HOW DID SUKUK FARE IN 2008 ?

The Global Sukuk Report 2008 by Global Investment House cited that the amount raised by sukuk, or Islamic bonds, totalled $15.1 billion US Dollars last year, compared with $33.1 billion in 2007. At the same time however, the number of sukuk issued worldwide increased from 129 to 165 in 2008.

The impact of the global financial downturn has only recently begun to be felt in the Gulf region. Consequently, the Global Investment House report recorded that the majority of sukuk were issued in the first three quarters of 2008, with only 26 sukuk issued in the final three months - an indication of the correlation with the impact of the global economic slowdown on the region.

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At the same time, the market for sukuk issuance, and Islamic finance instruments in the Gulf was noted to be growing. The Gulf Cooperation Council (GCC) was the largest issuer of sukuk last year, followed by Malaysia.

"The Islamic bond market is still concentrated in the GCC region and Malaysia, in terms of dollar amount. GCC countries accounted for 55.5 per cent of the dollar amount issued, while Malaysia accounted for 36.3 per cent," according to the report's findings.

The market share for sovereign issued sukuk is also increasing, with 73 sovereign sukuk issued in 2008, compared to 32 in 2007, an indication of the growing importance of the debt instrument to raise government funds.

Over half of Gulf states are already issuing sovereign sukuk, with the UAE leading the way.

In 2008, the UAE was the second largest market for sukuk raising, with Dh19.5 billion raised from 10 issues.

This was marginally behind Malaysia, which raised Dh20 billion. The only other country to have raised over $1 billion from sukuk was Saudi Arabia, out of a total of ten states which issued sukuk last year.

CONTROVERSY - ARE EXISTING SUKUKS SHARIAH COMPLIANT?

Wow, the statement itself is full of controversy – well, let me tell you what actually happened.

There was an article initially carried by Bloomberg, a financial news agency, specifically attributed the fall-off in sukuk last year due to a fatwa issued in early 2008 by the Bahrain-based Accounting & Auditing Association for Islamic Financial Institutions (AAOIFI) essentially deeming the majority of issuance thus far non-shariah-compliant and setting out a stricter series of principles necessary for religious acceptability.

AAOIFI’s doubts first hit the headlines in late 2007 when the body’s influential scholar and chairman Sheikh Mohammed Taqi Usmani told a conference that some 85% of outstanding sukuk failed the shariah-compliance test on the basis that they were asset-based rather than asset-backed - with the issuer undertaking to pay back the face value of the bond on maturity and without the buyers truly owning the underlying asset - mimicking a conventional bond through a guaranteed return and a lack of the profit and loss-sharing required under Islamic financial tenets.

A more detailed pronouncement was published by the AAOIFI board in February, the first point of which covered this area, stating that ownership of the relevant assets were required to be legally transferred to the sukuk-holders. The fatwa ruled unacceptable the extension of “loans” from the borrower to the investors to make up for any shortfall in the return on the assets - in effect offering an assured rate of return - while barring guarantees to repurchase the bonds for a nominal value at maturity, except in the case of the ijara, or leaseback, structure.

AAOIFI also called for closer scrutiny by shariah boards of the documentation detail of particular issues, rather than accepting the nominal structure at face value - a development that has for some time been advocated more broadly among conservatives in the Islamic banking community, complaining that overstretched or inexperienced scholars are frequently misled by issuers and their financial advisers over the true shariah-compliance of a transaction’s contractual framework.

The statement ended with an explicit exhortation for a return to basic principles: “The (AAOIFI) shariah board advises Islamic financial institutions to reduce their involvement in debt-related operations and to increase true partnerships based on profit and loss-sharing in order to achieve the objectives of shariah.”

SUKUK

I was reading a book on Corporate Finance just now and suddenly I remembered about sukuk. However, not many of us know how it works, therefore, I decided to give a brief introduction of sukuk.

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed income, interest bearing bonds are not permissible in Islam, hence Sukuk are securities that comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest.

Shariah requires that financing should only be raised for trading in, or construction of, specific and identifiable assets. Trading in indebtedness is prohibited and so the issuance of conventional bonds would not be Shariah compliant. Thus all Sukuk returns and cashflows will be linked to assets purchased or those generated from an asset once constructed and not simply be income that is interest based. For borrowers to raise compliant financing they will need to utilise assets in the structure (which could be equity in a ‘tangible’ company). It’s worth noting that Equity financing is Shariah compliant and fits well with the risk/return precepts of Islam.

The Problem with Interest or Riba

As Shariah considers money to be a measuring tool for value and not an asset in itself, it requires that one should not be able to receive income from money (or anything that has the genus of money) alone. This generation of money from money (simplistically interest) is Riba, and is forbidden. The implications for Islamic financial institutions is that the trading/selling of debts, receivables (for anything other than par), conventional loan lending and credit cards are not permissible.

The Problem of Uncertainty or Gharar

This principle is widely understood to mean uncertainty in the contractual terms and/or the uncertainty in the existence of an underlying asset in a contract and this causes issues for Islamic scholars when considering the application of derivatives. Shariah also incorporates the concept of Maslahah or Public benefit, denoting that, if something is overwhelmingly in the public good, it may yet be transacted and so hedging or mitigation of avoidable business risks, may fall into this category but there is still much discussion yet to come.

Controversy

Sukuks are widely regarded as controversial due to their perceived purpose of evading the restrictions on Riba. Conservative scholars do not believe that this is effective, citing the fact that a Sukuk effectively requires payment for the time-value of money. This can be regarded as the fundamental test of interest.

If you are interested to know more about sukuk, you may find that the article below is very helpful and informative :

1. Sukuk Structures

ISLAM AND THE PRESERVATION OF THE ENVIRONMENT

The Islamic attitude towards the environment that surrounds humanity is not merely restricted to the presence of Allah everywhere but also to the following dimensions:

By submitting to Allah, Islam establishes the bedrock of the relationship between finite, mortal human beings and the infinite Divine, the secular and the sacred. This relationship cannot be understood without first realising the meaning of the “submission” that the “created” should concede in his relationship with the Creator.

Humans have to accept that they are created beings who act as the “agents” of Allah on earth. These agents are creative in their own way but they are not Allah. Humans, however, will become closer to the sacred by operating according to Allah's instructions. The Prophet (s.a.w) in a Hadith Qudsi (Divine Hadith), quotes Allah as saying: "When a worshipper moves closer to me by good virtues and voluntary acts of worship (nawafil), I will be his hearing by which he can hear, I will be his eyes by which he can see, I will be his hand by which he can act, and his feet by which he can walk. If he asks Me [to give him] I will give him what he wants, and if he asks for protection I will protect him." (Al-`Asqalani, 1959: 11, 341)

Islam, as a way of life, expects human beings to conserve the environment for several reasons which may be summarized as follows:

1- The environment, is Allah's creation. The creation of this earth and all its natural resources is a sign of His wisdom, mercy, power and His other attributes and therefore serves to develop human awareness and understanding of this creator. (Ar-Ra`d, 13: 2-4; 21:79)

2- Muslims should seek to protect and preserve the environment because by so doing they protect Allah's creatures which pray to Him and praise Him. Humankind might not be able to understand how these creatures praise Allah but this does not mean that they do not do so, Allah says: (The seven heavens and the earth, and all beings therein, declare His glory: There is not a thing but celebrates His praise, and yet ye understand not how they declare His Glory!) (Al-Israa’ 17: 44)

3- The environment contains Allah's creatures which the Muslim scholars consider to also deserve protection.

4- Also among the reasons why Islam seeks to protect and preserve the environment is that Islam, as a way of life, is established on the concept of good (khayr). Therefore it is expected that Islam will protect the environment once it is understood that such protection is good by itself. The Qur'an states: (He whoso do good an atom's weight will see it. And whoso do ill an atom's weight will see it.) (Az-Zalzalah 99: 7-8)

In Islam, humans are expected to protect the environment since no other creature is able to perform this task. Humans are the only being that Allah has "entrusted" with the responsibility of looking after the earth. This trusteeship is seen by Islam to be so onerous and burdensome that no other creature would 'accept' it. Allah says: (Lo! We offered the trust unto the heavens and the earth and the hills, but they shrank from bearing it and were afraid of it and man assumed it Lo! he is a tyrant and fool.) (Al-Ahzab 33: 72)

In Islam the relationship between humankind and the environment is part of social existence, an existence based on the fact that everything on earth worships the same God. This worship is not merely ritual practice, since rituals are simply the symbolic human manifestation of submission to Allah. The actual devotions are actions, which can be practiced by all the creatures of earth sharing the planet with the human race. Moreover humans are responsible for the welfare and sustenance of the other citizens of this global environment. The Qur’an contains many verses that can be referred to for guidance in this respect. The following verse 21 of the second surah of the Qur'an, is one example:

(O people! Worship your Lord, Who hath created you and those before you, so that you may ward off (evil). Who hath appointed the earth a resting-place for you, and the sky a canopy; and causeth water to pour down from the sky, thereby producing fruits as food for you. And do not set up rivals to Allah when ye know (better).) (Al-Baqarah 2: 21-22)

The word in this verse which is translated as "may ward off evil" is in Arabic tattaqun. It enjoins piety and awareness which is accompanied by an appreciation of the surrounding environment. In this verse, the Qur’an speaks directly to all groups of people, whether believers, or not. It attempts to mobilize people to the importance of "worshipping Allah" as a symbol and a way of life that enjoins justice and equity in handling the system created by Him.

This system has been placed under human responsibility, to be cared for and not misused as can be concluded by returning to verse 22 of surah al-Baqarah. The word lakum (for you) in the phrase "created for you" contains the message that the earth is not for one generation but for every generation, past, present and future and that would include humans as well as other creatures on this earth. Accordingly, rivers, minerals are the property of all.

ISLAM AND THE ENVIRONMENT

I did my Islamic Economics paper last semester and one of the most interesting topics is on Islam and the environment. The topic really hit the right nerve as today, most people are moving towards going green. However, did we do something to really protect the environment or better known as “Mother Earth”? Or are we being a NATO – No Action Talk Only nation?

The topic was an eye opener for me – I have never been introduced to this side of Islam before, even though I am aware that Islam is not just a religion but A WAY OF LIFE (most people tend to forget that most of the time and see each aspect of Islam in isolation rather than admitting that Islam encompasses all things).

Anyway, I remembered of a story of Caliph Omar, one of the most distinguished of the Prophet's (s.a.w) companions demonstrated exceptional compassion towards animals. In fact he would deal strongly with those who overloaded their 'beasts of burden'. He would actually go to the extent of concealing himself from view and check that people were treating animals well. On one occasion he passed his hand over the wound of a camel intending to help heal the beast, saying, "I fear God may seek retributions from me for the pain you suffer”.

Man is a vicegerent on this earth, therefore, the concept of khalifah and amanah (trusteeship) comes into play here. Human stewardship of earth cannot only be about rendering judgement of truth (al-hukm bil-haqq = to judge by the truth) to humans but it is also, by extension, about being just to all inhabitants of earth, for “the earth He has spread out for His creatures (al-anam).” Therefore the earth is not only for man but also for nature, and hence true stewardship means to maintain an equilibrium between the needs of man and the rights of other creatures to live their life on this earth, for “He has set the balance that you exceed not the balance, and therefore observe the balance strictly and do not fall short thereof.”

The rise of ecological psychology in the West is in recognition that the superficial, even hypocritical, market economics and techno-scientific approaches (such as carbon trading) are not going to work. The solution is to be found at a deeper level by rekindling the innate human affinity and respect for nature that has been suppressed by two centuries of consumerist industrial civilization premised on indefinite growth, development and progress. Instead of the present-day dogmatic economic mantra of limited resources chasing after unlimited wants, a new economics of the future will have to be formulated, namely, one that is premised on the unlimited bounties of nature more than fulfilling the very limited needs of man, “for if you count the blessings of Allah, you will not exhaust them.”