ISLAMIC BOND @ SUKUK MARKET
Possibilities & Challenges
Prof. Dr. Mohd. Ma’sum Billah
www.drmasumbillah.blogspot.com
ISLAMIC BOND MARKET:
A PRACTICAL FRAMEWORK
• Bonds : long term debt obligations that are secured by
a specified asset or a promise to pay
• Islamic bonds : no interest payment & based on
Shari’ah principles
• Types of Islamic Bonds:
Salam bonds
Ijarah bonds
Istisna’ bonds
Musyarakah bonds
Muqaradah or Mudarabah bonds
ISLAMIC BONDS MARKET:
A PRACTICAL FRAMEWORK
• The Muqaradah & Mudarabah (Profit Sharing) Concept
in Islamic Bonds:
 a flexible structure without payment of coupon
 a sale of goods at a price covering the purchase price (costs)
 it gives the right to the owner to receive his capital & at the
same time the bonds are delivered
 more efficient in terms of the allocation of resources
 it does not encourage and permit to burden the mudarib
 profit realized from investment will be distributed according
to agreement
ISLAMIC BONDS MARKET:
A PRACTICAL FRAMEWORK
• Why Islamic Bonds?
 Increase demand for financial instruments
 Help to gain capital in Bank Islam’s
operations – means of fund raising
 No coupon rate
 Based on syari’ah principles
Conventional
VS.
Islamic Bond Market
A Conventional Scenario
• 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 organized 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.
•
•
•
•
Present Value
Yield-to-Maturity
Duration
Interest Rates
An Islamic Scenario
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
Practicality
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
Thank You
Wassalam