THE ROLE OF SUKUK

Proposal: Role of Sukuk In Malaysian Financial Market

Proposal: Role of Sukuk In Malaysian Financial Market

Abstract

The objective of this research is to review the evolution of Sukuk in the financial market of Malaysia. The paper also describe the Sukuk structures and analyze the various risks underlying the Islamic sovereign and corporate Sukuk in Malaysia.

As Malaysia is the biggest issuer of sukuk, she has comprising over 45% of US$9.3bil worth of new issuances (see figure 1). The paper compares the risk underlying traditional fixed income instruments and those underlying the Sukuk structures. Interest rate swaps and other derivative instruments are utilized to manage the risk of the traditional fixed income instruments. These instruments are not available to Islamic asset managers. The paper therefore, aims to analyze the securitized structures of Sukuk and suggest Shari'ah compatible frameworks which can replicate the functions of interest rate swaps and derivatives in managing the risks of Sukuk.

Introduction

Debt markets are an integral part of the financial sector and effectively supplement the funds provided by the banking sector in Malaysia. In emerging economies these markets are still at an early stage of their development. Islamic law (Shari'ah) prohibits the charging and paying of interest. Therefore, in countries where Muslim population constitutes an important segment of the society, traditional debt markets cannot flourish. Hence there is a high demand and need for developing alternatives to traditional debt markets that can be acceptable to the Islamic law.

[Figure 1]

As a result, there has recently been a rapid growth of a thriving multi billion dollar market in Shari'ah compliant sovereign and corporate Islamic structured financial instruments known as Sukuk. In Islamic capital markets, interest rate swaps and other conventional forms of derivative instruments such as credit derivatives and detachable options are not available as Islamic law also prohibits ...