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 8: Securitization Issues and Islamic Financial Products with Reference to Sukuk

Michael T. Skully

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


Michael T. Skully 8.1 INTRODUCTION Securitization is the creating and sale of new, usually liquid, financial assets backed by the security of other existing, usually illiquid, assets. It is through the shifting of risks and cash flow streams that otherwise illiquid assets owned by a firm become marketable. Conventional modern securitization involves the creation of a portfolio of homogeneous assets with identifiable cash flows. This portfolio is then sold to a credit-enhanced, Special Purpose Company (SPC). The SPC in turn raises the required funds through the sale of its own securities, which represents an interest in these assets. As this structuring is so important to its success, this activity is also known as structured finance. Islamic securitization is effectively conventional securitization modified to accommodate shari’ah principles and results in the creation of a financial asset known as sukuk. A sukuk is sometimes also referred to in the popular press as an Islamic bond, but this would be a mis-representation. A more appropriate term is a shari’ah-compliant investment certificate. The difference, unlike a conventional debt instrument, is that a sukuk should be used to fund a specific investment rather than for general use. The income arising from profits (not interest) earned by the sukuk holders should also be related to the purpose of this funding, thus connecting the real assets securitized with their associated risk and return. A positive return is provided only when the underlying activity is profitable. These assets and their use must also be acceptable shari’ah activities. Finally,...

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