Conventional
vs.
Islamic Bond @ Sukuk Market
Prof. Dr. Mohd. Ma’sum Billah
E-mail: masum2001@yahoo.com
Conventional Bond Market

Primary market
A financial market in which new issues of a security, such as a bond
or a stock, are sold to initial buyers by the corporation or
government agency borrowing the funds.The investment bank
underwrites securities and then sells them to the public.

Secondary Market
A financial market in which securities that have been previously
issued can be resold. It could be an organised market, such as
KLSE, or over-the counter (OTC) market in which dealers at different
locations stand ready to buy or sell securities over the counter to
whoever accept their price.
Market Participants

Dealers
Dealers link buyers and sellers by buying and selling securities

Brokers
Agents of investors who match buyers with sellers of securities

Investors
Includes individual investors, financial institutions, pension funds,
mutual funds and governments, from around the world.
Types of Bonds







Convertible Bonds
Extendible/Retractable Bonds
Foreign Currency Bonds
Government Bonds
High Yield or "Junk" Bonds
Inflation-Linked Bonds
Zero Coupon or "Strip" Bonds
Valuing Bonds
The value of a bond depends on the size of its coupon payments, the length
of time remaining until the bond
matures and the current level of interest rates.



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Present Value
Yield-to-Maturity
Duration
Interest Rates
Islamic Bond Market
Three main steps involved in the bond
issuance.
Securitization
 Bond Issuance
 Trading of dept certificates

Process of Securitization using Bai’ al-Inah
(1) Sells an asset to the creditor in cash @RM14mil
Creditor
(2) Cash payment RM14mil
(3) For future date, the debtor buys back the
asset for 15 mil
Debtor
Issuance of Islamic Dept Certificate
(Shahadah al-Dayn)
Two types of bonds:
Islamic coupon bond
 Islamic zero coupon bond

Trading of Dept Certificate –
Discounted Bai’ al-Dayn
For liquidity purposes, bond trading in the
secondary market is crucial.
Islamic Bond Market
Muqarada Bonds an Alternative for Islamic Dept Bonds
Securitization of Musharakah

Musharakah is a mode of financing which can be
securitized easily.

Especially in case of big projects where huge
amounts are required.
Musharakah certificate
Every subscriber can be given a Musharakah certificate,
which represents his proportionate ownership in the
assets of the Musharakah.
 After the project is started, these Musharakah
certificates can be treated as negotiable instruments.
 Can be bought and sold in the secondary market.

Difference Between Musharakah Certificates and a
Conventional Bond
Musharakah Certificates


Represents the direct
ownership of the holder in
the assets of the project.
If all the assets of the joint
project are in liquid form,
the certificate will represent
a certain proportion of
money owned by the
project.
Conventional Bond


Has nothing to do with the
actual business undertaken
with the borrowed money.
The bond stands for a loan
repayable to the holder in
any case, and mostly with
interest.
Growth in MYR Islamic Bond Market
Potential Growth in USD Islamic Bond
Market