Dr. Turkhan Ali Abdul Manap
Senior Economist (IRTI)
Prepared for
The 2nd Kazan Sukuk Conference, April 9, 2015, Kazan
© TAAM 2015
ISLAMIC RESEARCH & TRAINING INSTITUTE (IRTI)
(A member of)
ISLAMIC DEVELOPMENT BANK GROUP (IDBG)
Introduction
2
Capital Market and Economy
What makes Islamic finance different?
The Five Pillars of Islamic Finance
1) Prohibition of interest
2) Prohibition of speculation
3) Prohibition of the financing of illicit sectors (pork, weapons, alcohol,…)
4) Profit & Loss sharing principle
5) Asset backed principle
However:
Islamic finance is not restricted to Muslims (the “natural” clients) as some of
its principles may attract non-Muslim clients.
4
What is Sukuk
◊ The plural of the Arabic word Sak, literally translated as title deed
◊ Financial certificates structured to comply with Shariah prohibition
on the charging or paying interest(Riba) that grants an undivided
interest or share in an underlying asset along with the profit, cash flow and
risk commensurate with such ownership.
◊ Technically, Sukuk refers to securities, notes, papers or certificates,
with features of liquidity and tradability (except for salam and
murabahah sukuk)
Accounting And Auditing Organization For Islamic Financial Institutions (AAOIFI)
◊ AAOIFI Definition
“Investment sukuk are certificates of equal value representing
undivided shares in ownership of tangible assets, usufructs
and services (in the ownership of) the assets of particular
projects or special investment activity”
How do Sukuk Differ from Bond
◊ The fundamental of Islamic Finance requires
All contract arrangement must be
Transparent clear to all parties
No any unfair punitive clauses
With proper alignment of interest
Transaction must not involve excessive risk speculative due to uncertainty
Investments should have a social and ethical benefits to the society
No involvement of unethical business actives
◊ Which implies that ……
How do Sukuk Differ from Bond
◊ Sukuk constitute partial ownership in
Receivables (sukuk al Murabaha)
A lease (sukuk Al Ijara)
A project (Sukuk Al Istisna)
A business or partnership (Sukuk Al mudaraba / Musharaka)
Investment (sukuk)
◊ So Sukuk represents ownership of a real asset not like conventional
bonds own debt.
Comparing SUKUK to BONDS
Sukuk
Bonds
1. Holder owns assets
1. Holder owns cash flow only
2. Use a variety of contracts to create financial
obligations between issuer and investors; e.g. Sale,
lease, equity partnership, joint-venture etc.
2. Simply use a loan contract to create indebtedness
3. Return linked to profit elements in-built in the sale,
lease or partnership
3. Return linked to interest charged out of the loan
contract
4. Instrument may be equity or debt depending on
underlying contract
4. It is a Debt instrument
5. Tradability of the sukuk depends on the nature of the
underlying asset
5. No restriction on the tradability
6. Investment in Shari`ah-compliant activities
6. Proceeds are invested in any business without
restrictions
How do Sukuk Differ from Bond
◊ sukuk transform bilateral risk-reward sharing between borrowers and
lenders into market-based refinancing of shari’ah-compliant lending or trustbased investment in existing or future assets.
◊ sukuk do not pay interest, but generate returns through commoditization of
capital gains from actual transactions (i.e., asset transfer), such as:
 leasing : ijara
 cost-plus sale : murabahah
 profit-sharing/”sweat capital”/trust: musharakah or mudarabah
 shari’ah-compliant assets, usufructs or services
◊ investors own the underlying asset(s) via SPV that funds unsecured payments to
investors from direct investment in real, religiously-sanctioned economic activity
Sukuk Market At A Glance
11
Development of Sukuk Market
◊ Increasing appeal in non-core markets (UK, Turkey, Maghreb HK. UK
and others)
◊ Sukuk issuance soared over the last decades in response to growing
demand for alternative investments
◊ Outstanding sukuk globally exceeded US$1.8 trillion at end of 2013
◊ Total issuance in 2014 equivalent to roughly a quarter o f
conventional securitization in EM but only two percent of
conventional (local and foreign) bond issuance
TOTAL GLOBAL SUKUK ISSUANCES (JAN 2001 – DEC 2014, USD MILLIONS)
137499
140000
116400
111300
120000
100000
92403
80000
60000
52978
50041
40000
33837
◊ Significant slowdown of Sukuk issuance in 2008
because of market conditions.
◊ Apparent recovery in the recent past
◊ Reportedly healthy pipeline
◊ 2014 Global Sukuk Market bounces back from
2013 low with almost $116.4 billion sukuk issued
in the first nine months
37904
24264
20000
7050
13698
9645
1172 1371
0
13
Sukuk Insurance by Structure (2014)
Bai' Istijrar
Istithmar 1%
Bai' Inah 1%
4%
Salam
1%
Bai' Bithamin Ajil
2%
Others
5%
Wakala
5%
Musharaka
7%
Murabaha
59%
Ijarah
15%
◊ Murabaha and Ijarah structure
are still the preferred choice
◊ By structure, Murabahah and
Ijarah remain popular choices
among issuers in 2014 with 58%
and 15% respective shares for
each structure in total sukuk
issuances
14
Sukuk Insurance by Region
Bahrain
Qatar 2%
Turkey 3%
Indonesia 3%
4%
United Arab Emirates
5%
Others
6%
 Malaysia has taken
the lead but GCC is
still contributing
significantly.
Suadi Arabia
10%
Malaysia
67%
15
Sovereign Sukuk Issuance (2004-2014)
Malaysia
Brunei
Indonesia
Qatar
Bahrain
Pakistan
UAE
Sudan
Gambai
Hong Komng
South Africa
UK
Luxembourg
Yemen
Senagal
Singapore
Germanay
Nigeria
351494
60903
21890
19655
12545
7669
6855
2868
194
1000
500
340
272
250
200
193
123
71
1388
113
65
17
226
17
11
26
401
1
1
2
1
2
1
5
1
1
◊ issuance still concentrated in parts of Asia and
countries of the GCC
◊ Sovereign issuances dominated the global
Sukuk market
◊ Government and related entities are driving
the growth of the market compared with FI
and corporates in the past.
◊ This trend should help the construction of a
yield curve against which issuers can
benchmark themselves.
Sukuk Structure
17
Sukuk Basic Structure
Main Sukuk Types
Main Type of
Sukuk
Basic Structure of Ijarah Sukuk
Basic Structure of Murabaha Sukuk
Basic Structure of Commodity Murabaha Sukuk
Basic Structure of Musharaka Sukuk
Basic Structure of wakala Sukuk
The Way Forward…..
25
Why Russia Needs to Develop Islamic Finance and Sukuk
◊ Islamic finance has become increasingly important in the global
financial market, registering exponential growth over the past few
years.
◊ Compared with a size of only US$700 billion in 2008, the global
Islamic financial industry has expanded remarkably to an estimated
US$1.8 trillion by the end of 2013, representing an annual average
growth rate of 21%.
◊ According to market estimates, there is a huge potential for further
growth, with Islamic financial assets expected to reach US$6.5 trillion
by 2020
Why Russia Need to Develop Islamic Finance and Sukuk
◊ Sukuk market is the major growth area for Islamic finance
◊ Ten years ago, new sukuk issuance was only a modest US$5 billion. In just ten years'
time, annual sukuk issuance has already surpassed US$100 billion, amounting to
US$117 billion in 2013 which was more than 20 times higher than the figure in 2003
◊ The current account surpluses in the Gulf Cooperation Council (GCC) countries are
estimated to be more than US$300 billion
◊ while assets under management by sovereign wealth funds in those countries amounted
to as much as US$2 trillion
◊ Islamic investors in the Middle East and other Islamic countries generally have a
preference for investing in Shariah-compliant assets.
Why Russia Need to Develop Islamic Finance and Sukuk
◊ sukuk are becoming a mainstream asset class in the global financial
system.
◊ Financial innovation and tax reform in major international financial
centers have made sukuk largely comparable to conventional bonds.
◊ Apart from Islamic investors, sukuk are increasingly appealing to
conventional investors as a way to diversify their investment
portfolios.
What Russian Needs to do
◊ build a conducive platform for sukuk issuance
◊ sukuk are no different from conventional bonds in terms of economic substance, enabling issuers
to raise funds while giving investors interest-like return.
◊ However, the more complicated structure of sukuk, which involves the setting up of a special
purpose vehicle and multiple transfers of underlying assets, had led to additional tax liability for
sukuk issuers.
◊ Tax law amendments need to overcome this obstacle by removing the additional profits tax and
stamp duty charges incurred in issuing sukuk as compared with conventional bonds.
◊ Therefore , level the playing field between sukuk and conventional bonds with tax framework
changes .
What Russian Needs to do
◊ To play a lead-off role for by Issuing Sovereign Sukuk
To demonstrate to the global financial markets that the legal, regulatory and
taxation frameworks in Russian can well accommodate sukuk issuance.
To Encourage and attract more investors.
◊ Government sukuk could play a catalytic role, paving the way for local
and international fund-raisers, no matter from the public or private
sector, to follow suit.
◊ Make Kazan as a gateway of IFC to Russia’s access to global financial markets
 Matching the needs of fund raisers and investment demand of investors among Russia, the
Middle East, and other parts of the world interested in Islamic financial products
The way forward …...
◊ There are at least two ways to kick-off sukuk insurance
◊ 1) Gradual approach:
 A though legal and tax framework adjustment to cattle the Sukuk insurance but takes long
time
◊ 2) Fast track
 Off shore insurance
 Location of SPV
 Withholding tax (20%) – Non residents in Luxembourg and Netherlands
 VAT tax (18%) – Non-resident leasing out asset such as aircraft to Russian do not need pat VAT
 Property Tax (2.5) – Basically are exempted if the asset is immovable asset.
32
Contact
Dr. Turkhan Ali Abdul Manap
Senior Economist
Research Division
Islamic Research & Training Institute
P. O. Box 9201, Jeddah 21413
Kingdom of Saudi Arabia
Email: turkhanali@isdb.org
website: www.irti.org
Tel: + 966 12 646 6329
Fax: + 966 12 637 8927
ISLAMIC RESEARCH & TRAINING INSTITUTE
(A member of)
ISLAMIC DEVELOPMENT BANK GROUP