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Jun 06 2012

Secondary market and regulation are necessary to take sukuk to the next level

By Faisal Sarkhou Secondary market and regulation are necessary to take sukuk to the next level
06 June 2012
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.

In November 2009, General Electric issued a Sukuk al Ijarah for USD 500 million. The offering represents the largest international corporate sukuk issued by a US company and the first sukuk issued by a US corporation ranked in the top 10 of the Fortune 500 companies. The sukuk was rated AA+ by S&P and offered a coupon of 3.875%.

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
Although the sukuk market is still in its formative stage, it is developing at a significant pace. The sukuk market will only mature when corporate sukuk are issued with regularity platform, and for this to happen a viable secondary market also needs to be developed supported by a harmonized regulatory framework.

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.

© Zawya 2012

© Copyright Zawya. All Rights Reserved.


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