Islamic finance continues to enjoy phenomenal growth, with the global volume of Sukuk issued rising by 73% to US$47.1 billion during the course of 2007. It was reported that the Sukuk market continues to enjoy a year-on-year increase despite a slowdown in the rate of growth.
Despite the rise, there has been a decline in growth rates, as the 2007 increase is lower than that witnessed in 2006, when it stood at 125.75%.
In 2007, the total number of Sukuk issued was 207, compared with 199 and 89 in 2006 and 2005 respectively. In terms of value, the number of Sukuk issued in 2007 added up to US$47.09 billion compared with about US$25 billion in 2006 and US$10 billion in 2005.
Facts and figures
In the Middle East, there was a substantial rise in the volume of issuances. The Gulf Cooperation Council (GCC) states saw volume rise to 53 from 38, with most of the growth coming from the UAE. There was, however, a drop in the number of Sukuk issued in Southeast Asia mainly as a result of a fall in Malaysian corporate medium-sized issuance.
Despite this, Malaysia remains the world leader in Sukuk issuance by number and value, with 2007 trade totaling about US$25 billion. The Malaysian ringgit remains the most common currency for Sukuk issuance, followed by the US dollar. In Malaysia, most Sukuk are issued in ringgit, while in the GCC, the majority are issued in US dollar.
Pakistan was the fastest-growing market in 2007, enjoying a substantial rise in volumes — the number of Sukuk issued rose to 20 from four in 2006. Another remarkable feature last year was the explosion in the number of Sukuk worth more than US$1 billion.
There were only four such Sukuk in 2006 — two in the UAE and two in Malaysia — but in 2007, there were 14 such issues. Malaysia accounted for six, the UAE had five and Saudi Arabia, three. These 14 Sukuk alone represented 56% of the total value of the global market.
In 2007, the Sukuk market saw a decrease in the number of corporate Sukuk issued and yet, there was an increase in their value. In total, 156 corporate Sukuk were issued, compared with 167 in 2006 and 86 in 2005 but their value has grown consistently, rising to US$37 billion in 2007 from US$21 billion in 2006 and US$11 billion in 2005.
This decrease came mostly from Malaysia, where the number of corporate issuances fell to 112 last year from 148, although as in the GCC, the total value of these issuances rose, increasing to US$22.9 billion from US$13.7 billion.
There was a big drop in the value of Sukuk issued in the third and fourth quarters of 2007, although it is unclear whether this was a result of the US subprime crisis and the subsequent credit crunch. Proportionately similar drops in quarterly performance were seen in the second and third quarters of 2006 and the third and fourth quarters of 2005, which were periods of global credit expansion.
Shariah considerations
In essence, Shariah law is a flexible set of laws that are open to interpretation and religious boards frequently hold different views on key Shariah issues. In addition, Islamic legal jurisdiction (unlike common law and civil law) is not bound by precedent and legal opinions may deviate from previous decisions made by other Shariah scholars. Thus, a Sukuk structure has considerable discretion in the interpretation of Islamic law and may choose any school of thought to inform its decision-making process.
Shariah boards throughout the world that facilitate the approval of Sukuk for sale often hold differing interpretations on the accepted Shariah principles, thereby making investors nervous about buying Islamic bonds from outside their own jurisdiction.
Complex Sukuk structures involve challenging procedures and require extensive and costly advice — from a legal and religious perspective — in addition to diverse sets of skill and resources to make them work. Thus, corporations and financial institutions often shy away from such structures due to the legal risks and the potential costs of pioneering such instruments. Notwithstanding this, Shariah is dynamic and, like all legal jurisprudence, is open to interpretation.
It is accepted that the Achilles’ heel in the global acceptance and growth of Islamic finance is the level of standardization of Shariah rulings. At this juncture, there is yet to emerge a consistent ruling of Islamic law on the religious compliance of certain assets and transaction structures in terms of the Shariah.
The Shariah boards of different Islamic financial institutions may have different interpretations and advice because in Islam, there is no generally accepted codification of the jurisprudence. In a conventional sense, that can lead to uncertainty and confusion.
Legal pitfalls
The effects of non-standardized Shariah rulings include:
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Ambiguity and confusion
The absence of universally accepted codified Shariah standards is largely a result of the lack of uniformity in religious principles applied in the Islamic world. Shariah boards at individual financial institutions have their own way of defining what is or is not Islamic banking. Ultimately, this translates into different transactions being interpreted differently, ergo leading to a single identical financial transaction having various interpretations across different Shariah boards.This causes uncertainty on what is the acceptable way to do business in the Islamic banking and finance system. Further, the assessment of risk for both the financial institution and the investor can become complicated. The way Shariah advisory boards of Islamic financial institutions function thus remains a source of confusion.
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Not replicable
The difference in interpretation of Shariah laws means that one Islamic financial institution may not be able to “copy” another Islamic financial institution’s products and this can stifle the growth and integration of Islamic finance at both national and international levels.
Standardization needs
Conformity or similarity among the Shariah supervisory boards of Islamic financial institutions is urgently required to extend the possibilities in concept and application in the industry.
Establishing Shariah boards at a global and central bank level is required to expedite and develop some standard guidelines in the conduct of Islamic financial transactions. Standardization is necessary to circumvent any contradictions and inconsistencies between different fatwa rulings and their application by these institutions with a view to activating the role of the Shariah supervisory boards of Islamic financial institutions.
There is also the important factor of mutual recognition of financial standards and products across jurisdictions. The progressive harmonization of the Shariah, in this respect, needs to be viewed as an attribute toward greater international financial integration.
Moreover, supervision and regulation at the national and regional levels are necessary safeguards against potential improper practices. Such improper practices can cast a doubt on the credibility of all participants.
Shariah scholars from around the world should contribute toward greater understanding and international convergence. Such convergence and harmonization can only happen with greater engagement among the regulators, practitioners and scholars of Islamic finance in the international community.
The existence of a unified Shariah board via a council representing the different Islamic schools of thought, nationally and internationally, is necessary. This would facilitate the conformity of different types of financial services to Islamic law and, in addition, would define cohesive rules to expedite the process of introducing new products.
The effect of having such uncertainty and varying opinions within the Islamic banking and finance fraternity has caused many ripples that do not bode well for the growth of Islamic banking and finance.
Contentious issues
In summary, the standardization issues that arise include:
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Legal transfer and legal ownership — Land law reforms in each country relating to issues of de jure and de facto ownership by class of investors;
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Trust law reforms — Adaptation of the common law trust concept within the Shariah jurisdiction framework;
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Insolvency — Untested issues relating to the enforceability of creditors’ rights in the differing jurisdictions’ court system;
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Governing laws and jurisdiction — The question here is what or which laws should be used and why. There are suggestions to use alternative dispute resolution as an accepted standard.
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Taxation — Reforms are needed in relation to the transfer of assets at the end of the lease period, stamp duties and capital gains tax.