Business | Banking
Introduction to Sukuk:really most versatile bond?
You may have been hearing and reading a lot nowadays about the Sukuk launched by the Ports, Customs and Free Zones Corporation (PCFC) of Dubai. It is also referred to as the Thunder Sukuk.
- By Sohail Zubairi, Special to Gulf News
- Published: 00:00 February 1, 2006
You may have been hearing and reading a lot nowadays about the Sukuk launched by the Ports, Customs and Free Zones Corporation (PCFC) of Dubai. It is also referred to as the Thunder Sukuk.
Having been closely and directly involved with Dr Hussain Hamid Hassan, Chairman Sharia Board of Dubai Islamic Bank, in structuring, documentation and granting the Sharia approval to the Sukuk, I have been asked by some readers to write about the Sukuk, explaining its structure, how the investors will get the return and how the redemption to the investors will take place.
At an awesome size of $3.5 billion (Dh 12.85 billion), the Sukuk is the largest one so far launched in the Islamic finance world. At the same time, the over subscription value reaching more than $8 billion is also record-breaking.
No amount seems to be small anymore for Sukuk in the booming Gulf sector and perhaps we should be prepared to see another Sukuk record being formed in the foreseeable future.
Readers may recall the pioneering Malaysian Sukuk for $600 million(Dh 2.2 billion) launched in July 2002. A comparison of the magnitude of the PCFC Sukuk with the Malaysian Sukuk and the short time span of three years between them clearly demonstrates the fast and wider acceptability of Sukuk as the instrument of choice by the Islamic governments from the Asia-Pacific rim to the Arabian Gulf, and beyond.
It seems that the Sukuk is gradually edging out the good-old interest bearing conventional bonds, at least in the Islamic world to start with. In this regards, the underlying phenomenon has been two pronged the urge to attempt an Islamic way to fund the projects since it does not involve Riba (interest), which is strictly forbidden in Islam, and the string of successful endeavours in the last 4-5 years to fund large developmental projects in a Sharia-compliant manner.
This innovative investment instrument has not only won the hearts of the governments in the Islamic countries, but has also seen the large corporations adopting it in order to meet their financial objectives. Another aspect worth a mention is that whilst the Malaysian Sukuk was based on the Islamic structure of Ijara (where the customer selects the assets to be financed by a bank and the bank then purchases those assets and leases it to the customer for an agreed period), the promoters of PCFC Sukuk have adopted Musharaka. This portrays the depth and diversity of Islamic finance field in general and of the Sukuk instrument in particular.
At the same time the above also brings out into the open the lack of innovation that the conventional bonds are confronted with. Whilst a Sukuk can be launched based on any of the six basic Islamic structures; Mudaraba, Musharaka, Murabaha, Ijara, Istisna and Salam (or a combination of two or more of them), the conventional bonds are haplessly confined to the centuries old structure of loan and interest.
Another aspect which differentiates Sukuk from bonds from an investors point of view outlook is their asset-backed nature. Contrary to the default in the payment of bonds being a frequent feature in the West (the value of distressed bonds' index running in billions of dollars) and the investors losing all their wealth, the built-in safety aspect of Sukuk being asset-backed reasonably assures the investors of their ability to retrieve a major part of their investment even if things go terribly wrong since they will be having an undivided share in the ownership of the Sukuk assets.
Although the Sukuk market is in its infancy, so far there has been no default in payment of any Sukuk return or periodical redemption.
Reverting to the subject, the PCFC Sukuk is based on Musharaka or partnership. It is Sharikat Al-Aqd or contractual partnership where an agreement is entered between the two or more parties to combine their equity (be it in cash or kind) for the purpose of investing the same in a Sharia compliant manner for making profits, which are then distributed according to a pre-agreed ratio.
- The writer is Vice-President and Head of Sharia Structuring, Documentation and Product Development, Dubai Islamic Bank.
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