The Islamic Debt Market for Sukuk Securities

The Islamic Debt Market for Sukuk Securities

The Theory and Practice of Profit Sharing Investment

Foundations of Islamic Finance series

Edited by Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad

The relatively new sukuk (or Islamic debt securities) markets have grown to more than US $800 billion over the past decade, and continue to grow at a rate of around 20-30 per cent per year. Arguably the first of its kind, this path-breaking book provides a highly unique reference tool relating to key issues surrounding sukuk markets, which are found in 12 major financial centres, including Kuala Lumpur, London and Zurich.

Chapter 2: Sukuk Securities, their Definitions, Classification and Pricing Issues

Mohamed Ariff, Meysam Safari and Shamsher Mohamed

Subjects: economics and finance, financial economics and regulation, islamic economics and finance, money and banking

Extract

Mohamed Ariff, Meysam Safari and Shamsher Mohamad 2.1 INTRODUCTION Islamic securities are specially tailored financial products that conform to a given set of legal-common-law-based (shari’ah) financial transaction principles, which are deemed strictly applied when designing financial contracting terms covering such products. These principles are quite different from those used in the design of conventional securities. The principles guiding the design of these securities evolved over some two and a half centuries without reference to such doctrine-based principles as are applied in designing Islamic financial products in historical times. From the time fractional reserve banking established a strong acceptance by regulators around ad 1800 some four decades after the Papal edict made interest rate-based lending permissible by the Roman Church, the lion’s share of production lending that existed for millennia on profit-sharing slowly gave way to a one-way contract where the profits and risk of a production loan became divorced. The entrepreneurs had to take the full risk of a venture, not the lender. This is not the case for the production of Islamic financial securities. The products thus designed under the Islamic label are found in publicly-traded bills, shares, debt-like sukuk and derivative markets or as privately-traded in financial institutions. Broadly defined, Islamic financial products could be classified into four types: (i) musharaka securities with ownership-and-control in the entire firm’s assets via share ownership, which makes this class very closely similar to common share securities with claims to profits only if profits are earned after sharing in the risk of...

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