Global capital markets have long been functioning without Islamic components. Only recently have they been subject to the emergence of a new dimension: the sukuk (Islamic Bond) market. The sukuk market has experienced a spectacular growth since 2001 in the Middle East, supported by ultra-high petro-derived liquidity levels, which have fuelled by a growing demand for Islamic financial services and propelled the number of Islamic issuers within the region. However, the sukuk market has not been immune to the recent financial crisis, and the activity has notably slowed amidst difficult global market conditions. This has allowed the market some time for reflection on a number of specific issues, which have gradually emerged and will need to be solved. Although the long term outlook for the industry remains bullish, with the potential demand for sukuk likely to far outstrip available supplies, the future for sukuk remains full of challenges and constraints.
[...] -This calls for the creation of a Shari'ah compliant inter-bank money market and other short term Shari'ah compliant liquidity instruments, which would not only create a secondary/ liquid market for sukuk but also boost Islamic banks' profitability. The 200% oversubscription of the short term sukuk issued by the Central Bank of Bahrein demonstrates investors' appetite for this type of instruments. more detailed yield curve with a complete structure of issues needs to be built by sovereigns and governments related issuers. [...]
[...] -On a practical basis, until there is some broad consensual standardization on the substance of the underlying sukuk and terminology, investors will need to look at each structure individually to properly assess the cash flow generation and the risk/return profile of a sukuk. Investors have to bear in mind that the risk/ return characteristics of a sukuk can vary significantly within a particular sukuk type, irrespective of the type of structure used. -Overall, standardization will help cut the costs of Islamic products, increase their attractiveness and encourage the emergence of a truly integrated global market for sukuk. [...]
[...] sukuk holders do not benefit from the originator's guarantee neither on the principal nor the coupons. They benefit from an effective asset transfer: the sukuk holders own the assets and the cash flows. sukuk performance depends on the quality of underlying assets and the cash-flows extracted from those assets. The rating for this type of sukuk depends on the quality of the assets and the features of the structure; it can therefore be higher than the originator's one. Investors' rights over the assets. [...]
[...] The AAOIFI recommendations to move away from the bulk of current unsecured structures towards secured, asset backed ones could lead to more asset-backed sukuk issuance once markets normalise ie sukuks where returns are driven by asset performance or sale rather than based on a guarantee. The critical difference being that under those structures, a true sale of the underlying assets to the investors is registered and these sukuk should survive bankruptcy. The emergence of innovative structures is expected to accommodate the buy-back restriction, by making the repayment of the principal linked to the performance of the underlying asset. [...]
[...] This added to the global financial crisis and many sources attributed the decline in the sukuk market to the AAOIFI statement (new issuance declined by 44% and spreads widened by 2-3 times on new corporate sukuk, underlining additional Shari'ah compliance risk). In reality, it was difficult to gauge to what extent this slowdown was a function of global credit market conditions and how much was due to Shari'ah compliance issues. The AAOIFI statement seemed to have more impacted sukuk structures. [...]
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