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Sukuk Securities: New Ways of Debt Contracting


Praise for Sukuk Securities

“Sukuk trading has been rapidly growing in the past and has promising growth potential in both Muslim and non-Muslim countries. Providing an overview of the features, size, contracts, practice and regulatory aspects of sukuk, the book is a useful source of reference for those who want to know and understand the intricacies of these new emerging Shari’ah compliant securities.”
—Habib Ahmed, Sharjah Chair in Islamic Law & Finance, Durham University Business School, United Kingdom

“In the relatively new, yet fast growing sukuk market, the authors have captured and given an in-depth description of all the essential elements of the product and how it can be used effectively in the marketplace. This book is an essential tool for all practitioners and those wishing to understand the sukuk market better.”
—Daud Vicary Abdullah, President & CEO, International Center for Education in Islamic Finance

“This volume is a notable achievement. Within these covers the reader gains a thorough understanding of this new debt instrument. The authors provide a comprehensive account of how sukuk are designed and structured, their cash flows, pricing and trading, along with the issues involved in how the securities are rated and regulated.”
—Mervyn K. Lewis, FASSA, Adjunct Professor, University of South Australia

Sukuk Securities: New Ways of Debt Contracting is certainly a must-read publication for finance experts and enthusiasts whether they are from industry, regulatory or academia. The authors have succinctly and comprehensively presented the different forms of sukuk structures that have been issued since 1998. They have shown that such debt contracting is pro-growth, able to match different needs and more importantly, an effective solution to the problem of increasing national debts which is helpful to financial stability.”
—Datuk Syed Othman Alhabshi, Chief Academic Officer, INCEIF

“The authors conceptualize sukuk as a mode of financing based on asset ownership and profit sharing. With this as a benchmark, they assess other sukuk concepts and classifications, structuring and issuing practices, regulations, and pricing methods. Their contribution will certainly enrich academic discussions, and their outline of sukuk structures yet to be issued should inspire practitioners.”
—Volker Nienhaus, Visiting Professor, University of Reading, United Kingdom

“This book is a must-read for all those interested in capital market innovations, now that sukuk securities are making huge waves in many parts of the world. The authors provide valuable insights into the mechanics and dynamics of sukuks in terms of both theory and practice. The approach taken in this volume is thoroughly analytical and remarkably refreshing.”
—Mohamed Ariff Abdul Kareem, Professor of Economics and Governance, INCEIF

MOHAMED ARIFF, PHD, a professor of finance at Bond University, Australia (and the University Putra Malaysia), is widely considered a specialist on Asian Pacific finance and Islamic finance. Formerly, he served as the elected president of the Asian Finance Association. He is a co-author of Investments and has authored or coauthored 33 other books. His scholarly articles have appeared in leading economics and finance journals.

MEYSAM SAFARI, PHD, is a senior lecturer at SEGI University, a private institution in Malaysia. He won a prestigious scholarship from Khazanah Holdings. His scholarly research and teaching is in finance, although he has an engineering background.

SHAMSHER MOHAMAD, PHD, is a professor at INCEIF University. After distinguishing himself in professional duties, he served as the dean of the faculty of economics. His teaching includes post-graduate finance subjects and supervising 25 doctoral students to completion.

Preface xi

Acknowledgments xiii

List of Tables xv

List of Figures xvii

About the Authors xix

PART ONE The Foundation of Sukuk Securities 1

CHAPTER 1 Introduction to Sukuk Markets 3

Islamic (Participation) Debt Securities 4

The Origin of Sukuk Structures 6

Contemporary Sukuk Securities 9

How Sukuk Securities Are Priced 10

The Structure of This Book 12

CHAPTER 2 Sukuk Securities: Definitions, Classification, and Pricing Issues 13

Fundamental Principles 14

Defi nitions and Regulations 20

Classifi cation Based on Practices 22

Conclusion 29

CHAPTER 3 Pragmatic and Idealistic Approaches to Structuring Sukuk 31

Shariah : The Basic Foundations of Islamic Finance and Sukuk 32

Islamic Financial Principles 35

Three Approaches to Islamic Finance 40

The History of Sukuk 41

Sukuk Structures: Pragmatic and Idealistic Approaches 44

Conclusion 55

CHAPTER 4 Contract Design and the Structure of Common Sukuk Securities Issued to Date 57

Mudarabah (Partnership) 57

Musharakah (Profit Sharing) 59

Murabahah (Markup) 62

Ijarah (Leasing) 64

Salam (Futures) 67

Istisna (Working Capital) 69

Conclusion 70

CHAPTER 5 Samples of Sukuk Issued 71

Sukuk Simpanan Rakyat (Malaysia) 71

Central Bank of Bahrain 73

Khazanah Nasional Berhad (Malaysia) 74

Qatar Central Bank 74

Nakheel Sukuk (UAE) 75

Mahan Airline Company (Iran) 75

Conclusion 76

CHAPTER 6 Contract Design and the Structure of Sukuk Securities Yet Issued 77

Wakalah (Agency) 77

Manfaah (Usufruct) 78

Muzarah (Farmland Leasing) 78

Musaqah (Orchard Leasing) 79

Muqarasah (Tree Leasing) 79

Conclusion 79

CHAPTER 7 Sukuk Securities and Conventional Bonds 81

Comparison of the Yields of Islamic Securities and Bonds 82

Yield Curves 86

The Granger Causality Test for the Yields of Sukuk and Conventional Bonds 90

Conclusion 94

PART TWO Sukuk Securities in Practice 97

CHAPTER 8 Regulations with a Difference 99

Regulating Sukuk 99

Conclusion 105

CHAPTER 9 Securitization, Trading, and Rating 107

Sukuk Trading 107

Sukuk Rating Methodologies 113

Conclusion 123

CHAPTER 10 Worldwide Sukuk Markets 125

The Geographical Location of Sukuk Securities 128

The Effect of Geographical Location on Contract Specifications 137

Conclusion 139

CHAPTER 11 Regulatory Issues for Sukuk Financial Products 141

The Current Sukuk Market 142

Regulation and Shariah Issues in the Current Sukuk Market 143

Current Sukuk Structures 145

Possible Developments and Implications 151

PART THREE Payoff Structures and Sukuk Valuation 161

CHAPTER 12 The Foundation and Principles of Islamic Finance 163

Foundation 163

Principles 164

Conclusion 167

CHAPTER 13 Cash-Flow Identification and Pattern Recognition for Theoretical Valuation Models 169

Zero-Promised Regular-Payment Sukuk 169

Fixed-Promised Regular-Payment Sukuk 171

Variable-Promised Payment Sukuk 172

Undetermined-Promised Payment Sukuk 174

Conclusion 175

CHAPTER 14 A Matter of Choice: Sukuk or Bond? 177

The Economics of Conventional Bond-Based Funding 178

World Markets for Conventional Loans 181

The Case against Interest-Based Debt with No Risk Shared 182

Are Sukuk an Alternative to Bonds? 185

Conclusion 187

CHAPTER 15 Challenges and Future Developments 189

Valuation 189

Liquidity 190

Market Widening and Market Depth 191

Cost of Issuance 191

Variation in Schools of Thought 192

Educating More Experts in Sukuk 193

Regulatory Sufficiency 194

Conclusion 195

Bibliography 197

Index 209