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 4: A Guide to Islamic Finance Principles and Financial Engineering

Munawar Iqbal

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


Munawar Iqbal 4.1 INTRODUCTION Despite commendable progress in product development, there are many areas of financial transactions where suitable alternatives for modern conventional products have yet to be developed. Product development is one of the biggest challenges facing the Islamic Finance Industry (IFI). In the Islamic theory of contracts of exchange, the general rule is that of permission. Every contractual arrangement is permissible unless expressly prohibited by shari’ah, and the prohibitions are surprisingly very few. Until now, Islamic financial products have essentially been based on classical modes developed centuries ago. While they may serve as useful guidelines, they may not serve the needs of modern financial markets which are becoming more and more sophisticated and competitive. In order to exploit the fast-changing market environment and to face increasing competition, financial engineering innovation is imperative. While it is possible to modify classical contracts to suit modern conditions, a much broader scope for financial engineering exists in developing new contracts. However, because of the requirement that every new product be compatible with shari’ah, anyone wishing to enter this arena needs to know the basic principles of the Islamic theory of contracts and the do’s and don’ts of shariah. Explaining these is the purpose of this chapter. Financial engineering means different things to different people. One of the meanings, which is the most relevant to this discussion, is ‘it is the process of design, development and implementation of new innovative financial products, processes and the formulation of creative solutions to problems in finance’....

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