Sukuk: Introduction and Current State of Play
This afternoon (9 April 2009) I went to a talk show that held by School of Management, University of Science Malaysia. It discussed about Sukuk or Islamic Bond. The speaker was Muhammad Zahid Abdul Aziz, an expert in Islamic Finance. Muhammad Zahid Abdul Aziz is the Director and Owner of Muamalat Financial Consulting Sdn Bhd. His career started as an auditor and investment banker. Nowadays, he and his company are well known as consultant in underwriting of Islamic Finance product.
The seminar is fairly shocking. As a person who does not know much about Islamic finance, I got new information. First phase, he described about Islamic finance and Sukuk. I just knew that Islamic Bond (Sukuk) already established in Germany, China, and Japan. Then, he described the current state of play in Middle East (because he worked there for many years).
Islamic Capital Market, itself, is not a new object in finance. It already established around 40 years ago. Thus, it was forgotten. Islamic Capital Market is a market that the transaction, operation, and services comply with Islamic rules.
Islamic Capital Market has to be free from 4 main items, which are (1) activities prohibited by Islam, (2) Usury or Riba, (3) Gambling or Maysir, and (4) Ambiguity or Ghahar.
First, there are lot of sukuk types. Because Sukuk is lay on one of Islamic Instruments and indeed can be structured in different techniques. There are Sukuk Salam, Sukuk Istisna, Sukuk Mudharaba, Sukuk Musharaka, etc. In Malaysia, as presented by the speaker today, there are Sukuk Isthimar (Investment), Sukuk Ijarah (leasing), and Sukuk Musharaka (Joint Venture).
Sukuk Ijarah is based on Ijarah concept. Ijarah in conventional finance is leasing. It means selling benefit or to use or service for a fixed price. Sukuk Ijarah is issued to finance the Ijarah transaction.
There are also Sukuk that based on Musharaka. This sukuk was very well known in Islamic Finance until February 2008. As we all know, the investor is always conservative; thus wants higher return. This kind of investor who always plays in conventional finance does not want to have risk sharing. Then scholars found a new way to attract investor. Scholars were re-engineering the sukuk musharaka to find the fixed rate and of course still in the Islamic Finance path. Scholars added LIBOR as another gain that investor can get. The latter, this situation creates debates.
As I note from the speaker, all the transaction involves agents and SPV (special purpose vehicle). The reason is to avoid debt trading. Further, the interest rate that applied in Sukuk is based on Internal Rate of Return. Actually, I want to ask about IRR but due to time I could ask him today. In my point of view, IRR is a concept of Time Value of Money including uncertainty (Ghahar) and of course, Riba. I do really want to know about the IRR concept in Sukuk.
The main point is every transaction in Islamic Finance has to follow Islamic Rules. It is also applied in Sukuk. The basic and important “criteria” in Sukuk are (a) asset must be clearly owned by sukukholders, (b) Objection in debt trading, (c) Not allowed to restructure bank facilities, (d) not permissible to structure Price undertaking (including taking collateral).
The seminar was not only talking about Sukuk, but also about Islamic Money Market products. It discussed Islamic Medium Term note (IMTN) and Commercial Paper (ICP). IMTN, similar with conventional MTN, has maturity from 1 up to 7 years. It based on Murabahah. FYI, Murabahah is a concept where the sale of goods at a price which includes a profit margin agreed to by both parties. IMTN is almost similar with rent-to-own agreement. IMTN has to be private placement basis. In other hand, ICP has to be tender and underwritten basis. It has less than one year maturity. ICP is also based on Murabahah.
Information that I can also “extract” in the seminar was about the Credit Card. Islamic card must based on Bai Al – Inah. Bai Al-Inah is sale and buy-back agreement. The most shocking information that I can acquire in the seminar is “Islamic Finance is part of Islamic Economics. Islamic Economics can run well if the country also applies Islamic Law. Thus, the problem is….Not every Islamic Country applies good Islam Law due to politics, even in Middle East”. Then, I remembered with a proposal defense in School of Management by Fareed M Alyagout from Saudi Arabia. Fareed told the examiner that in business, Saudi Arabia applies different business law. Saudi Arabia has two courts to intermediate business problems. One court is adopted from UK law and another one indeed applies Islam Law. Thus, in Business, in Saudi Arabia, They are more comfortable to use International Law which adopted from UK.
Penang, 9 April 2009