ISLAMIC
CAPITAL MARKETS
• Main function is to facilitate transfer of investable funds from
those having surplus to those requiring funds. Achieved by
selling of securities (Bonds/Sukuk and Shares)
• Primary and Secondary Markets
• Islamic Financial Instruments must comply with the following:
Prohibition of Riba (Interest)
Avoidance of Gharar (Ambiguity) in agreements
Prohibition of Maisir (Gambling)
No involvement in production , distribution in prohibited
commodities.
• Financing products of an Islamic Bank (Not capital market
products) are
General Investment
Special Investment
Leasing
Partnership
Deferred payment sale
Deferred delivery sale
Cost plus Trade Finance
Islamic Capital Market products and services
versus conventional market
Conventional
Money Market Instruments
Fixed income bonds
Equities
Unit Trust/Mutual Funds
Real Estate through
Investment Funds (unrestricted leverage )
Stock broking
Islamic
Commodity Murabaha
Sukuk
Shariah compatible equities
Same as conventional
Real Estate with Shariah
acceptable leverage
Islamically acceptable
broking
Sukuk/ Islamic Investment Certificate
• Market in the current form opened in 2002, current size well
over US$ 100 billion.
• Securities backed by tangible assets and streams of income.
• Sukuk issues are certificate of ownership on a pro-rata basis,
negotiable in the secondary market.
• Issuers need not be Islamic Institutions.
Sukuk/ Islamic Investment Certificate
Sukuk Structure
• Legal structure derived from securitization structure with
special purpose vehicle (SPV) to acquire suitable asset.
• Suitable assets: leasing, equities, real estate and other sukuk
with a minimum of 15% in the portfolio, rest can be debt
securities.
• Pool of assets sold to SPV (a Charitable Trust) which issues
certificates to investors for a specific maturity.
• Funds collected paid to original owner of assets.
• Net income generated from the assets is used to pay periodic
coupons to the buyers of certificate
• On maturity assets are generally sold back to the original
owner, using an irrevocable undertaking. Proceeds received
are distributed to Sukuk holders at the time of maturity.
Sukuk/ Islamic Investment Certificate
Attractiveness and concerns
• Priced competitively
• Shariah compliant
• Mostly rated instruments, can be listed on recognized
Exchanges.
• Wide range of maturities, coupon fixed/floating
• Liquidity is generally limited
• Global investors are yet to be aware of the instrument
• Institutions have limitations on assets in their balance sheets.
• A large number of legal agreements need to be reviewed.
Structure for IDB’s Sukuk Issuance
Liquidity facility to cover
periodic distribution payments
Purchase Undertaking Deed to
purchase all outstanding Sukuk
Assets at the maturity date
IDB acts as Wakeel to SPV
Sukuk Assets
Consideration
Trust in favour of Trustee
acting on behalf of investors
SPV
Sukuk Assets
» Ijara
» Sukuk
(>51%)
Certificates
Proceeds
» Equity
» Installment Sale
» Istisna’a
Investors
Equities
• Sharia eligibility criteria is the most important feature.
• In Dow Jones Islamic Indices were introduced in 1990’s.
• FTSE indices are also available.
Funds
•
•
•
•
A large number of Funds are in existence
Current overall size is USD 50 billion
Most funds are relatively small in size
Business opportunities for Brazilian institutions to launch
Shariah compatible funds for equities.
• Larger fund management group will have the advantage.