Islamic Capital Market

ICM03-The Sukuk Market

Khairuddin Zakaria

B.Sc.Eng, MBA, CIFP, RFP

Outline

• Overview

• Securitisation and Islamic securities

• Distinctions between sukuk and bond

• Regulatory framework governing sukuk

• Sukuk issuance

• Issues and criticisms

Overview on Sukuk Market

Overview: Sukuk as a Sub-Component

Securitisation and Islamic Securities

(Sukuk)

• Securitisation– a process of transforming an otherwise illiquid

asset into a liquid one

– the process of packaging financial promises and transforming them into a form whereby they can be freely transferred among a multitude of investors

• Benefits– Originator has direct access to capital market

– Investors have access to secondary market to liquidate their positions

Securitisation and Islamic Securities

(Sukuk)

• One of the Arabic equivalent term to securitisation is taskik– Literally refers to the process of dividing assets

into papers/certificates (sukuk)

– Technically refers to securitisation of assets with the features of liquidity and tradibility

• Generally, sukuk is Islamic security and can either be:– Debt (the assets are debts)

– Equity (the assets are non-debts)

Distinctions between sukuk and bond

• Bonds are interest-bearing securities arising out of the securitisation of loan contracts (issuers are the borrowers)

• In sukuk, the issuer is not a borrower but can either be:

• A buyer in a sale contract

• A lessee in a lease contract

• A partner in a partnership contract

• Sukuk are representations of ownership claims in

a pool of assets or

rights to receivables

• A comparison between bond and sukuk

Distinctions between sukuk and bond

Regulatory framework governing

sukuk

• In Malaysia, the issuance of sukuk would require:

– the approval of the Securities Commission Malaysia (SC) under section212 of the Capital Markets and Services Act 2008 and in this regard,

such issuance must comply with the Guidelines on the Offering ofIslamic Securities (Guidelines).

In addition, the structure of Sukuk must be confirmed andapproved by a Shariah adviser approved by the SC

As a guide, the SC Shariah Advisory Council, which is responsible:

for advising the SC on all matters, related to the comprehensivedevelopment of the Islamic capital market in Malaysia,

and functions as a reference centre for all Islamic capital market issues,has outlined several Shariah principles that could be adopted in thestructuring and issuance of sukuk.

Regulatory framework governing

sukuk

Shariah Compliance: Main Principles

Sukuk Issues

• Bai Inah in sukuk structure

– Approved in Malaysia but not in most other

countries and AAOIFI

• Bai al Dayn

– Approved by SAC of Malaysia but not AAOIFI

• Naming of sukuk structure

– Sukuk issuance can involves several contracts

but which one should be used as the sukuk

name

Summary of AAOIFI Sukuk Criticisms

The End

God Knows Best

Thank You