7

Capital Markets

A sakk is a financial security representing a claim on physical assets of a borrower with potential income streams as well as a market value.  This item stretches from short-term financing modes by central banks to similar account receivables financing that can be used to finance a firm.  Some of these take a similar form to almost bond-like issues with regular pre-agreed payments in ijarah, or lease-type contracts using lease payments as rewards for the fund providers.  Sukuk could be a more complex capital-raising instrument similar to the more understandable common stock like issue of share ownership with claims to physical assets of an entity over a limited period of time.  This Islamic financing product can be engineered to raise money for diverse economic activities by (i) providing some form of claim over part or all of the physical assets of an entity or (ii) some form of agreed payments, which depend on the income streams of the assets backing the financing.  The pay-off will be based not on interest, but on lease payment, or profit-share-basis, or as repayment of the sum lent with a given increase at the time of liquidation of the contract. 

 

Sukuk, unlike bonds will not normally use loans as the underlying relationship since the investors cannot enjoy any returns in such cases.  It will utilize other underlying contracts (sale, lease, partnership, etc.) to enable the investors to enjoy a return over their investment.  Bonds are evidence of debt, whereas sukuk are broader as they can include debts (from sale) as the underlying assets (Malaysia) and non-debt assets as the underlying (global standard). 

 

The sukuk market is a fairly new development in the Islamic financial system.  Issuances grew 145% in 2006 compared to 2005 to reach US$27 Billion.  The sukuk market peaked at US$47 Billion in 2007 and dropped by 55% to US$21 Billion in 2008.  The market recovered in 2009 to reach a total issuance of US$31 Billion, which was higher than the total issuance in 2006.   The type of sukuk issued include sale-based sukuk (murabahah, bai bithamin ajil (BBA), bai al inah, istisna’a, and salam), lease-based sukuk (ijarah and a mixture of ijarah and istisna’a structures) and equity-based sukuk (musharakah, mudharabah, and wakalah bi isthimar). 

 

In the sukuk market, Malaysia represents 58%, followed by the United Arab Emirates (18%), and Saudi Arabia (8%).  Malaysia issues a large number of sukuk in smaller denomination in contrast to UAE issuances that are less frequent, but are large ticket issuances.  Central Bank of Bahrain uses sukuk ijarah and sukuk salam on a very frequent basis to provide Islamic banks in Bahrain liquid instruments to invest in.  Besides countries with growing interest in Islamic financial markets such as Pakistan, Indonesia, and Brunei, non-Muslim countries are also tapping into the sukuk market now.  For example, Germany issued US$123 million sukuk ijarah in 2004 and in 2006, in the USA, Cameron Gas, a Louisiana-based oil and gas company, issued $167 million sukuk musharakah.  In accordance with the growing sukuk momentum in the United States, General Electric (GE) issued US$500 million sukuk ijarah in November 2009 and Goldman-Sachs  issued the same in September, 2014.

 

The sukuk instrument is growing in popularity in Muslim and non-Muslim countries around the world as an innovative financing instrument and a way to raise funds for various projects, business expansion, and increased competitiveness, which attracts ethical and creative investors worldwide.  The technical and innovative sukuk structures fascinate financiers and the challenge to make the transaction Shari’ah compliant constitutes a thrill for many Islamic financial engineers.  

 

Call our FAAIF team now for a sukuk consultation!