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THE NEWS
Investor’s, Page 01

Thursday, 19 March 2009

An overview of the sukuk market

By Syed Imad-ud-Din Asad

Islamic finance signifies financial services and products that comply with provisions
given in the Quran and the Sunnah. It not only includes banking, but also capital formation,
capital markets, and all types of financial intermediation.
Over the years, Islamic finance has not only increased in size, but has also grown
complex as finance professionals compete furiously to produce new Shari'a-compliant
transactions and instruments. This innovation is most visible in the world of sukuk.
Also referred to as "Islamic bond", sukuk signifies, speaking more accurately, an
investment certificate. The Accounting and Auditing Organisation for Islamic Financial
Institutions (AAOIFI) defines sukuk as certificates of equal value put to use as common shares
and rights in tangible assets, usufructs, and services or as equity in a project or investment
activity. AAOIFI sets sukuk apart from equity, notes, and bonds. It is made clear that sukuk are
not debts of the issuer: they are interests in underlying assets or investment activities.
Issuance of sukuk is a significant way of raising finance by institutions, corporations,
sovereign and state entities. There is a variety of sukuk structures--- sukuk al musharaka, sukuk
al mudaraba, sukuk al ijara, sukuk al istisna, etc--- and all of them employ techniques that are
well developed in conventional markets for structured finance.
It must be mentioned that not all sukuk structures are Shari'a-compliant. Unfortunately, at
times, in order to create an Islamic product, finance professionals blithely re-engineer a
conventional one and then sprinkle it with Arabic names and terminology. To an ordinary
investor, Arabic alone is often enough proof of the Islamic nature of the instrument or
transaction. In 2007, a very prominent Muslim scholar, Muhammad Taqi Usmani, openly
questioned the Islamic credentials of the different prevalent sukuk structures and claimed that
most of them were in violation of Islamic law. He particularly referred to sukuk al mudaraba and
sukuk al musharaka. He claimed that the two structures had become akin to conventional interest
bearing bonds: guaranteed returns and no risk sharing.
Though Malaysia and the GCC countries are the centres for sukuk issuance, sukuk
issuance is not limited to Muslim countries: there is a growing number of issuers based in the
United States, Europe, and other parts of Asia. For instance, in June 2006, the U.S. saw the
issuance of its first sukuk in Texas by Houston-based oil and gas concern East Cameron Partners,
which raised $166 million.
Sukuk are offered in specialised exchanges such as the Labuan Exchange in Malaysia, the
Third market in Vienna, and the Dubai International Finance Exchange. They are assessed and
rated by international rating agencies, and are generally issued in U.S. dollars. However, this
issuance in U.S. dollars means that there is a currency risk for all non-dollar investors.
The market for sukuk has seen tremendous growth: from less than $8 billion in 2003 to
$46.65 billion in 2007. However, in 2008, sukuk issuance witnessed a 66 per cent decline all
over the world. In Malaysia and the GCC countries the issuance fell 59 per cent and 55 per cent
respectively. The fourth quarter was the worst as the amount of sukuk issued worldwide dropped

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to $584 million. While it was mainly attributed to the falling prices of oil and the global financial
turmoil, some--- for instance, Moody's--- claimed that Mr. Usmani's criticism of sukuk had a role
in it as well.
In fact, the increase in sukuk issuance in 2007, despite the global financial crisis, had
caused some people to have unrealistic ideas and expectations regarding the maturity and
strength of the Islamic financial industry. The situation in 2008 proved that Islamic markets were
not immune from the ongoing worldwide downturn. Not just that, experts do not expect the
sukuk market to recover before the recovery of conventional financial markets. According to
CIMB, the largest underwriter of sukuk in 2008, sukuk issues may decline to $13 billion this
year.
Still, the future of Islamic finance, in general, and sukuk, in particular, does not look
gloomy. There are over $1,000 billion worth of infrastructure projects planned in the Gulf over
the next decade. Majority of these projects will be seeking Shari'a-compliant funding.
However, Muslims need to be careful while devising new products. They need to make
sure that Islamic principles are properly observed and that they do not present an un-Islamic idea
as Islamic just because there is more profit in it.

(The writer is a graduate of Harvard Law School, specialising in Islamic finance. For questions
and comments, he may be contacted at syed_asad@post.harvard.edu)

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