The Islamic finance sector has become a dynamic, fast-growing global phenomenon. 2011 proved to be a watershed moment for the industry as global Shariah-compliant assets crossed the USD 1,000 billion mark. According to 'The Banker', the number of institutions reporting Shariah-compliant activity has increased from 221 in 2007 to 348 in 2011. Similarly, the number of institutions registered to conduct Shariah-compliant activities has risen from 525 in 2007 to 675 in 2011. The industry is expected to record a compound annual growth rate (CAGR) of 15% to 20% until 2015.
In 1990, the first sukuk was issued in Malaysia by Shell MDS, a foreign-owned, non-Islamic corporation. It was a Malaysian ringgit-denominated issue of MYR 125 million (equivalent to USD 30 million approximately) based on the principle of Bai' Bithaman Ajil.
From 2001 to 2010, total global sukuk issuance increased from USD 1.1 billion to USD 45.1 billion, representing a CAGR of 50%. During this period, 2,114 sukuk were issued, representing USD 197.6 billion in total financing. Corporates represented the majority of the issuers (63%), while sovereign (34%) and quasi-Sovereign (3%) entities composed the remainder.
Nakheel, a subsidiary of Dubai World at the time, listed the world's largest sukuk on the Dubai International Financial Exchange (DIFX) in December 2006. The sukuk, structured as a Sukuk Al Ijarah, achieved record participation totaling USD 3.52 billion. It came with specific subscription rights to invest in any future public share offerings by Nakheel.
Constraints of Sukuk Investments
The major constraints of sukuk investments include the following:
- Currently no recognized secondary market or active trading
- Buy and hold strategy by most major investors
- Few or no market makers
- Lack of regulatory support
- Lack of harmonization in existing sukuk structures
- Different Shariah board interpretations
At present only a small proportion of sukuk are traded, with most investors taking a buy and hold approach. However, as more sukuk are issued, investors may be tempted to trade sukuk so as to generate greater returns on capital invested and create liquidity.
Faisal Sarkhou is the executive vice president and head of financial services and investment at KIPCO Asset Management Company. He is a board member of several reputable companies and also sits on a number of company and investment fund management committees.
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