Sukuk Securities

New Ways of Debt Contracting

Meysam Safari, Mohamed Ariff, Shamsher Mohamad

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118937877
• eBook ISBN: 9781118943748
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

The essential guide to global sukuk markets worldwide Sukuk Securities provides complete information and guidance on the latest developments in the burgeoning sukuk securities markets. Written by leading Islamic finance experts, this essential guide offers insight into the concepts, design features, contract structures, yields, and payoffs in all twelve global sukuk markets, providing Islamic finance professionals with an invaluable addition to their library. The first book to fully introduce the market, this book provides a detailed overview of the sukuk market, with practical guidance toward applying these instruments in real-world scenarios. Readers will learn how sukuk securities are regulated and the issues that arise from regulations, and gain insight into the foundation and principles of Islamic finance as applied to these instruments. Extensive tables illustrate t-test comparisons between conventional bonds and sukuk, risk factors, and the issuance of different types of sukuk securities by country to give readers a deeper understanding of the markets.

In 2010, the World Bank recommended sukuk as the best form of lending for growth in developing countries; since then, the value of new issues has grown at 45 percent per year. The market's present size is close to US $1, 200 billion, with private markets in major financial centers like London, Zurich, and New York. This book provides comprehensive guidance toward understanding and using these instruments, and working within these markets.

• Get acquainted with the sukuk market, definitions, classification, and pricing
• Learn the different approaches to structuring and contract design
• Discover how sukuk is applied, including regulations, ratings, and securitization
• Examine payoff structures and suggested sukuk valuation in the context of Islamic finance principles

With the sukuk market growing the way it is, regulators, investors, and students need to fully understand the mechanisms at work. Sukuk Securities is the complete guide to the sukuk markets, with expert insight. July 2014 saw the first sukuk listing in London. Hong Kong and Seoul have also entered this niche market. Predictions are that there will be continued high growth of sukuk debt markets around the world, all providing targeted funding via sukuk contracting modes.

PART One
The Foundation of Sukuk Securities

CHAPTER 1
Introduction to Sukuk Markets

On Christmas Eve 2013, Pope Francis, in his first apostolic exhortation, pleaded for “a return of economics and finance to an ethical approach which favors human beings.” Instituting an ethical approach to finance is the purpose of Islamic financial markets, which have created securities that conform to Islamic scripture and traditions. In some countries this form of contracting has been dubbed participation finance to emphasize the profit-sharing aspect of this new market practice. Islamic securities are specially tailored financial products that conform to the set of ethical and common law–based financial transaction principles laid out in Shari’ah, or Islamic law. Shari’ah literally means “the way,” and it takes its body of principles from the Quran and the Sunnah (an account of the normative behavior of the Prophet Muhammad). Those principles are strictly applied when designing the financial contracting terms that cover such products. Compliance is assured by a committee of experts working at each financial institution, and the institutions must abide by the rulings of both the national and international committees on compliance standards.

Although sovereign laws enacted by various governments originated with some strong ethical foundations in order to protect people, these were watered down in recent centuries by the power of the moneyed class, which includes modern banks. The result is that some of the high moral edicts that governed the financial behavior of human societies are no longer taken into consideration in the design, marketing, and sale of financial products. There has been a call in recent years to go back to human ethics, since the world has witnessed how new and untested financial innovations could wreck the wealth of societies. It is a call for finance that favors human beings against the interests of the moneyed class.

For example, in the environment of close to zero percent interest rates that has prevailed since 2010, banks are now going back to the old bad habit of offering bets on future events to entice bank depositors to bring their savings to the banks with a “bet.” If the bets are won, the contracted low interest rate will be increased by the banks. Of course, the experience of depositors in the United States in 1994–2008 was that bets like these made lots of people lose money. Although such bets are just another form of gambling, bank regulators have yet to move aggressively to outlaw these contracts being offered by regular (versus investment) banks that cater to the common person with little savings.

ISLAMIC (PARTICIPATION) DEBT SECURITIES

Islamic financial instruments, constructed with some extra elements of ethical precepts, have helped to form a niche market for financial products in 76 countries today. The total assets of this niche market are no more than a small fraction of the world’s conventional securities markets. These Islamic securities may be classified into four major groups: stocks, mutual funds, money markets, and sukuk (bonds that comply with Shari’ah requirements).

Sukuk certificates are Islamic debt securities held by the lenders. This book is about these new instruments, which are currently issued and traded in 12 markets; the first public issue was in 1998. In October 2013, Britain announced its intention to start a sukuk market in 2014–2015. This book describes the foundation of sukuk as Islamic securities, sometimes also called participation debt certificates or participation debt securities to connote the risk-sharing aspect of sukuk debt contracting.

The principles to which Islamic securities adhere are quite different from those used in the design of conventional securities, but some modern terms are shared by the two practices, borrowed from conventional financial contracting. The modern financial principles that guide the design of conventio...

Table of contents

• Cover
• Series
• Titlepage
• Copyright
• Dedication
• Preface
• Acknowledgments
• About the Authors
• PART One The Foundation of Sukuk Securities
• PART Two Sukuk Securities in Practice
• PART Three Payoff Structures and Sukuk Valuation
• Bibliography
• Index
• End User License Agreement