Thursday, June 08, 2006

The issue of Sukuk: Islamic 'debt finance'

The latest boom in the IF industry is that of 'Sukuk Issuance' - the 'Islamic' alternative to debt finance. Obviously, we can't neglect this important area that is at the very foundations of the modern financial system, since we are hopelessly trying to imitate every product that comes onto the conventional markets.

The issuance of Sukuk, in itself, is not a problem. It encourages entrepreneurship from the grass-roots level. But the structuring of the increasing multitude of Islamically-questionable Sukuks emerging on the market scene is what is lamentable.

An established principle is the Islamic Economic ethics is that a debt (dayn) cannot be sold. It can only be re-assigned at face value. We have, on the market, Sukuks on Bai' bi thaman 'Ajil (deferred payment sale), on Salam (wherein payment is made in cash at the point of contract but the delivery of the asset purchased is deferred to a pre-determined date), on Murabahah (cost plus mark-up agreement) etc. that are securitized receivables and cannot be traded in secondary markets.

However, issuance of Sukuks on tangible asset-backed portfolios is indeed permissible, with elaborate rulings, and are tradeable at variable rates.

The absence of secondary markets in the region necessiatates that these Sukuks are held until maturity. They have hitherto only appeared as a tool to mitigate excess liquidity at the subscriber level in favour of a fixed return at maturity. Its full implications have not yet been measured. Maybe these debt-based Sukuks will automatically be phased out with the emergence of secondary markets as their fixed value redemption becomes evident as less profitable than the variable asset-backed Sukuks.


Blogger amma said...

Most financial transactions are Shariah-compliant, with minor changes and minor differences in the structure. They become more and more conventional finance.There many businesses under the Sharia in America today. Most areas of finance is very possible according to Islamic principles now.
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Blogger shoeb said...

There is a company in the US that is offering excellent returns on secure Sukuk/Murabaha Contracts, check out

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Blogger cottasofia said...

Think investors are usually shocked when they find their sukk isnt a debt instrument. Sukuk are Islamic Financing Certificates and not strictly debt instruments as most people believe to be true.

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