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Bond Vs Sukuk Notes
Bond Vs Sukuk Notes
This is where Sukuk comes in to fill in the gap between Islamic financing and the global capital market.
Sukuk (Arabic: ﺻﻛوك, plural of ﺻكsakk, "legal instrument, deed, check") is the Arabic name for a financial
certificate but can be seen as an Islamic equivalent of bond.
What is Sukuk?
According to Securities Commission Malaysia (SC), sukuk refers to certificates of equal value which evidence
undivided ownership or investment in the assets using Shariah principles and concepts endorsed by the
Shariah Advisory Council Malaysia (SAC). Accounting and Auditing Organization for Islamic Financial
Institution (AAOIFI) described sukuk as securities of equal denomination representing individual ownership
interests in a portfolio of eligible existing or future assets.
Think of Sukuk as Islamic bonds that are structured in a way to generate returns to investors and similar to
an asset-backed security. They are issued and traded in compliance with the principles of Shariah, which
prohibit “riba” or interest.
A sukuk can be structured to offer a fixed return similar to the interest on a conventional bond. But unlike a
bond holder, a sukuk holder is granted an ownership interest in the assets or business being financed, and
the return is tied to the performance of the underlying assets.
Malaysia’s flexible foreign exchange administration rules allow multilateral development banks, multilateral
financial institutions, sovereigns, quasi-sovereigns and local or foreign multinational corporations to issue
foreign currency denominated Sukuk in Malaysia.
Sukuk issued by Malaysian government is called Government Investment Issue (GII) and it is used to raise
funds from the domestic capital market to finance the Government’s development expenditure. GII is Islamic
securities issued in compliance with Shariah requirements and is an alternative debt instrument for the
Government. GII is issued under the Government Funding Act 1983 to enable the Government of Malaysia
to raise funding in accordance with the Shariah principles. The terms and conditions of the GII are governed
by, and construed in accordance with, the laws of Malaysia.
Similar to the conventional securities, Sukuk can be rated on a sovereign and corporate basis. The rating
analyst or the rating agency will mainly focus on the credit rating of the instrument and any expected default
or losses, the agency will give high priority to the legal, the structure and the underlying assets of the Sukuk.
It should be noted that, the rating agency will take the Sukuk assets in account only if the assets are in place,
otherwise, the rating will be based on the borrower portfolio.
Although some may argue that the differences between sukuk and bonds are merely technicalities, these
differences matter to Muslims. In fact, the practice of profiting from money alone, at the expense of
productivity and real people has been one of the drivers for many of the economic problems that have plagued
the world in the last decade. Interest and artificial inflation of prices based on debt rather than on real value
is the main reason why bubbles form, burst, and then lead to recessions and depressions.
Sukuk, unlike bonds, are priced according to the real market value of the assets that are backing the sukuk
certificate. Bond pricing is based on the credit rating of the issuer. This is necessary in the case of bonds
because when you sell a bond on the secondary market, you are actually selling the debt in the underlying
loan relationship. The sale of a sukuk on the secondary market is simply the sale of ownership in the asset.
Source: MIFC
Malaysia, being the largest issuer of sukuk globally, is recognised as the most developed Islamic financial
market in the world as measured by Thompson Reuters’ Islamic Finance Development Indicator. Malaysia
has a deep domestic market that supports local-currency sukuk issuances. Moody’s Investors Service
expects sukuk issuance by Islamic financial institutions in Malaysia to grow 10-13% in 2018 and Malaysia
will remain a key issuer in south-east Asia. Moody’s also expected Malaysia to continue dominate global
sukuk issuance volumes both in the long- and short-term market.
For more information on Malaysia’s sukuk issuance, this can be found using BIX SEARCH tools in BIX
Malaysia using 2 easy steps below:
1. Click the BIX SEARCH function on the front page