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EventhoughtheIslamicfinancialsectorisyetaminormarket,ithasgrownsharply
mainlythankstodifferentfactorssuchas:
Muslimpopulationisgrowingallovertheworld.
Muslims are now living in all quarters not only in Arab countries, which
makestheircontributiontotheuniversaleconomyessential.
ThegrowingdemandofIslamicfinancialinstrumentsinsomecountries.For
example,theArabcountrieslikeBahrainandDubaipushedsomegovernment
to encourage the expansion of Islamic institution by rearranging their
regulationsandtaxlaws.
TheideathatIslamicfinancecanoperatebetterthanconventionalbankingdue
toitsriskfreestructure.Somescholarshavebeendiscussingtheprocessof
adopting Islamic finance as and alternative to normal financing. This
happened after the latest financial crisis with the subprimes interest rate
problem.
SomefinancialinstitutionsarenowconsideringIslamicfinancialinstitutions
asameanofdiversification.
Thegrowthinthismarketcanbemainlyexplainedbytheriskstructurerelatedto
Sukuk.Indeed,asforallotherIslamicfinancialinstruments,Sukukpromotesrisk
sharingasasubstitutetoconventionalinterestandinterestleverage.
StepsinvolvedduringtheissuanceofSukuk:
ThespecialpurposevehicletoraisefundsforaknownprojectissuesSukuk
certificates.
The funds generated through the Sukuk funding are used to pay the
manufacturer/construct/buy(itdependsonthenatureoftheunderlyingasset)
anddelivertheproject.
Afterdelivery,ownershipistransferredtothespecialpurposevehicle.
Inordertogetbacktheownershipoftheasset,theenduserwillrent/leasethe
asset/property/projectbypayinginstallmentstothespecialpurposevehicle.
After collecting the different installments, the special purpose vehicle will
distributethemamongtheSukukholdersdependingontheagreeduponratios.
Afterall,investorsshouldbeaskingaboutthelevelofriskinessrelatedtoSukuk.The
problem is that, since it is not widely and commonly used, Sukuk market faces
differenttypesofproblemsbeing:
1. Thelimitedsourceofhistoricaldataaboutthepastsukukperformancemakes
thisinstrumentopentoquestionableideas.Thereisalackofresearchand
empiricalstudies,whichresultinmakingtheSukukmarketunattractiveto
investors.Asallfondholders,investorshavetohaveanideaonthefinancial
instrument that is going to be used. More research and studies should be
conductedabouttoSukukasawaytoencouragepeopletoadoptthisfunding
instrumentratherthanusingtheconventionalbondones.
2. Thenatureoftheunderlyingasset:Sukukissuanceismainlyrelatedtothereal
estatemarket.Thismarkethasexperienceddifferentcomplicationswiththe
latestfinancialboom.ThisproblemisgreatlyabouttheShariahcompliance
risk,whichisonlyapplicabletoIslamicfinancialinstrumentssinceithastodo
with the risk of loss of the underlying asset due to the sukuk Shariah
incompliance.
There are several differences between conventional and Islamic banking,
thatswhyinordertobecomplianttotheIslamicrulings,eachissueofsukuk
hastobeapprovedbyShariahboard.ThisrisklimitsandrestrictstheSukuk
usageasfinancialinstrument.
3. OneofthebigissuesfacingSukukmarketnowadaysisthelackofconcrete
proper legislative base. Therefore, as a Shariah instrument, Sukuk has to
operateundernonShariahcompliantregulations.Hence,legalactionsafter
possiblecasesofdefaultcanbeveryconfusingtodecideupon.
Theproblemisrelatedtothefactthatitwouldbehardtobuilddocument
sukukrelatedcontractssothatboth,theShariahandthegoverninglawsatthe
sametime,wouldsupportthem.
4. Followingthepreviousissue,thereisalackofstandardizedpolicieswhenit
comestoIslamicfinance.Standardsandregulationsareveryimportantfor,
both,issuersandinvestorssinceitwillhelpthemunderstandtheirrightsand
obligationswilechoosingSukukasafundinginstrument.
Thisproblemconstructsamajorproblemmainlyinnonarabcountrieswhere
Shariahlawsarenotpartoftheeverydaylifeofinvestors.Thereignoranceof
suchlawsmaydiscouragethemtouseIslamicfinancialinstruments.
5. ThenatureofthecollateralgivenatthebeginningoftheSukukprocedureis
alsoonethemarketproblems.Thevalueofthecollateralmayfluctuateduring
thetransactionperiod.Thisvariationinthevalueoftheunderlyingassetcan
beseenasariskfortheinvestorincaseofdefault.
Asweknow,thecollateralisahedgingstrategythattheinvestorwillusein
ordertoreducetheriskinessoftheinvestment.Incaseofdefault,thecollateral
willbesold,andtheinvestorwillgetbackhis/hermoney.Whatifthevalueof
thecollateraldecreased?Theinvestorwillbefacinglosses,whichcontradicts
withtheideaofthecollateral.Thisiswhythenatureofthecollateralshould
behighlyrestrictedtoaspecificnatureinordertoensurethesafenessofthe
investor.