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Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk
Euromoney Institutional Investor, June 2004, Pages: 194
In Chapter 1, 'Investment in Islam', we examine the major precepts that govern Islamic investing and how these allow for an ordered and systematic approach to investing and financial markets. The primary Islamic concerns relating to ribaand gharar are addressed in a manner to allow readers to compare these concepts with conventional regulations.
We then examine the rules that distinguish sukuk from fixed-income instruments ranging from certificates of deposit to bonds and floating-rate notes. Also, we will examine why the approach to the trading of true debt is not shared uniformly between Malaysia and the Arabian Gulf.
There is a detailed study of sukuk in Chapter 2, ' Sukuk: origins and distinctiveness'.
With the knowledge of specific Islamic legal theories, sukuk may be structured to meet Islamic transactional rules relating to asset possession, measurement and transfer. The chapter also outlines the Important work that has been done by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to develop 14 prototypical sukukin its Investment SukukStandard. The AAOIFI standard identifies a unique universe of securities that may be similar to conventional bonds, but the asset-based sukuk are not asset-backed secured claims on a debt. This difference and the distinction between the Malaysian and other Islamic views on this point are contrasted to provide a road map for bankers and issuers with respect to instrument and jurisdiction choices according to the investor or need to be served.
Chapter 3, 'Structuring sukuk transactions', establishes that sukuk adapt well to modern western capital market techniques. This means that sukukoften emulate bond-like features and benefit from the latest developments in the asset- and mortgage-backed securities markets. In corporate finance, sukuk allow for balance-sheet management and cultural integration. Sukuk allow for the monetisation of assets and dispersion risk in a Shari'acompliant manner at an enterprise or bank that mandates this faith-driven imperative.
'Sovereign sukuk: applications and implications' are the subject of Chapter 4. Although both financial firms and non-investment-grade governments have tested sukuk concepts since the mid-1980s, the sukuk market has taken off thanks to investment-grade government issuances. These sukuk programmes have begun to help Islamic banks transition from the commodity murabahatrades. Nonetheless, the full range of 14 prototypes has not worked its way into the market.
In Chapter 5, we examine ' Sukuk applied to corporate finance and real estate'. This chapter explores the corporate market as well as the increasingly widespread application of sukuk in the North American real estate markets, showing the way forward for both corporate users and for the introduction of sukukbased on the less well-developed contracts including istisna'a, even extending to timesharing. Finally, real estate investment trusts (REITs) offer more than one frontier of growth for sukuk, representing a form of sakkas well as a means to acquire sukuk.
'Enabling infrastructure' is the theme of Chapter 6. Although sukuk may not necessarily be distinct from other forms of cross-border securities, the Islamic financial services industry is working hard to ensure that any distinctions do not prevent sukukfrom being freely traded in the global capital markets. Sukuk are also increasingly issued subject to civil laws that are themselves in development. We provide a case study of how an evolving civil code in a country that has civil and Shari'a courts has managed to achieve a successful international sovereign issuance.
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