Sukuk Securities New Ways of Debt Contracting

Preface xi

Acknowledgments xiii

List of Tables xv

List of Figures xvii

About the Authors xix

PART ONE The Foundation of Sukuk Securities 1

CHAPTER 1 Introduction to Sukuk Markets 3

Islamic (Participation) Debt Securities 4

The Origin of Sukuk Structures 6

Contemporary Sukuk Securities 9

How Sukuk Securities Are Priced 10

The Structure of This Book 12

CHAPTER 2 Sukuk Securities: Definitions, Classification, and Pricing Issues 13

Fundamental Principles 14

Defi nitions and Regulations 20

Classifi cation Based on Practices 22

Conclusion 29

CHAPTER 3 Pragmatic and Idealistic Approaches to Structuring Sukuk 31

Shariah : The Basic Foundations of Islamic Finance and Sukuk 32

Islamic Financial Principles 35

Three Approaches to Islamic Finance 40

The History of Sukuk 41

Sukuk Structures: Pragmatic and Idealistic Approaches 44

Conclusion 55

CHAPTER 4 Contract Design and the Structure of Common Sukuk Securities Issued to Date 57

Mudarabah (Partnership) 57

Musharakah (Profit Sharing) 59

Murabahah (Markup) 62

Ijarah (Leasing) 64

Salam (Futures) 67

Istisna (Working Capital) 69

Conclusion 70

CHAPTER 5 Samples of Sukuk Issued 71

Sukuk Simpanan Rakyat (Malaysia) 71

Central Bank of Bahrain 73

Khazanah Nasional Berhad (Malaysia) 74

Qatar Central Bank 74

Nakheel Sukuk (UAE) 75

Mahan Airline Company (Iran) 75

Conclusion 76

CHAPTER 6 Contract Design and the Structure of Sukuk Securities Yet Issued 77

Wakalah (Agency) 77

Manfaah (Usufruct) 78

Muzarah (Farmland Leasing) 78

Musaqah (Orchard Leasing) 79

Muqarasah (Tree Leasing) 79

Conclusion 79

CHAPTER 7 Sukuk Securities and Conventional Bonds 81

Comparison of the Yields of Islamic Securities and Bonds 82

Yield Curves 86

The Granger Causality Test for the Yields of Sukuk and Conventional Bonds 90

Conclusion 94

PART TWO Sukuk Securities in Practice 97

CHAPTER 8 Regulations with a Difference 99

Regulating Sukuk 99

Conclusion 105

CHAPTER 9 Securitization, Trading, and Rating 107

Sukuk Trading 107

Sukuk Rating Methodologies 113

Conclusion 123

CHAPTER 10 Worldwide Sukuk Markets 125

The Geographical Location of Sukuk Securities 128

The Effect of Geographical Location on Contract Specifications 137

Conclusion 139

CHAPTER 11 Regulatory Issues for Sukuk Financial Products 141

The Current Sukuk Market 142

Regulation and Shariah Issues in the Current Sukuk Market 143

Current Sukuk Structures 145

Possible Developments and Implications 151

PART THREE Payoff Structures and Sukuk Valuation 161

CHAPTER 12 The Foundation and Principles of Islamic Finance 163

Foundation 163

Principles 164

Conclusion 167

CHAPTER 13 Cash-Flow Identification and Pattern Recognition for Theoretical Valuation Models 169

Zero-Promised Regular-Payment Sukuk 169

Fixed-Promised Regular-Payment Sukuk 171

Variable-Promised Payment Sukuk 172

Undetermined-Promised Payment Sukuk 174

Conclusion 175

CHAPTER 14 A Matter of Choice: Sukuk or Bond? 177

The Economics of Conventional Bond-Based Funding 178

World Markets for Conventional Loans 181

The Case against Interest-Based Debt with No Risk Shared 182

Are Sukuk an Alternative to Bonds? 185

Conclusion 187

CHAPTER 15 Challenges and Future Developments 189

Valuation 189

Liquidity 190

Market Widening and Market Depth 191

Cost of Issuance 191

Variation in Schools of Thought 192

Educating More Experts in Sukuk 193

Regulatory Sufficiency 194

Conclusion 195

Bibliography 197

Index 209

MOHAMED ARIFF, PHD, a professor of finance at Bond University, Australia (and the University Putra Malaysia), is widely considered a specialist on Asian Pacific finance and Islamic finance. Formerly, he served as the elected president of the Asian Finance Association. He is a co-author of Investments and has authored or coauthored 33 other books. His scholarly articles have appeared in leading economics and finance journals.

MEYSAM SAFARI, PHD, is a senior lecturer at SEGI University, a private institution in Malaysia. He won a prestigious scholarship from Khazanah Holdings. His scholarly research and teaching is in finance, although he has an engineering background.

SHAMSHER MOHAMAD, PHD, is a professor at INCEIF University. After distinguishing himself in professional duties, he served as the dean of the faculty of economics. His teaching includes post-graduate finance subjects and supervising 25 doctoral students to completion.