While Y2K was historic for the beginning of a new millennium, it was a landmark year for global Islamic finance too. In 2000, Malaysia issued the first ever sukuk, a sharia compliant investment instrument. And, by the time sukuk reached its teenage, it became the fastest growing Islamic finance product covering more than 50% of total Islamic finance asset volume of about $1.3tn.
Sukuk (singular is Sakk) represents undivided shares in the ownership of tangible assets relating to particular investment activity.
A sukuk investor carries right to profit, responsibility of loss and ownership of the underlying asset proportionate to the investment made. Sukuk was invented to develop a sharia compliant alternative to conventional bond. So, it is equally important to know what sukuk is not.
An obvious question of curious mind would be, where is the “wow” factor of sukuk over bond? Well, it is in some of the salient features of sukuk. Since sukuk represents partial ownership, not debt, it stands on the basic islamic principle of risk sharing with the obligor instead of risk shifting. The risk of loss encourages careful evaluation of projects and underlying assets by the sukuk-holders unlike bondholders.
This largely helps ruling out the ill projects. Sukuk has created scope for financing giant projects and infrastructural developments involving large investor base in sharia compliant manner. Apart from sharia compliance, while risk sharing feature is encouraging issuers to go for issuing sukuk, ownership right and profitability potentials are attracting investors in such instrument.
The outcome of tremendous popularity of sukuk is today’s large sukuk base in global finance. While Gulf Coordination Council (GCC) countries have been frequently issuing sukuk for project financing, Malaysia issued their largest sukuk of $1.2bn in 2013 and is issuing its first BASEL III compliant sukuk of $903m in 2014. Considering rapid growth of Sukuk, Islamic Development Bank (IDB) has already plans to expand its main London-listed sukuk program to $10bn from the current $6.5bn. Britain also announced plans to become the first country outside the Muslim world to issue sukuk of $320m within 2014.
Coming back to textbook discussion, sukuk can be of five major types: Mudaraba sukuk, Musharaka sukuk, Ijara sukuk, Salam sukuk and Istisn’a sukuk. However, Ijara sukuk and Musharaka sukuk are most popular ones. Depending on the demand and financing pattern, hybrid sukuks are also becoming evident nowadays. Without going into detail, a drawline of basic sukuk structure may help understand the mechanism at baseline.
In spite of being one of the top five Muslim majority countries in the world, Bangladesh is yet to issue any sukuk. It is globally acclaimed that out country has got immense potential for expansion of Islamic finance. In February 2013, an international conference was held in Dhaka regarding potential of sukuk as an alternative funding source for Padma Bridge.
Not only government, large businesses can also consider sukuk as an effective source of financing. There are numerous success stories of sukuk especially in infrastructure and long term financing which we can also replicate in our country.
It can not only mobilise domestic fund to main stream investments, but also can attract investment from outside countries enriching foreign direct investment (FDI).
However, newly introduced sharia index at Dhaka Stock Exchange has lit the light of possibility of issuing sukuk in our country too. The earlier we realise the benefits of this fast growing Islamic instrument, the better it is for our economy.
