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Title
Page No.
Introduction
Core of the report
Objectives of the report
Limitations of preparing the report
Methodologies
Literature review
Overview of the concept
History of sukuk bonds
Definition of sukuk
Different types of sukuk
Empirical Analysis
Impact of sukuk in economic development of different
countries
Prospects of sukuk in Bangladesh
Conclusion
Conclusion
References
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14-16
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Chapter
Introduction
The core of this research is focused on the academic research written on the Islamic sukuk
since the emergence of this concept in the Muslim world, by gathering some of the
outstanding papers written on the topic, looking at the problems raised, the solutions given,
and the recommendation suggested by the scholars for further development. The study then
assesses and evaluates these research works in order to achieve the objectives of the
evaluation.
The term Methodology describes how the data needed in order to fulfill
the purpose is collected. It also discusses the formula and how to present
the formula in the report.
a. Quantitative research: Some research in the evaluation sample collected and used
the quantitative method by looking at the sukuk issuance size, number, geographical
distribution, international, local, and currencies of issues, expected volume of issues.
b. Qualitative research: On the other hand, the qualitative method is applied to collect
and analyze data in regards to the sukuk issuance acceptability, Shariah and legal
issues, types of contracts used, social effects of the issue.
I have used qualitative approach for our report because the majority of
data collection from the qualitative approach.
LITERATURE REVIEW
Sukuk is the Arabic term for Islamic securities. The literal meaning of sukuk is certificate.
According to the Accounting and Auditing Organization for Islamic Financial Institution
(AAOIFI), in its Shariah Standard 17(2), investment sukuk as certificates of equal value
representing undivided shares in ownership of tangible asset, usufructs and services, assets of
particular projects of special investment activity. The Islamic Financial Services Board
(IFSB), in its Capital Adequacy Standard (IFSB 2), defined sukuk as Certificates that
represent the holders proportionate ownership in an undivided part of the underlying asset,
where the holder assumes all rights and obligations to such asset., while, in SC Guidelines
on Islamic Securities 2004, defined sukuk as a document of certificate which represents the
value of an asset. If we compare the three definitions above, SC has defined sukuk clearly
and encompasses the other two definitions. According to SC definition, sukuk is a certificate
that represents the value of an asset because sukuk as one of the Islamic financial instrument
that is a wholesale asset-based capital market security (Ali Said 2011). There are, however,
differences in the type of asset that can qualify under the global standard setting bodies
(AAOIFI & IFSB) definition and the SCs definition. The AAOIFI and IFSB do not
recognize financial asset (i.e., receivables) as assets that would qualify to form the
underlying assets of a tradable sukuk (ISRA 2011). Sukuk explained in hadith and Islamic
commercial literatures are limited, but a few references help to establish the root for sukuk
and the transaction. There was reference mentioning the term sukuk recorded in Al-Muwatta
by Imam Malik cited in ISRA (2011): Yahya related to me from Malik that he had heard
that receipts (sukuk) were given to people in the time Marwan ibn al-Hakam for the produce
of the market at al-Jar. People bought and sold the receipts (sukuk) among themselves before
they took delivery of the goods. Zayd Thabit and one of the Companions of the Messenger of
Allah, may Allah bless him and grant him peace, went to Marwan ibn al-Hakam and said,
Marwan! Do you make usury halal? He said, I seek refuge with Allah! What is that? He
said, These receipts (sukuk) which people buy and sell before they take delivery of the
goods. Marwan therefore sent a guard to follow them and to take them from peoples hands
and return them to their owners. There are another two primary references related to sukuk
cited by Adam and Thomas (2004): Abu Huraira asked Marwan if he permitted selling
sakaak. This sukuk were similar to a modern food stamp and were traded without the holders
of the sakaak taking possession of the underlying foodstuff. And; Sulayman bin Yasaar
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reported that Abu Huraira said to Marwan, You have permitted the sale by riba. Marwan
replied. what did I do? You permitted the sale of sakaak (sukuk) and it was forbidden by
the Messenger of God to sell food before you possessed it. Then Marwan sermonized to the
people, forbidding this practice. Based on the references above, Islam gave many ways for
people to buy and sell goods but the transactions must be Shariah-compliant. Similar to the
transaction of sukuk, Islam also permitted the buying and selling asset-based capital but must
be based on the Shariah principles. According to Nathif and Thomas (2009), there are four
basic features of sukuk. Firstly, sukuk are certificates that represent undivided shares in
ownership of a particular project, issued for the purpose of establishing or financing a
business. The sukuk holder is entitled to all rights conferred by Shariah to an owner over
property. The second feature is the sukuk must not contain any guarantee of sukuk capital
according to AAOIFIs recommendations. The third feature is the sukuk must not contain
any guarantee of a fixed profit or profit based on a percentage of the capital. Murabaha
Sukuk and Ijarah Sukuk have been excluded from this ruling as it is permissible to have a
contracted yield based on the agreed profit from the murabah sale or the agreed rental from
the leased asset. The last feature is that the sukuk must not contain any statement of
obligation from the issuers side that it will buy back sukuk for a nominal price. However the
sukuk may include a promise to buy back the sukuk at a market price, or a mutually agreed
price at maturity.
In the classical period of Islam, Sakk (sukuk)which is cognate with the European root
"cheque" from Persian '( )pronounced check'meant any document representing a
contract or conveyance of rights, obligations or monies done in conformity with the Shariah.
Sukuk were extensively used during medieval Islam for the transferring of financial
obligations originating from trade and other commercial activities.
The first attempt to overcome the liquidity problem faced by Islamic banks has been
done by the Central Bank of Malaysia in 1983 and so Malaysia's first Islamic bank was
started to work. The bank did not use the interest from Government securities or treasury
bills and instead issued government investment certificates which were bereft bonds. The
certificates represent the Malaysian Islamic bank debt to government. There was no
predetermined interest rate for these bonds so the rate of return was announced by the
government. In 1992, the Malaysian government was issued $ 600 million Sukuk bonds in
international markets. National Mortgage Corporation of Malaysia provided a new program
in 2001 for the purchase of debt securities. The program and the establishment of Islamic
mutual funds were depended on Malaysian Sukuk Innovation Investments in the deployment
of new Islamic financial instrument. Malaysia is the world's largest Islamic bond founder so
that has become the world's largest Sukuk market by corporate Sukuk and has 62% of the
total global Sukuk share. For the first time in the area of the Persian Gulf states, the Bahrain
Monetary Institute issued government documents in accordance with Islamic law in 2001.
Also, in 2002, the Bahrain Islamic Liquidity Management Centre was established. The center
purchased and collected legitimate assets from governments, financial institutions and
corporations; and therefore Sukuk bonds were issued with the transaction capability based on
the value of assets base. In order to attract financial resources of Muslims, England America,
Germany and Japan have been attempted to issue Sukuk bonds. United Arabic Emirates
issued 5/3 billion Sukuk bonds for the second phase of Dubai Airport. Since the bonds sold
for various projects in the U.S. have been about 5/1 billion dollars, so the issue of 5/3 billion
Sukuk bonds for the second phase of Dubai Airport show the ability of Sukuk bonds in
financing.
DEFINITION OF SUKUK
Sukuk (), plural of Sakk ( )which means "legal instrument, deed, check", is
the Arabic name
for
financial certificates,
but
commonly
referred
to
as
"sharia compliant" bonds. It may be defined as a Shariah-compliant financial instrument that
is gaining wide acceptance not only in Muslim states, but also in largely non-Muslim
countries where it is seen as a very promising instrument to mobilize funds for economic
development by government as well as public-related institutions. This mode of financing
involves the securitization of a tangible asset so that investors could share in its profits and
risks. A certificate vesting ownership is issued for this purpose. This would entitle investors
to a portion of the income in proportion to their investment.
Organization of Islamic Financial Institutions has defined Sukuk as: Certificates with
the same value which after accomplishment of the underwriting process; it represents the
nominal amount paid by the buyer to issuer and the holder will be the owner or a set of
assets, benefits of the asset or beneficiaries of an activity or a specific investment project
(securities& exchange organization).
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in
its standard 17, investment sukuk are certificates of equal value representing after closing
subscription, receipt of the value of the certificates and putting it to use as planned, thus it
represents a common shares and rights in the underlined assets or their usufructs and
services.
Islamic Financial Services Board (IFSB-2) defines: Certificates that represent the
holders proportionate ownership in an undivided part of the underlying asset, where the
holder assumes all rights and obligations to such asset.
Sukuk must comply to the underlying Shariah principles 1. Funds raised must be used for Shariah-compliant (halal) activities.
2. Fund raised may be used to finance needed tangible assets. Specificity of assets is
important, since Sukuk unlike conventional bonds cannot be used for general
financial needs of the issuer.
3. Income received by sukukholders (investors) must be derived from the cash flows
generated by the underlying.
4. Sukukholders have a right to the ownership of the underlying asset and its cash-flows.
5. Clear and transparent specification of rights and obligations of all parties to the
transaction, in particular the originator (customer) and sukukholders.
6. No fixity in returns.
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At last we can say that sukuk is an Islamic bond structured in such a way as to generate
returns to investors without infringing Islamic law (that prohibits riba or interest) and which
represents undivided shares in the ownership of tangible assets relating to particular projects
or special investment activity.
Sukuk is different from conventional bonds in the following ways
Points of
distinctions
Asset ownership
Investment
criteria
Issue unit
Issue price
Investment
rewards and
risks
Effects of costs
Conventional Bonds
Sukuk
However there are some similarities between Sukuk and conventional bond that are given
below:
Marketability: Sukuk are monetized real assets that are liquid, easily transferred and
traded in the financial markets
Rateability: Sukuk can be easily rated.
Enhanceability: Different Sukuk structures may allow for credit enhancements.
Versatility: The Variety of Sukuk Structures allow for structuring across legal and
fiscal domains, fixed and variable income options etc.
10
Chapter - Empirical
analysis
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by 2020. It is important to note that the program has expanded the countrys infrastructure
and construction sectors by 177% during 2012 (Oxford Business Group, 2012).
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Chapter Conclusion
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CONCLUSION
Sukuk is considered as a reliable asset and such as guaranteed securities (Islamic) and
classified routinely is more powerful than classifiable bonds and investing by companies and
institutes and public. This financial instruments can be used to attract and gather the
dispersed society assets and also to take appropriate portfolio for provide most advantage
with Islamic beliefs for investors. In this study, the definition and types of Sukuk bonds was
presented and it was stated that the Sukuk investors, by their nature, have the right to have
the necessary information about their investment assets in other investments and other
additional investment. This helps to create a market discipline. Sukuk can be found
competitive required structure for market; in that case, the developing economies that are
origin of Sukuk can be benefited greatly from it. So the government can have a proper
planning and preparations for this new financial instrument, have an important step to take
usury-free banking law. The uses of this new financial tool, can solve many problems related
to financing economic enterprises that all these cases, are the intrinsic functions of Islamic
government for achieving stable development.
From the perspective of Bangladesh, Sukuk may be a good option for raising fund for
the large scale of construction and implementation of development projects. We are
expecting to see a substantial position of Sukuk issuance in Bangladesh in the coming years.
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