islamic Financialare devising ways to develop both the primary Market’s Organizationand secondary markets in Sukuk. Moresovereign issuances would help build yieldcurves for more efficient pricing. Governments Authorare also looking at tax deductions to give a fillipto the Islamic bonds sector. Sonam Garg Consultant – FinacleUltimately, for regions to succeed in this market Infosysit would be required that they capitalize on Sukuk and its Growth across Major Islamic Financial Markets