Understanding Islamic Finance - Doha Academy of Tertiary Studies

Sukuk and Securitization 411Islamic finance. Salam Sukuk in Bahrain and some Shirkah-related certificates in Sudanare the only exceptions. Experience of Shirkah-based certificates of investment issued bycorporate bodies has proved their suitability and profitability. Further, the procedures ofIjarah Sukuk issues need some refinement in consultation with a team of Sharī´ah scholars.15.3.8 Potential of Sukuk in Fund Management and Developing the IslamicCapital MarketSukuk, a by-product of the fast-growing Islamic finance industry, have confirmed theirviability in mobilization of resources and their effective use for the benefit of both investorsand the fund users. Their growth is attributable to a number of factors, including, amongothers, their potential for liquidity and fund management. They could also be used as a toolfor monetary policy and open market operations. As is the case in Sudan, central banks canissue Sukuk for the purpose of controlling liquidity. 23Previously, IFIs had to rely on Tawarruq and Murabaha-based dealings in the internationalmetals market and equity markets for the purpose of short-term and medium- to long-termfund and cash management respectively. The modus operandi of the transactions in themetals market was not fully acceptable to the Sharī´ah scholars, as the Murabaha conditionswere not accomplished in letter and spirit. The emergence of Sukuk in general since 2001,and IjarahSukuk in particular, and that of the market makers and servicers facilitates IFIsin short-term fund placements in a Sharī´ah-compliant manner. Due to a shortage in supplyof such instruments vis-à-vis their demand, Sukuk were tightly held until the recent past,resulting in the absence of a secondary market. Lately, the position has eased and activetrading has started. The average volume of trading in PCFC Sukuk has been $10 million aday since their launch. 24 An active secondary market dealing in Nakheel Sukuk just aftertheir issue in December 2006 also points to a healthy signal in this regard.According to Sameer Abdi of Ernst & Young, about one-third of investors in countrieswith a Muslim majority are seeking Sharī´ah-compliant products; another 50–60 % woulduse products conforming to Sharī´ah tenets if they were commercially competitive. At thecompany level, a large number of businesses and institutions in the world, where Sharī´ahcompliantproducts are available, particularly in the Middle East, are shifting to publicvehicles offering Sharī´ah-compliant solutions to financial problems. This confirms the hugepotential of Sharī´ah-compliant certificates of investment.In a Sukuk issue of $800 million from Abu Dhabi Investment Bank that closed onDecember 4, 2006, nearly 40 % of the investors came from Europe. In the Nakheel Sukukissue of $3.52 billion also, 40 % of investors are from Europe. A number of European andJapanese corporations are planning to explore the Sukuk market for raising long-term funds.A huge amount of funds is needed for infrastructure projects in the Muslim world, andif managed properly and carefully without compromising on the Sharī´ah principles, thiscan not only be arranged through the vehicle of Sukuk, but also it could be a steppingstone for broad-based development of these economies. This requires developing Islamiccountries to increasingly use the vehicle of Sukuk for financing their infrastructure and otherdevelopment projects.23 See Eltejani, 2005, pp. 411–413.24 The Economist, December 9th–15th, 2006, p. 73.