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Sukuk Securities: New Ways of Debt Contracting

Sukuk Securities: New Ways of Debt Contracting

Meysam Safari, Mohamed Ariff, Shamsher Mohamad

ISBN: 978-1-118-94374-8

Sep 2014

192 pages



The essential guide to global sukuk markets worldwide

Sukuk Securities provides complete information and guidance on the latest developments in the burgeoning sukuk securities markets. Written by leading Islamic finance experts, this essential guide offers insight into the concepts, design features, contract structures, yields, and payoffs in all twelve global sukuk markets, providing Islamic finance professionals with an invaluable addition to their library. The first book to fully introduce the market, this book provides a detailed overview of the sukuk market, with practical guidance toward applying these instruments in real-world scenarios. Readers will learn how sukuk securities are regulated and the issues that arise from regulations, and gain insight into the foundation and principles of Islamic finance as applied to these instruments. Extensive tables illustrate t-test comparisons between conventional bonds and sukuk, risk factors, and the issuance of different types of sukuk securities by country to give readers a deeper understanding of the markets.

In 2010, the World Bank recommended sukuk as the best form of lending for growth in developing countries; since then, the value of new issues has grown at 45 percent per year. The market's present size is close to US $1,200 billion, with private markets in major financial centers like London, Zurich, and New York. This book provides comprehensive guidance toward understanding and using these instruments, and working within these markets.

  • Get acquainted with the sukuk market, definitions, classification, and pricing
  • Learn the different approaches to structuring and contract design
  • Discover how sukuk is applied, including regulations, ratings, and securitization
  • Examine payoff structures and suggested sukuk valuation in the context of Islamic finance principles

With the sukuk market growing the way it is, regulators, investors, and students need to fully understand the mechanisms at work. Sukuk Securities is the complete guide to the sukuk markets, with expert insight. July 2014 saw the first sukuk listing in London. Hong Kong and Seoul have also entered this niche market. Predictions are that there will be continued high growth of sukuk debt markets around the world, all providing targeted funding via sukuk contracting modes.

Preface xi

Acknowledgments xiii

List of Tables xv

List of Figures xvii

About the Authors xix

PART ONE The Foundation of Sukuk Securities 1

CHAPTER 1 Introduction to Sukuk Markets 3

Islamic (Participation) Debt Securities 4

The Origin of Sukuk Structures 6

Contemporary Sukuk Securities 9

How Sukuk Securities Are Priced 10

The Structure of This Book 12

CHAPTER 2 Sukuk Securities: Definitions, Classification, and Pricing Issues 13

Fundamental Principles 14

Defi nitions and Regulations 20

Classifi cation Based on Practices 22

Conclusion 29

CHAPTER 3 Pragmatic and Idealistic Approaches to Structuring Sukuk 31

Shariah : The Basic Foundations of Islamic Finance and Sukuk 32

Islamic Financial Principles 35

Three Approaches to Islamic Finance 40

The History of Sukuk 41

Sukuk Structures: Pragmatic and Idealistic Approaches 44

Conclusion 55

CHAPTER 4 Contract Design and the Structure of Common Sukuk Securities Issued to Date 57

Mudarabah (Partnership) 57

Musharakah (Profit Sharing) 59

Murabahah (Markup) 62

Ijarah (Leasing) 64

Salam (Futures) 67

Istisna (Working Capital) 69

Conclusion 70

CHAPTER 5 Samples of Sukuk Issued 71

Sukuk Simpanan Rakyat (Malaysia) 71

Central Bank of Bahrain 73

Khazanah Nasional Berhad (Malaysia) 74

Qatar Central Bank 74

Nakheel Sukuk (UAE) 75

Mahan Airline Company (Iran) 75

Conclusion 76

CHAPTER 6 Contract Design and the Structure of Sukuk Securities Yet Issued 77

Wakalah (Agency) 77

Manfaah (Usufruct) 78

Muzarah (Farmland Leasing) 78

Musaqah (Orchard Leasing) 79

Muqarasah (Tree Leasing) 79

Conclusion 79

CHAPTER 7 Sukuk Securities and Conventional Bonds 81

Comparison of the Yields of Islamic Securities and Bonds 82

Yield Curves 86

The Granger Causality Test for the Yields of Sukuk and Conventional Bonds 90

Conclusion 94

PART TWO Sukuk Securities in Practice 97

CHAPTER 8 Regulations with a Difference 99

Regulating Sukuk 99

Conclusion 105

CHAPTER 9 Securitization, Trading, and Rating 107

Sukuk Trading 107

Sukuk Rating Methodologies 113

Conclusion 123

CHAPTER 10 Worldwide Sukuk Markets 125

The Geographical Location of Sukuk Securities 128

The Effect of Geographical Location on Contract Specifications 137

Conclusion 139

CHAPTER 11 Regulatory Issues for Sukuk Financial Products 141

The Current Sukuk Market 142

Regulation and Shariah Issues in the Current Sukuk Market 143

Current Sukuk Structures 145

Possible Developments and Implications 151

PART THREE Payoff Structures and Sukuk Valuation 161

CHAPTER 12 The Foundation and Principles of Islamic Finance 163

Foundation 163

Principles 164

Conclusion 167

CHAPTER 13 Cash-Flow Identification and Pattern Recognition for Theoretical Valuation Models 169

Zero-Promised Regular-Payment Sukuk 169

Fixed-Promised Regular-Payment Sukuk 171

Variable-Promised Payment Sukuk 172

Undetermined-Promised Payment Sukuk 174

Conclusion 175

CHAPTER 14 A Matter of Choice: Sukuk or Bond? 177

The Economics of Conventional Bond-Based Funding 178

World Markets for Conventional Loans 181

The Case against Interest-Based Debt with No Risk Shared 182

Are Sukuk an Alternative to Bonds? 185

Conclusion 187

CHAPTER 15 Challenges and Future Developments 189

Valuation 189

Liquidity 190

Market Widening and Market Depth 191

Cost of Issuance 191

Variation in Schools of Thought 192

Educating More Experts in Sukuk 193

Regulatory Sufficiency 194

Conclusion 195

Bibliography 197

Index 209