gif Sukuk


Mughees Shaukat, PHD researcher and Assist- ant researcher in INCEIF & ISRA


There is a basic dis- sonance between the tendency to mimic conven- tional financial practices and products and promot- ing Islamic finance. The former tendency assumes that conventional financial products and practices respond to genuine social needs. It ignores their ill ef- fects in terms of injustice, inequity and instability. But the entire rationale of Islamic finance is a quest of prosperity with justice and equity.


being Shariah compliant cannot be accepted unless it is shown to be in consonance with the objectives of Shariah, the maqasid. In the presence of evidence that debt financing viti- ates the higher purposes of Shariah, equita- ble distribution and relative stability, debt-like sukuk cannot be regarded to be Shariah com- pliant. It is naïve to assume that replicating conventional financial products demonstrates the viability of Shariah in modern age. The distinctive feature of Shariah is its welfare- enhancing role. Mimicking un-transparently collateralised debt instruments without any regard for their tendency to reduce welfare is no service to Shariah.


Being in consonance to the above and will try to highlight, discuss and explore into those aspects/concepts, that can be considered as core to the very existence of Islamic finance; though in the medium and parlance of Sukuk as is relevant to the nature and essence of this study.


Sukuk VS conventional bond: The issuance of Sukuk on the basis of the rules of the Shining Shariah is among the ob- jectives of Islamic banking, and is also one of the greatest means of establishing Islamic economies in society. This, however, is on


24 Global Islamic Finance October 2010


condition that the tools used to develop and structure Sukuk are in consonance with the fundamental principles which distinguish Is- lamic economic systems from others. The in- terest-based system prevalent in the world to- day regularly issues bonds that yield interest from capital-intensive enterprises that bring great profits and regular revenues. Yet, the holders of such certificates are no more than lenders to the sponsors of such enterprises; and their earnings come from the interest on their loans in a percentage that accords with the price of interest in the marketplace.


The profits of these enterprises after costs, including interest payments, return exclusive- ly to the sponsors. The basic concept behind issuing Islamic Sukuk, however, is for the holders of the Sukuk to share in the profits of large enterprises or in their revenues. If Su- kuk are issued on this basis they will play a major role in the development of the Islamic banking business and thereby contribute sig- nificantly to the achievement of the noble ob- jectives sought by the Shariah.


Among the features of Sukuk are the fol- lowing: 1. Sukuk is among the best ways of financing large enterprises that are beyond the ability of a single party to finance. 2. Sukuk provide an ideal means for inves- tors seeking to deploy streams of capital and who require, at the same time, the ability to liquidate their positions with ease whenever the need should arise. This is because it is envisioned that a secondary market for the trading of Sukuk will develop. Thus, when- ever investors require cash from their invest- ments, or from a part of the same, it will be possible for them to sell their Sukuk holdings, or a part thereof, and receive their value from their original investment plus earnings, if the enterprise is profitable, in cash. 3. Sukuk represents an excellent way of man- aging liquidity for banks and Islamic financial institutions. When these are in need of dis- posing of excess liquidity they may purchase Sukuk; and when they are in need of liquidity, they may sell their Sukuk into the secondary market. 4. Sukuk is a means for the equitable distri- bution of wealth as they allow all investors to benefit from the true profits resulting from the enterprise in equal shares. In this way, wealth may circulate on a broad scale without remaining the exclusive domain of a handful of wealthy persons. This is clearly among the most important of all the higher purposes sought by an Islamic economic system. 5. Sukuk could now be seen in a completely new and an unheard of role as a ‘Rescue Tool’ for nations who have severely been hit by the recent financial crisis. The country of Greece was badly exposed during the recent financial crisis due to the accumulation of cheap lend- ing, unrestrained spending and failed fiscal reforms at large. As a result, the public debt


has already pushed over its economy and is estimated to reach 155% of the GDP by 2012. This has created an adverse impact on the stagnant economy, and the GDP has de- clined by 12% followed by a spiraling budget deficit.


Islamic finance practitioners and economists are suggesting that the debt-trapped govern- ment consider an international sovereign Sukuk issuance as a safer bailout plan, to regain control from the escalating debt cri- sis and to improve the much wanted investor confidence. Sukuk has been a key solution adopted by different governments around the globe to bridge fiscal deficits despite their respective sovereign ratings. The Hellenic Republic has failed in debt servicing and is currently left with few options. On top of this the national debt is estimated to reach over EUR300 billion (US$368.5 billion) pushing its bond rates to a record high.


The downgraded sovereign ratings to “BB+” in April this year reflects the political, economic, and budgetary challenges faced by the Greek government in its efforts to reduce and sus- tainably control the public debt. Suggesting a sovereign Sukuk issuance, RAM Holdings group chief economist Dr. Yeah Kim Leng told Islamic Finance news that access to private funds through Shariah complaint products can be the viable solution. “Greece has run out of options to raise public funds within the country. Borrowing from multilateral agencies could come at high cost for them. Despite its poor sovereign ratings, Greece can consider an international sovereign Sukuk issuance. Such issuance could target the Middle East, which has excess petro dollars regularly in search of long-term investment opportunities or the private equity capital pulling away from the region.


“The Greek private sector can play a major role in structuring such issuance to entice new Islamic investments. It will be a kick-start for Greeks to work away from bankruptcy and to avoid becoming a failed state. The time frame in this exercise can be reduced by the proactive involvement of international Islamic finance institutions already in seek of moder- ate opportunities,” he said.


Nevertheless the launch of a secondary mar- ket for Sukuk bonds by the Saudi Arabian Capital Market Authority (CMA) has led to Ul- ama and religious scholars issuing a number of fatwas and statements prohibiting this. The majority of these fatwas and statements were unwritten (i.e. issued verbally) and so were missing many details. The statements and fatwas mentioned above have caused ambiguity among the public with regards to the legality of circulating Sukuk. Members of the public have questioned and raised their eyebrows and have voiced to lucidate and explain the difference between Sukuk


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84  |  Page 85  |  Page 86  |  Page 87  |  Page 88