An Overview Of The Sukuk Market
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THE NEWS Investor’s, Page 01 Thursday, 19 March 2009 An overview of the sukuk market By Syed Imad-ud-Din Asad Islamic finance signifies financial services and products that comply with provisions given in the Quran and the Sunnah. It not only includes banking, but also capital formation, capital markets, and all types of financial intermediation. Over the years, Islamic finance has not only increased in size, but has also grown complex as finance professionals compete furiously to produce new Shari'a-compliant transactions and instruments. This innovation is most visible in the world of sukuk. Also referred to as "Islamic bond", sukuk signifies, speaking more accurately, an investment certificate. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines sukuk as certificates of equal value put to use as common shares and rights in tangible assets, usufructs, and services or as equity in a project or investment activity. AAOIFI sets sukuk apart from equity, notes, and bonds. It is made clear that sukuk are not debts of the issuer: they are interests in underlying assets or investment activities. Issuance of sukuk is a significant way of raising finance by institutions, corporations, sovereign and state entities. There is a variety of sukuk structures--- sukuk al musharaka, sukuk al mudaraba, sukuk al ijara, sukuk al istisna, etc--- and all of them employ techniques that are well developed in conventional markets for structured finance. It must be mentioned that not all sukuk structures are Shari'a-compliant. Unfortunately, at times, in order to create an Islamic product, finance professionals blithely re-engineer a conventional one and then sprinkle it with Arabic names and terminology. To an ordinary investor, Arabic alone is often enough proof of the Islamic nature of the instrument or transaction. In 2007, a very prominent Muslim scholar, Muhammad Taqi Usmani, openly questioned the Islamic credentials of the different prevalent sukuk structures and claimed that most of them were in violation of Islamic law. He particularly referred to sukuk al mudaraba and sukuk al musharaka. He claimed that the two structures had become akin to conventional interest bearing bonds: guaranteed returns and no risk sharing. Though Malaysia and the GCC countries are the centres for sukuk issuance, sukuk issuance is not limited to Muslim countries: there is a growing number of issuers based in the United States, Europe, and other parts of Asia. For instance, in June 2006, the U.S. saw the issuance of its first sukuk in Texas by Houston-based oil and gas concern East Cameron Partners, which raised $166 million. Sukuk are offered in specialised exchanges such as the Labuan Exchange in Malaysia, the Third market in Vienna, and the Dubai International Finance Exchange. They are assessed and rated by international rating agencies, and are generally issued in U.S. dollars. However, this issuance in U.S. dollars means that there is a currency risk for all non-dollar investors. The market for sukuk has seen tremendous growth: from less than $8 billion in 2003 to $46.65 billion in 2007. However, in 2008, sukuk issuance witnessed a 66 per cent decline all over the world. In Malaysia and the GCC countries the issuance fell 59 per cent and 55 per cent respectively. The fourth quarter was the worst as the amount of sukuk issued worldwide dropped Page 1 of 2
Available at
to $584 million. While it was mainly attributed to the falling prices of oil and the global financial turmoil, some--- for instance, Moody's--- claimed that Mr. Usmani's criticism of sukuk had a role in it as well. In fact, the increase in sukuk issuance in 2007, despite the global financial crisis, had caused some people to have unrealistic ideas and expectations regarding the maturity and strength of the Islamic financial industry. The situation in 2008 proved that Islamic markets were not immune from the ongoing worldwide downturn. Not just that, experts do not expect the sukuk market to recover before the recovery of conventional financial markets. According to CIMB, the largest underwriter of sukuk in 2008, sukuk issues may decline to $13 billion this year. Still, the future of Islamic finance, in general, and sukuk, in particular, does not look gloomy. There are over $1,000 billion worth of infrastructure projects planned in the Gulf over the next decade. Majority of these projects will be seeking Shari'a-compliant funding. However, Muslims need to be careful while devising new products. They need to make sure that Islamic principles are properly observed and that they do not present an un-Islamic idea as Islamic just because there is more profit in it. (The writer is a graduate of Harvard Law School, specialising in Islamic finance. For questions and comments, he may be contacted at [email protected])
Page 2 of 2
THE NEWS Investor’s, Page 01 Thursday, 19 March 2009 An overview of the sukuk market By Syed Imad-ud-Din Asad Islamic finance signifies financial services and products that comply with provisions given in the Quran and the Sunnah. It not only includes banking, but also capital formation, capital markets, and all types of financial intermediation. Over the years, Islamic finance has not only increased in size, but has also grown complex as finance professionals compete furiously to produce new Shari'a-compliant transactions and instruments. This innovation is most visible in the world of sukuk. Also referred to as "Islamic bond", sukuk signifies, speaking more accurately, an investment certificate. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines sukuk as certificates of equal value put to use as common shares and rights in tangible assets, usufructs, and services or as equity in a project or investment activity. AAOIFI sets sukuk apart from equity, notes, and bonds. It is made clear that sukuk are not debts of the issuer: they are interests in underlying assets or investment activities. Issuance of sukuk is a significant way of raising finance by institutions, corporations, sovereign and state entities. There is a variety of sukuk structures--- sukuk al musharaka, sukuk al mudaraba, sukuk al ijara, sukuk al istisna, etc--- and all of them employ techniques that are well developed in conventional markets for structured finance. It must be mentioned that not all sukuk structures are Shari'a-compliant. Unfortunately, at times, in order to create an Islamic product, finance professionals blithely re-engineer a conventional one and then sprinkle it with Arabic names and terminology. To an ordinary investor, Arabic alone is often enough proof of the Islamic nature of the instrument or transaction. In 2007, a very prominent Muslim scholar, Muhammad Taqi Usmani, openly questioned the Islamic credentials of the different prevalent sukuk structures and claimed that most of them were in violation of Islamic law. He particularly referred to sukuk al mudaraba and sukuk al musharaka. He claimed that the two structures had become akin to conventional interest bearing bonds: guaranteed returns and no risk sharing. Though Malaysia and the GCC countries are the centres for sukuk issuance, sukuk issuance is not limited to Muslim countries: there is a growing number of issuers based in the United States, Europe, and other parts of Asia. For instance, in June 2006, the U.S. saw the issuance of its first sukuk in Texas by Houston-based oil and gas concern East Cameron Partners, which raised $166 million. Sukuk are offered in specialised exchanges such as the Labuan Exchange in Malaysia, the Third market in Vienna, and the Dubai International Finance Exchange. They are assessed and rated by international rating agencies, and are generally issued in U.S. dollars. However, this issuance in U.S. dollars means that there is a currency risk for all non-dollar investors. The market for sukuk has seen tremendous growth: from less than $8 billion in 2003 to $46.65 billion in 2007. However, in 2008, sukuk issuance witnessed a 66 per cent decline all over the world. In Malaysia and the GCC countries the issuance fell 59 per cent and 55 per cent respectively. The fourth quarter was the worst as the amount of sukuk issued worldwide dropped Page 1 of 2
Available at
to $584 million. While it was mainly attributed to the falling prices of oil and the global financial turmoil, some--- for instance, Moody's--- claimed that Mr. Usmani's criticism of sukuk had a role in it as well. In fact, the increase in sukuk issuance in 2007, despite the global financial crisis, had caused some people to have unrealistic ideas and expectations regarding the maturity and strength of the Islamic financial industry. The situation in 2008 proved that Islamic markets were not immune from the ongoing worldwide downturn. Not just that, experts do not expect the sukuk market to recover before the recovery of conventional financial markets. According to CIMB, the largest underwriter of sukuk in 2008, sukuk issues may decline to $13 billion this year. Still, the future of Islamic finance, in general, and sukuk, in particular, does not look gloomy. There are over $1,000 billion worth of infrastructure projects planned in the Gulf over the next decade. Majority of these projects will be seeking Shari'a-compliant funding. However, Muslims need to be careful while devising new products. They need to make sure that Islamic principles are properly observed and that they do not present an un-Islamic idea as Islamic just because there is more profit in it. (The writer is a graduate of Harvard Law School, specialising in Islamic finance. For questions and comments, he may be contacted at [email protected])
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