Special Report

Sukuk: New buzzword for Islamic finance

Published Date: April 18, 2007
By By Rania El Gamal, Staff writer

 

KUWAIT: The market for Sukuk (Islamic bonds) is booming, and the Gulf region is a big part of it. According to an Islamic finance expert, interest in Sukuk issuance is growing even more in the region.

"Statistics show that Islamic Sukuk issuance in the Gulf and other Arab countries have reached $14 billion by the first quarter of 2006. While the Sukuk's average growth rate in the Gulf has reached almost 45 per cent from 2001 till 2005," said Dr Abdulaziz Al-Qassar, Shariah Advisor, Real Estate Bank of Kuwait in a seminar organised by the Institute of Banking Studies on Monday night.  "Sukuk issuance is expected to reach $100 billion in the next five years," he added. The seminar shed light on the definition of Sukuk, its different types and future challenges facing the market. Sukuk represents a new development in global capital market; it is one of the fastest growing sectors in Islamic financing. According to market reports, Islamic finance market has grown over the last decade by more than 20 per cent per year, while as of February 2007, it is worth from $200 billion to $400 billion worldwide. In the past three years the total global issuance of Sukuk has reached $41 billion, rising from just $2 billion in 2003. Issam Al-Tawari, Vice-chairman and CEO, Rasameel Structured Finance Co defined Sukuk as "tradable financial instruments which reflect the value of a particular asset or assets." The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines Sukuk as "certificates of equal value representing undivided shares in tangible assets, usufruct and services... or the asset of particular projects or special investment activity."  "The importance of Sukuk lies in its ability to transfer assets into liquidity without the need to go into long legal complications for the investor," said Al-Tawari. "(Sukuk) are also a source of cashflow and finance for the originator," he added.  Any assets can be transferred into sukuk, with the condition that at least 51 per cent of the underpinning assets must be leased-back as 'real assets' (ie not debt instruments). However, it is important to note that Islamic finance is governed by Islamic jurisprudence (Fiqh Al-Muamalat), which explains the contracts and trading deals that are halal (permissible) or haram (invalid). The assets that will be converted into Sukuk must be obtained from an Islamically acceptable deals, meaning not investing in any transactions against the Islamic Sharia principles (ie no riba or interest, pork, alcohol, or gambling).  Talking about the humble beginnings of modern Islamic finance back in the 1970s - the first Islamic bank was established in Egypt in 1971 - Al-Tawari tracked the development of the industry which has grown significantly in size in almost 75 countries across four different continents. Financial analysts foresee that the multibillion-dollar sector will record an average of 15 per cent growth rate annually over the next 10 years.  "Today Kuwait has 31 Islamic investment institutions, while Bahrain which is labelled as the 'Financial Centre' in the region has just 23 Islamic investment institutions," noted Al-Tawari.  There are different types of Sukuk, such as: Ijara Sukuk (lease financing), Mudaraba Sukuk (trust-financing), Musharaka Sukuk (participating financing), and Murabaha Sukuk (cost-plus financing).   The market for Sukuk is rapidly expanding in the Gulf and Mena regions. Mega Sukuk issuance took place in the region during the past couple of years. In January 2006, Dubai Ports World issued $3.2 billion sukuk - a ground-breaking issuance - while just recently MTC Kuwait (Mobile Telecommunications Co) issued a $1.2 billion sukuk.  Referring to Malaysia's pioneering experience in the Sukuk market - Malaysia was the first country to issue Sukuk - Al-Tawari pointed out that Kuwait needs to follow Malaysia's lead and find the suitable market and legal conditions to develop its debt capital market. There are still more future challenges facing the Sukuk issuance market. "The market needs to be aware with the importance and structure of Sukuk," said Al-Tawari. "There are still no legal principles to govern the Sukuk issuance," he concluded.