Risk and Regulation of Islamic Banking
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Risk and Regulation of Islamic Banking

Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad

From a single product offering in 1963, the Islamic financial services industry has grown to an estimated $1.6 trillion in assets. Products must comply with profit and risk-sharing criteria and regulations preventing banks from venturing into activities with high risk and excessive uncertainty. This timely volume analyses these matters and considers the range of new products, discussing both conceptual and practical dimensions. It connects Islamic finance to the mainstream theoretical literature on financial intermediation while also exploring its differences. The expert contributors also examine why an ethical foundation is important and why the system requires well-thought-out regulations to ensure outcomes that protect the community’s well-being.
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Chapter 10: Need for pricing information to value sukuk securities

Meor Amri Ayob


Information is needed for accurate calibration of the values of cash flows that come from Islamic sukuk contracts traded in public markets. This is the focus of this chapter. In the absence of structured valuation models, current industry advice is based on what investors are willing to pay for a given sukuk security as traded, for example, in the Malaysian fixed-income securities market. There is an absence of models specifically derived to account for the several different characteristics of the six different sukuk contracts that are traded in Malaysia. Unlike this situation, conventional bonds that are traded in the same market as fixed-income securities have special valuation models that are used as independent means to estimate a theoretical value. For investment advisory practice in the industry, such prices are very close to the long-term tendency of conventional bond prices. The pricing advisory firm–Bond Pricing Agency Malaysia (BPAM)–is unable to base its advice to sukuk investors in the more objective ways that the advice is framed using both market and valuation prices to advise conventional bond clients. This is the subject of our discussion in this chapter.

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