Report on Sukuk gif
According to the London-based Trowers and Hamlins, despite an increase in return from US bonds, Western investors have be-
come even more interested in investing in Gulf Sukuk because of their strong real value and low risk. It said the issuance of corporate Sukuk in the region, which controls more than 45 percent of the world’s recover- able oil resources, has jumped by nearly 20-fold over the past five years because of strong appetites for such tools
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27.5 percent, and then Sukuk al Mudaraba at 1 .4 percent. Some of the popular types of Sukuks discussed here include Sukuk al Mu- rabaha, Sukuk al Ijara, and Sukuk al Mush- araka. Sukuk al Murabaha: This is a process of direct structuring of securities wherein a Special Purpose Vehicle (SPV) invests the funds raised through the sale of Sukuk in Murabaha operations.
The company purchases the asset from the SPV on a Murabaha basis, and the future periodic installments paid by the company to the SPV account for the repayment of the cost and the profit component.
Sukuk al Ijara: The company seeking to raise finance through the issuance of Sukuk al Ijara (the originator) sells certain assets to the issuer. The issuer, then, pays for the as- sets using the proceeds of the Sukuk issu- ance and holds title to the assets on trust for the Sukuk holders.
The issuer leases the assets back to the originator for a fixed period of time and for a rent. At maturity, the originator may have the right to purchase the assets back from the issuer at a price which would represent the redemption value for the Sukuk holders.
Sukuk al Musharaka: Several corporate enti- ties refer to these Sukuk as Musharaka Term Finance Certificates (MTFCs). Under the Su- kuk al Musharaka, the Sukuk holders con- tribute a capital amount to the issuer. The is- suer then enters into a joint venture with the party seeking finance (the originator) where the issuer provides the capital received from the Sukuk holders, and the originator sup- plies the assets and/or their own capital re- quired for the business to function.
The profits from the Musharaka business are distributed to the issuer and the origina- tor at a predetermined basis. Any losses are shared in proportion to the capital contribu- tion, and the issuer pays a periodic distribu- tion amount to the Sukuk holders from the Musharaka profit distribution.
Sukuk gaining new heights The increase in demand, along with the standardisation of Islamic financial instru- ments, is expected to fuel the growth of the Sukuk market. UAE and Malaysia con-
tinue to remain the most active markets for Sukuk. As per Zawya report, Gulf States raised US$18.7bn or 55 percent of the to- tal US$33.4bn Sukuk issued world-wide in 2007. With the Sukuks constituting more than 40 percent of all bonds issued in Ma- laysia, the country has fast developed its market name in the Islamic world.
In Malaysia, Sukuk bonds had surpassed conventional bonds for three years running with an annual turnover of above US$15bn. Growing wealth in the Middle East is increas- ingly demanding Shari’ah-compliant prod- ucts in the Middle East and Asian regions.
Such opportunities will also provide inves- tors a chance to diversify their investments rather than being concentrated in the de- veloped countries only. It is estimated that investors from the GCC and Asia Pacific re- gions currently hold US$267bn in Shari’ah- compliant assets.
The rising demand for Islamic financial products has led the financial managers to increasingly look into innovative structur- ing of Shari’ah-compliant financial products that will better fulfil the needs of clients. The prospects of Gulf-based pension funds and insurance industry looking at investments in Sukuks as part of their investment strategy could provide an invaluable impetus to the development of the Islamic finance indus- try.
Indeed, the Sukuk market is the fastest emerging form of Islamic finance, estimated to be increasing at an annual average rate of 40% spurred by the high levels of surplus savings and reserves in the Middle East and Asia.
According to the London-based Trowers and Hamlins, despite an increase in return from US bonds, Western investors have become even more interested in investing in Gulf Su- kuk because of their strong real value and low risk. It said the issuance of corporate Sukuk in the region, which controls more than 45 percent of the world’s recoverable oil resources, has jumped by nearly 20-fold over the past five years because of strong appetites for such tools. By mid-2008 the firms in the GCC have raised US$6.2bn (or 61percent) in 22 issues of the total Sukuk.
It is expected that the Sukuk issuance in the UAE could cross the US$9bn mark dur- ing the year. According to the available data from DIFC, the total value of Sukuks is esti- mated at around US$88bn, while US$13bn worth is listed on the Dubai International Fi- nancial Exchange (DIFX).
Although as per S&P report the total Sukuk issuance stood at US$14bn in the eight months ending Aug. 31, down from US$23bn in the same period in 2007, the analyst still expected that the Sukuk issuance will reach US$20-25bn in 2008 given the good pipe- line.
With the development of secondary mar- kets, Sukuk offerings are appearing on spe- cialized exchanges such as the DIFX, the Labuan Exchange in Malaysia, and the Ku- wait Stock Exchange has also shown inter- est by setting up a market for conventional and Islamic bonds.
According to a study done for the Internation- al Monetary Fund (IMF), a strong demand from Muslim countries and conventional glo- bal institutions for Shari’ah-principled bonds would boost the potential for Sukuk despite the global credit crises. However, it stated that some critical constraints relating to continued legal uncertainty and regulatory divergences ought to be addressed.
Many corporate issues—particularly large ones—are quasi-sovereign and as such are seen to benefit from an implicit sovereign guarantee. Thus, although these issues may be linked to an underlying asset, investor appetite is driven primarily by the sovereign nature of the risk. It also helps to explain successful large scale placements that have been made in recent years, including two Dubai-based issues of US$3.5bn in 2006.
Currently, the top originators are the Na- kheel, PCFC, Aldar Properties, and DP World from UAE, SABIC from the Kingdom of Saudi Arabia, and Nucleus from Malaysia. Togeth- er they represent about 31 percent of total world Sukuk issues. The majority of the Su- kuks carry good ratings as per the global rat- ing agencies like Moody’s, S&P, and Fitch. The DP World second Sukuk with an issue size of US$1.5bn carried ratings of A1 by Moody’s and A+ by S&P; DIFC Sukuk with
2010 October Global Islamic Finance 13
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