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Tuesday, 8 July 2014

Islamic bonds ‘Sukuk’ and the capital market

Sukuk are investment-financial tools, which considered as Islamic bonds, issued by any Islamic bank (IB). As it is the case with every investment financial tool, Islamic bonds have the same characteristics as the ordinary ones, yet with major difference. Sukuk focuses on financing assets and represents a fair ownership of such assets.

Sukuk is legitimately, legally, commercially and normally is considered as Islamic investment certificates with identified value, objective and style. They usually used to finance commercial, industrial or agricultural projects, through which security owners and holders invest and finance such Sukuk. These projects represent full ownership of the security-holders, and through such projects, they receive their profit shares. Security holders have the right to sell or assign Sukuk through traditional capital markets (securities market; stock, bonds or Sukuk), where buying, selling and assigning transactions are subject to identified terms and conditions. Moreover, the transactions are subject to profit/loss rules governing the selling/buying transaction.

Sukuk returns are generated from leasing the related assets, whether real estate or equipment, vehicles and aircrafts etc.

The main objective of issuing Sukuk was and still is to ensure required funds requested by funding-seekers, to the end of financing their projects, companies and investment assets (off course that is done in compliance with Sharia principles). Usually, these projects or assets based on common Sharia-compliant commercial and financial basics. Moreover, these projects are expected to achieve proper cash flows and distribute a significant amount of their generated profits (with rate, terms and conditions formerly agreed upon) to security holders.

In order to develop Sukuk, we should be acquainted with the challenges and obstacles that faced and are still facing the Islamic bonds market all over the world, including procedural, application, financial and Sharia aspects.

Examples of such challenges are the authenticity of the selling transaction from the owner to the holder; nature of the tools used to calculate the reserve account “surplus”; and nature of legal and Sharia impacts on vows made from Sukuk manager to holders, as mentioned in one of the recent studies performed by the National Commercial Bank (KSA)
In this regard, a recent banking study revealed that Islamic banks (IBs) face several obstacles related to investing client deposits, treasury bonds and stocks. Banks operating according to Sharia principles assured that they do not face any problems whatsoever with deposits activity, yet on the contrary, they face certain investment activity problems.

As such, and to invest excessive banking liquidity across several countries including Oman, we should work hard on preparing a feasibility study and mechanism to issue consecutive Sukuk to cover the state budget deficit and replace them with bonds.

Accordingly, and due to the role, nature, objective, importance, perspective and reasons behind such issues, the Omani government can diversify them and thus finance several projects, companies and studies. Particularly, those projects focusing on local development, whether public or social projects, including roads, bridges, ports, airports, power and water plants. Such projects generate continuous cash flows, are Sharia compliant and do not face any obstacles in entering investment partnerships with security holders and share revenues.
According to recent financial and investment studies, the presence of significant financial potentials would enhance the industry of managing Islamic wealth across the Middle East. Such industry relies mainly on wealthy individuals and increases investors’ trust in economy, while recovering from the global financial crisis.

The study further revealed that Sukuk are a main component of Islamic capital markets, ie the second main component after shares.

As for the answer on the question on the nature of terms and conditions required to promote Sukuk globally (hence no local terms and conditions exist), we found out that they are similar to those of issuing and promoting bonds. With one exception, in order to promote Sukuk, they should be Sharia compliant and approved by the Sharia supervisory board at the issuing entity, whether financial institutions or IBs. However, if the issuing entity does not have a Sharia supervisory board, it should approve these Islamic bonds by an approved board without prejudice to the provisions of the issuing entity Articles of Association, statute and other association documents. On the other hand, the issuing entity, before enrolling, should ensure liquidity of such Sukuk through the Central Bank.

In the same context, Malaysia is the biggest country and financial banking system in terms of Sukuk issues number and value. Recently, several Arab countries started issuing Sukuk to finance equipment, investments, service facilities and major infrastructures using foreign currencies.

Competent IBs are those excelling, across Islamic countries in particular, in managing, distributing and marketing Sukuk. As we mentioned before, Sukuk finance investments through assets which are either acquired, sold, or leased and which at the end are owned. These Sukuk can also finance ships, trailers, aircraft and real estate; in addition build bridges, airports, dams and tunnels.

Similar to funding tools, Sukuk has an ability to create financial and investment tools, which are circulated among banks and capital markets. That in turn has a huge role in creating investment opportunities and directing savings to different investment channels.

Sukuk-based investment tools viable for circulation would soon enough become an alternative for banking transactions. Hence, when capital market tools diversified and transactions organised, such tools become more attractive for deposit savers, nevertheless, it becomes a better source of funding for investors. Moreover, these tools are also useful for IBs as means of managing their liquidity and customising IB resources with funds investment.

(Oman Daily Observer / 06 July 2014)
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