The challenges ahead
A financial concept which needs to be studied in depth
SUKUK BY MUFTI MUBASHIR
SUKUK (the Arabic word for legal instrument or a name for a financial certificates) is Islamic equivalent of bonds. Islamic finance does not recognize fixed income or income bearing bonds, as such sukuk securities are structured to comply with Islamic laws and investment principles, which does not allow charging or paying of interest. Financial assets which comply with Islamic finance can be classified in accordance with tradability in the secondary markets. It is asset class that enables organizations to raise capital in a shariah compliant manner.
It is well known that Islam rejects the institution of riba (interest) and gharar (excessive uncertainty) and Maysir (gambling) and Qur'an considers them as unjust and exploitative.
Deal not unjustly and ye shall not be dealt unjustly (Quran2:279)
The term `Islamic bonds' is misleading, since they are not bonds. They are pool of assets packaged and sold to investors which in turn receive periodic payments allowing the main assets to use. They might behave as bonds and are not structurally bonds. Sukuk gained mass acceptance during the last decade. It represented ownership of an asset, It is not a claim to cash flow but an ownership claim.
Sukuk owes its origin to middle ages where it represented papers representing financial obligations from trade and financial market. Sukuk is different from original in which ownership of the assets is transferred to traditional concept of securitization, a process where ownership of a underlying asset is transferred to large number of investors through certificates representing proportionate value of assets. About 1.3 Trillion assets are being managed according to Islamic investment principles, it is estimated that twenty percent of banks customers would look for an Islamic financial product over a conventional one with similar risk returns. It is said that sukuk financing is similar to green investing.
Sukuks are important because they represent a new source of funds at attractive rates. They represent Islamic markets liquidity. Investors are tapping on this product as there is surplus cash, it allows room for wealth to be unlocked.
In modern perspective, the essence of sukuk lies in asset monetization the so called Securitization that is by issuing Sukuk taskeek. Sukuk can be structured by different methodology. There is some degree of disagreement and Moulana Mohammad Taqi Usmani president of Shariah Council in a paper titled “ Sukuk and their contemporary applications” identified three key structuring elements that differentiates sukuk from conventional bonds.
A) Sukuk must represent ownership shares in assets or commercial or industrial enterprise that brings revenue or profit.
B) Payments to sukuk holders should be the share of profit of assets or enterprise.
C) The value paid to Sukuk holders on maturity should be current market value of assets and not the principal originally invested.
Primary criticism of Sukuk is that it requires payment for time value of money which is regarded as fundamental test of interest. The fixed value of returns on investment, which is similar to interest, in that investors return is not dependent on risk of particular venture. Banks that issue sukuk are investing in assets and not currency. Return of such assets take the form of rent which is evenly spread over the rental period.
Sukuk constitutes partial ownership of debt (Sukuk Murabha), Sukuk al Ijara, project Sukuk al Istitna, business Sukuk al Mushraka or investment Sukuk al Ishithmer. Sukuk structures replicate the cash flow of conventional bonds and are listed on present exchanges LSE and Luxemburg stock exchange and made tradable through Euroclear. The most accepted structure which is tradable is Sukuk al ijara.
In emerging economies, debt markets are in early stages of development, since Islamic laws prohibit charging or paying of interest, therefore in countries which is predominantly muslim populated traditional debt markets cannot make huge profits as such the need for the alternative.
There are about 150 million to 200 million Muslims who constitute minority percentage population of India. It is biggest untapped market for Islamic investment funds, especially equities, exchange traded funds ETF’S, exchange traded commodities ETC’S . The Bombay Stock exchange BSE is currently working with number of firms who are interested in structuring shariyah compliant equity fund products. It has recently launched BSE Tasis Shariah 50 index , which will cater to Indian and international investors, regardless of faith with a new index which can be put to use to track investments that are compliant with Shariah laws.
Shariah Index has certainly drawn attention in and outside the country. This house has three scholars on its shariah board, Mufti Saifullah Rahmani who has to his credit publication of fifty books on shariah matters. Mufti Barkuttullah from UK ,besides advising many banks is a great scholar, and Iqbal Hassan Nadvi from Canada.
The year 2011 has been set as a target year by Saudi Arabia, Malaysia, and Qatar to spend one trillion Dollars on development projects. AT least 3.9 billion Dollars of Islamic bonds sales will fund the building of oil refineries and petrochemical plants, according to data collected by Bloomsberg.
Sukuk was displayed in all major headlines of the world in 2009 and Islamic products were referred to as “ coming of Age.” It was when International Finance corporation listed a whopping US$100 million on NASDAK Dubai. Global Sukuk issuance has reached over US$30 billion mark according to Kuwait finance house reports.
Our state being as of now a muslim majority state, there is a pressing need felt, for establishment of Islamic finance, that will be addressing tomorrow's needs today.
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Lastupdate on : Wed, 20 Apr 2011 21:30:00 Makkah time
Lastupdate on : Wed, 20 Apr 2011 18:30:00 GMT
Lastupdate on : Thu, 21 Apr 2011 00:00:00 IST
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