The Role of Sukuk in Islamic Capital Markets
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3. SUKUK STRUCTURES, ISSUANCES AND INVESTMENT
In determining the extent of sukuk’s inclusiveness in a country’s capital markets, a general
review of its bond market has been undertaken in the respective case studies. Countries that
have active LCY bond markets facilitate easier access vis-a-vis promoting sukuk as an
alternative form of financing, as highlighted in Box 3.1.
Box 3.1: Benefits of LCY Bond Markets
LCY bond markets offer several benefits. Firstly, they eliminate the double-mismatch problem by
aligning the currency and term of the credit with the currency and term of the credit providers.
Secondly, LCY bond markets create competition against banks by providing large corporations
and infrastructure projects an alternative source of funding in the event the terms and conditions
of bank loans are deemed unattractive. Thirdly, bond markets are better able to provide long-term
capital (with terms of over 10 years) compared to banks. Fourthly, LCY bonds provide alternative
investment options that offer higher yields and/or a better match with the investment needs of
individuals and institutions. Last but not least, bond markets convey important information about
general credit conditions, as well as information on the creditworthiness of specific institutions,
which is not readily available from the banking system. While the 2008–2009 global financial
crisis has cast doubts on former US Federal Reserve Chairman Alan Greenspan’s contention that
LCY bond markets can serve as a “spare tyre” by continuing to provide credit when the banking
system is under stress, a well-functioning domestic bond market reduced the impact of bank
liquidity problems (loans can be called while bonds generally cannot) and also conveys other
significant benefits.
Source: Asian Development Bank (2013)
Central to the development of a sukuk market is the need for a clear roadmap that focuses on 4
key areas:
1. Promoting the issuance of LCY and FCY sukuk.
2. Fostering supply (sell side) and demand (buy side) for sukuk issuance.
3. Improving the existing legal, regulatory and tax frameworks to promote a level playing
field for sukuk issuance.
4. Enhancing market infrastructure (i.e. development of an Islamic money market to
support secondary trading, an electronic trading platform for transparency and
monitoring of issuances and price guidance).
According to McKinsey (2017), 6 pillars or building blocks ensure the long-term growth of
capital markets, as depicted in Figure 3.1.