Table Content

1.1 Introduction of Sukuk ..................................................................................................................... 3 1.2 History of Sukuk market in Malaysia 4 1.3 Progress of Sukuk market in Malaysia ... 5 1.4 Factors that enable Malaysia to become the choice of firms in issuing Sukuk 6 1.5 Suggestion . 10 1.6 Conclusion . 11 References .. 13

1.1 Introduction of Sukuk Sukuk is the Arabic name for the financial certificate but can be seen as equivalent to Islamic bonds. However, fixed income, interest bearing bonds are not allowed in Islam, the Sukuk are securities that comply with Islamic law and investment principles, which prohibits charging or paying interest. Financial assets that comply with Islamic law can be classified in accordance with their tradability and nontradability in the secondary market. A conservative estimate by the Ten-Year Framework and Strategies suggest that more than $ 700 billion in assets managed according to Islamic investment principles. Shariah-compliant assets worldwide valued at approximately $500 billion and had grown in more than 10 per cent per annum over the past decade, placing Islamic finance in the global asset class itself. In the Gulf and Asia, Standard & Poor's estimates that 20 percent of banking customers now spontaneously choose an Islamic financial product over conventional risk-return profile of the same. With the ban on Arabic terminology and unusual, Sukuk financing can be a bit mystifying to outsiders. A good analogy is one that is ethical or green investing. Here the universe of investable securities is limited by certain criteria based on moral and ethical considerations. Islamic finance is also a subset of the global market and there is nothing that prevents the conventional investor from participating in the Islamic market.

1.2 History of Sukuk Market in Malaysia In the classical period of Islam sukuk which is cognate with the roots of Europe "check" (which itself comes from the Persian) - meant any document representing a contract or conveyance of rights, obligations or monies done in conformity with the Shariah. Empirical evidence shows that sukuk were a product is widely used during medieval Islam for the transfer of financial obligations originating from trade and other commercial activities. The essence of sukuk, in the modern Islamic perspective, is the concept of asset monetization - the so-called securitization - which is achieved through the issuance of sukuk. Great potential in changing the future cash flow of assets into cash flow now. Sukuk may be issued on existing as well as specific assets that may be available on future dates. The end of 2006 worth more than U.S. $ 50bn the sukuk market is due to the exponential increase in 2007 with all issues that may be oversubscribed 5 to 6 times in the middle of a rapidly growing interest in western countries.

1.3 Progress of Sukuk Market in Malaysia In developing the sukuk market, Malaysia provides a total solution for sukuk activities by providing a complete sukuk issuance and trading platform, supported by four elements: various Islamic instruments, infrastructure, laws and regulations of strong, sound Shariah governance framework and talent supply . These elements are also strengthened by the Malaysian Islamic financial system is comprehensive with all the major components of the financial system of Islamic banking, takaful, Islamic money and capital market in the final stage of development. Besides that, different part of the Islamic financial system not only facilitates the production and distribution of paper but also creates a strong demand for sukuk by providing a broad investor base. There are also various Islamic instruments in the sukuk market in Malaysia, including currency swap and Islamic forward contracts that are provided to facilitate hedging and other risk management activities. Sukuk market in Malaysia, is also supported by the rules and regulations, and the pool of global and domestic players who are experienced and professional legal and accounting services, including consulting and tax law, as well as documentation in the production and trade. In promoting Malaysia as an International Islamic Financial Centre (MIFC), we aim to develop Malaysia as a center for origination, distribution and trading of sukuk to give further impetus to the development of bond market an increasingly vibrant and progressive in Malaysia and in Asia. This will strengthen the international dimension of the sukuk market in Malaysia by providing relationships with issuers and investors. To deepen and widen the bond and sukuk market, Malaysia has further liberalized the foreign exchange administration rules to allow multilateral financial institutions, multinational corporations and other countries to produce both ringgit and non-ringgit denominated instruments in our capital markets. Malaysia also has a financial infrastructure and regulations that facilitate that contribute to efficient price discovery and shorter time to market, thus providing an effective platform for sukuk issuance and trading activity. Established framework of law, regulatory and Shariah in Islamic finance infrastructure in Malaysia is reinforced by the supporting financial infrastructure, including the settlement and bond information system.

To facilitate the issuance of sukuk in Malaysia that is efficient, an MIFC-stop center established as a single point of contact for efficient delivery process to facilitate the issuance of sukuk. To facilitate this process, there is no restriction on the ability to use international rating services, the ability to hedge position and the ability to shift production to foreign currency. Profits and dividends received by non-resident investors from holding instruments and non-ringgit Islamic ringgit issued in Malaysia are exempted from withholding tax. Special purpose vehicle (SPV) for Islamic financing purposes via the Islamic capital market is not subject to administrative procedures under the Income Tax Act 1967. In addition, companies that establish these SPVs are given tax deduction on the cost of issuance of Islamic securities incurred by the SPV. The production cost for all Islamic securities approved by the Securities Commission are also eligible for tax deduction. Finally, there is stamp duty exemption for 10 years on instruments relating to Islamic securities under the MIFC.

1.4 Factors that enable Malaysia to become the choice of firms in issuing Sukuk i. Strong Regulatory and Shariah Governance Framework The Shariah Advisory Council (SAC) was established in May 1996 to advise the Commission on Shariah matters pertaining to the Islamic Capital Market. The progressive approach of the SAC has allowed the Islamic Capital Market, especially sukuk market, to expand and develop suitable with the change of economic while ensuring compliance Shariah principles. The regulatory bodies such as Bank Negara Malaysia, the Securities Commission and Bursa Malaysia have been working towards a sustainable framework of legislation, rules and guidelines to support the growth of the Sukuk industry. In Malaysia which as a lead in issuance Sukuk have a state a guidelines.

The issuance of sukuk is regulated by Securities Commisison (SC) through the framework provided under the Guidelines on the Offering of Islamic Securities. The structure of sukuk must be confirmed and approved by Shariah adviser who is appointed by the issues. A Shariah adviser can be independent Shariah adviser approved by the SC or a Shariah committee attached to a financial institution that operates Islamic Banking activities approved by Bank Negara

Malaysia. Guidelines on the Offering Of Islamic Securities was established in 2004 is give a facilitate and trust from other foreign country to issuance sukuk in Malaysia and at the same time is have strict rule which the investment dont have a riba activities. The sukuk structure requires strict shariah compliance. Not every issuer has the competency or expertise for that. This is the one factor the Malaysia get the attention from the world in the Sukuk market.

ii.

Leading Edge Product Innovation Another factor that Malaysia to become the choice of firms in issuing sukuk is the countrys leading edge in product innovation. Malaysia was the first to introduce a global corporate Sukuk, sovereign Sukuk, the worlds largest corporate Sukuk, the first exchangeable Sukuk, the first listed Islamic REITs , the first municipal Sukuk based on a equity contract , the longest dated Sukuk. In addition, Bursa Malaysia also have launched the worlds first end-to end shariah compliant commodity trading platform in 2009 , Bursa Suq Al-sila, to facilitate commodity trading for Islamic financing, Sukuk and investment transactions under the Shariah principles of Murabahah, Tawarruq and Musawwamah.The current commodity used is crude palm oil, which may be extended to other Shariah approved commodities in the future. Earlier this year, based on newspaper The Star, HSBC Amanah Malaysia Bhd, a subsidiary of HSBC Bank Malaysia plans to introduce an innovative sukuk this year for retail investor. HSBC is as a leading sukuk house. This is one sign that country is more innovative in Sukuk Market. Malaysia has pioneered many of the worlds innovative sukuk structures.Among the various sukuk structures that were originated in Malaysia are:

1990 First bai bithaman ajil Islamic debt securities by Shell MDS Sdn. Bhd.(RM125 million 1994 First sukuk mudharabah by Cagamas Berhad (RM30 million) 2001 First corporate sukuk ijarah by Kumpulan Guthrie Berhad (USD150 million) 2002 First sovereign sukuk ijarah by the Government of Malaysia (USD600 million) 2003 First tradable sukuk istisna by SKS Power Sdn. Bhd. (RM5.6 billion) 2005 First sukuk musharakah by Musharakah One Capital Berhad (RM2.5 billion) 2006 First exchangeable sukuk by Khazanah Nasional Berhad (USD750 million)
Sources by Bank Negara Malaysia

iii.

Malaysia International Islamic Financial Centre (MIFC) Incentives The Malaysia International Islamic Financial Centre (MIFC ) initiative was launched in August to promote Malaysia as a major hub for international Islamic finance. The MIFC initiative comprises a community network of financial and market regulatory bodies, Government ministries and agencies financial institutions, human capital development institutions and professional service companies that are participating in the Islamic finance. MIFC also provide the incentive for issuers and depositor to issuing sukuk in Malaysia. This is one attractive for firm to choice that country . Incentives for issuers Incentives for investors

No restriction on repatriations of proceeds abroad Free to hedge positions International credit rating allowed International documentation allowed Stamp duty exemption Deemed approve for AAA (local rating) or BBB international rating issues SPV not subject to tax or tax administrative procedure Tax deduction until 2015 on expenses incurred on issuance of Islamic securities No fees imposed for sukuk listed in 2009 No restriction on Portfolio investment Repatriation of capital , profit, income Converting foreign currency into RM & vice versa Entry & exit of foreign investorsfunds

Malaysia International Islamic Financial Centre gives attractive tax for both party issuers and depositors. Malaysia has an overall enabling tax and economic environment that makes the country an attractive market to issue new sukuk. We are beginning to see more GCC (Gulf Cooperation Council) countries offering sukuk in Malaysia, said Directod Dr M.Muhammad Awan as a US-based Global Studies Institutes.

iv.

High Quality Market Infrastructure The factor high quality market infrastructure give investor sukuk facilitate to ensure that the management of Sukuk is smooth. Bursa Malaysia offers a platform for the listing of Sukuk under an Exempt Regime for both-listed or non-listed issuers. In addition, 2009 Bursa has announced their plan to launch a secondary trading platform for bonds, including sukuk to attract retail interest in Malaysian Debt market. Facilitative environment that encompasses a sound infrastructure platform which also caters for global investment whereby flexibility is laso accorded for foreign investors to leverage on international clearing and settlement system. In 2011, the sukuk issuance is projected to surpass the level recorded in 2007 when it sustained the highest level of issuances. The year 2010 also saw Malaysia's evolution as a multi-currency sukuk origination platform with four foreign currency sukuk issuances amounting to about USD3 billlion. This trend will benefit from the Bloomberg AIBIM Bursa Malaysia Sovereign Shariah Index (BMSSI) developed by the Association of Islamic Banking Institutions Malaysia (AIBIM), Bursa Malaysia and Bloomberg that is also being launched today as part of the enhancement in the Islamic finance platform. In further strengthening the infrastructure for the sukuk market, the Malaysian Electronic Clearing Corporation or MyClear, a wholly-owned subsidiary of Bank Negara Malaysia that operates the country's real time gross settlement system and securities depository system, is also undertaking an initiative to promote cross-border financial transaction that is efficient, reliable and secured. Another infrastructure development that is taking shape in the international Islamic financial system is the establishment of the International Islamic Liquidity Management Corporation (IILM). Launched in October 2010, the IILM has begun its operations in Kuala Lumpur on the 1st of February. Its main task is to issue short-term multi-currency liquidity instruments to facilitate the cross-border liquidity management between financial centres and at the same time enhance the financial inter-linkages. The IILM is scheduled to roll out the issuance of liquidity instruments later this year. This will allow for more efficient management of financial flows across borders and thus contribute towards the efficient internationalisation of Islamic finance.

1.5 Suggestion Sukuk is financial certificate in Arabic name. Its also known as Islamic equivalent of bond where the documents that represent ownership in an asset. Sukuk that standard for investment issues are mudarabah, ijarah, murabahah, musharakah, salam and manfaa. To maintain issues of sukuk in Malaysia is quite difficult because of factor of religion in Malaysia. As we know, sukuk is one of the Islamic rules that according to shariah law. We can say that Malaysia still can maintaining issues of sukuk because of the main religion was Islam. So that is not reason why sukuk cant to implement well. First suggestion that can be done is sukuk have to be their own to be tradeable. All obligations and the rights accompany such ownership. They must establish the ownership of assets in its books by manager if sukuk issuance. Other than that, manager of sukuk cant an offer loans to sukuk holders when expected earnings is more than actual earnings. Sukuk also cant be represented as debt or receivable except have to sell all the assets or in case of trading. To re-purchase sukuk by investment agent, partner, investment manager, they cant using a nominal value when it is exceed the maturity. But they can buy sukuk by using market value or net value in accordance with Shariah rules of partnership. It can be allowed to anyone from sukuk Al-Ijarah to purchase their sukuk with condition they are not from those kinds of persons. This activity must be compliance at every stage of the operation and oversee its implementation by Shariah supervisory boards. In issue of fatwa, they also cant limit their roles on structure of sukuk. Other than that, the establishment of a regulatory framework is important. A legal framework, regulatory and supervisory framework provides the essential foundation for the functioning of a modern capital market. For the rapidly market such as the Islamic capital market, it is important to ensure that an appropriate and conducive regulatory environment exist to adequately regulate the Islamic capital market. Individual members may also wish to address any factors that could prevent product development and innovation that work or does not encourage participation in the Islamic capital market transaction. Meanwhile, the conventional principle of securities regulation can be applied to Islam capital markets may in certain circumstances where an individual jurisdiction felt the need for more specific guidelines will be introduced to ensure that unique aspects of Islamic capital market products should be regulated. These members may wish to continue a series of issues. Domestically, some jurisdictions have begun to develop specific guidelines for the Islamic capital market.

Last but not least, as Islamic financial transaction become global in nature, the establishment of liquidity management centre (LMC) is important. This is to facilitate the creation of the Islamic interbank money market that will enable financial institutions to manage their liquidity effectively. In addition, LMC facilitate the collections of the assets acquired from the government, financial institution and companies. These assets are securitized through the issuance of sukuk instruments or trading for the Islamic financial services institutions to invest their excess liquidity. By creating a secondary market for trading these instruments, LMC returns able to provide short-term competitive investment, liquidity opportunity for Islamic institutions.

1.6 Conclusion Sukuk are certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity (AAOFI, 2008). Besides that, the core principle of Islamic finance that form the basis of the sukuk market has been in existence for more than 1,500 years, but the actual fact of the sukuk market in Malaysia was introduces around 1990. Since then, the market has continued an upward trend. Recently, the market for sukuk is now maturing and sukuk have become increasingly popular in recent years, both as a means of improving the government financial through sovereign issues and as a way for companies to obtain financing through offering corporate sukuk. However, the financial crisis hit this increasing. Besides that, the demand for sukuk or Islamic securities has gained universal acceptance as a feasible alternative to conventional financial products. Sukuk may also appeal to conventional investors looking for attractively priced instrument for regular income and capital gains. There are some similarities and differences between Sukuk and conventional bonds. The similarities are it always has fixed term maturity, bears a coupon (profit) and is tradable on the normal yield price. However, Sukuk is structured in such a way that the issuance is not an exchange of an approved asset for some financial consideration that allows the investors to earn profits from the said transaction. Conversely, the differentiate Sukuk from conventional bonds is the Sukuk asset-backed nature. Contrary to the default in the payment of conventional bonds and the investors losing all their wealth, the built-in

10

safety aspect of sukuk being asset-backed reasonably assures the investors of their ability for retrieve a major part of their investment even if things go terrible wrong, since they will be having an undivided share in the ownership of the sukuk assets. However, they are advantages and constraint in sukuk investment. There are many advantages in sukuk. Firstly sukuk are important tool for development especially in terms of creating job opportunities through investment in infrastructure projects and production, providing employment to a large percentage of unemployed people. In addition, Islamic sukuk investments in stocks are also projects that are open to various investors, including Islamic and commercial bank plus citizens. This is beneficial for economy because it puts the labor force to work and lead to the creation of new services. Other than that, the main advantage of sukuk is enhanced quality it brings with the presence of the tangible assets. Besides that, the appropriate underlying assets has the ability to not only produce desired income stream for investors but allow even struggling entities to pledge their most profitability assets for sukuk financing. In addition, sukuk are priced competitively in line with conventional bond issues, sukuk are shariah compliant investments and generally have better risk profile. Sukuk also are tradable and fill the existing need for shariah-compatible tradable instrument plus short term Islamic financial market. But, the constraints that are faced by sukuk are secondary market illiquid due to absence of critical mass market makers. Other than that, there is limited awareness about these instruments in the western market and some countries member jurisdictions plus no benchmark for portfolio monitoring as available to conventional bonds. Last but not least, as looking forward, islam investment funds such as sukuk is the shariah of security that can be understood by conventional market investor. In facts, sukuk also have been seen as a catalyst for the success of shariah finance in the global financial market. In addition, the success of the sukuk set continue, especially in light of current market conditions as investors look for ways to limit the exposure from the tightening of interest rates. Furthermore, sukuk are securities that comply with Islamic law and principles of investment which prohibits charging or paying interest, they may be a welcome alternative in the current market.

11

Reference

1- Retrieved May 1, 2012, from http://en.wikipedia.org/wiki/Sukuk 2- Ayub, M. (2009). Understanding Islamic Finance. (pp. 31-36). John Wiley & Sons. 3- Khalil, A. Sukuk: Denition, Structure and Accounting Issue. (2011). Malaysia: Universiti Sains Islam Malaysia. 4-

12