The Relationship between Sukuk Prices and Interest Rates In United Arab Emirates UAE

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION3

1.1 Background3

1.2 Theoretical framework4

1.3 Problems statement5

1.4 Aims and objectives6

1.5 Research Questions6

CHAPTER 2: LITERATURE REVIEW7

2.1 The Sukuk Development and Growth7

2.2 Sukuk Types10

2.3 The Risks Related to Sukuk12

a) Rate of Return Risk12

b)Foreign Exchange-Rate Risks13

c)Credit and Counterparty Risk13

d)Default Risk13

e)Coupon Payment Risk13

f)Redemption of Asset Risk13

g)Shariah Risk14

2.4 Previous Studies in Sukuks14

Current Position of Sukuk Market15

CHAPTER 3: RESEARCH METHODOLOGY16

3.1 Research Framework16

3.2 Dissertation Layout16

3.3 ResearchMethods16

3.4 Econometric Model17

ENDNOTES19

BIBLIOGRAPHY21

CHAPTER 1: INTRODUCTION

1.1 Background

The Islamic law which is the Shariah, does not allow the taking or giving of usury or riba in the form of interest. Accordingly, the Muslim countries are adopting the Islamic system while impeding the progress of the conventional system of finance and banking. The current market is replete with a new Islamic and Shariah-compliant product by the name of Sukuks. These are Islamic counterparts to the regular bonds issued by both the governnments as well as by the corporate entities. In addition, these are asset-backed securities that are rather safe.

Sukuks, which are Islamic counterparts of regular bonds can be issued by any business or organisation ranging from the government, semi-government, to commerical entities. However, the sukuks can only be issued when the entity has assets on its balance sheet that could back the issuance of the sukuk bonds. There is no doubt that sukuk bonds are very effective instruments for resource activation in any economy. However, these bonds will be beneficial to the general public only when these are issued in accordance with the principles required to issue these bonds. For instance, it is imperative that these bonds have a minimum issuance requirement for their feasibility. The Islamic bonds or Sukuks are very similar to the conventional bonds such that they also have the underlying risks as are present in the conventional bonds. Therefore, the scholars of Islamic finance emphasise the need to develop such Sukuk bonds which already incorporate the various risk hedging instruments and derivatives such as the interest rate swaps.

The major problems faced by Sukuk issuers are that the Islamic world is not familiar with the Islamic mode of financing, banking, and investment. In this way, it becomes very difficult to achieve the right off-take of any issuances. Indeed, the growing of wealth in the hands of few due to petrodollars has also contributed to the situation. Secondly there is effect of monetary policy of these countries as the change in intrest rates change the peoples perception to invest.

1.2 Theoretical framework

The theoretical framework of this research will be based on Islamic economic principles that based on Shari'ah and applied in Islamic banking and finance. Following are the prohibitions that are related to the Sukuk:

Riba or Interest. This is defined as the seeking of reward or incentive for lending or borrowing the money. However, money should only be treated as a medium of exchange and not as contrary. Therefore, money should only buy other commodities rather than money.

Gharar or Too Much Uncertainty. This too much uncertainty does exist in the ...