The Role of Sukuk in Islamic Capital Markets
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Box 3.2: Definition of NBFIs
NBFIs comprise a mix of institutions that include pension funds, insurance companies, mutual funds, leasing,
factoring and venture capital companies. The common characteristic of these institutions is that they
mobilise savings and facilitate the financing of different activities, but do not accept deposits from the public.
NBFIs play an important dual role in the financial system. They complement the role of commercial banks by
filling the gaps in their range of services. In addition, they compete with commercial banks and force them to
be more efficient and responsive to the needs of their customers. Most NBFIs are also actively involved in the
debt markets as well as the mobilization and allocation of long-term financial resources. The state of
development of NBFIs is usually a good indicator of that of the financial system.
Source: World Bank Group (2015)
3.2 KEY CHALLENGES IN THE DEVELOPMENT OF A SUKUK MARKET
Although the sukuk market is developing at a significant pace, some countries still a slew of
potential challenges, which could impede their growth and future development. These
challenges include:
 Legislative framework
 Tax framework
 Shariah standardization
 The development of a sustainable supply of corporate sukuk
 The level of financial intermediation provided by NBFIs and the diversification of
investor bases
3.2.1 LEGISLATIVE FRAMEWORK (COMMON LAW VS CIVIL LAW)
In a sukuk transaction, the creation of ”trust” and the recognition of ”beneficial interest”
underscores the essence or validity of a contract to uphold the rights of sukuk investors over
the underlying sukuk assets and the cash flows that are attached to the assets. As indicated in
Section 2, the concept of trust and beneficial interest is recognized legislatively under common
law but not civil law. As such, for countries that adopt the civil law code, the recognition of
trust and beneficial interest must be incorporated into its legal framework to ensure the
commercial viability of a successful sukuk issuance. To overcome this issue, some civil law
jurisdictions such as Turkey (as explained in Box 3.3) have issued sukuk structured as a
securitization instrument under a similar legislative framework as that for an asset-backed
securitization (ABS).
Box 3.3: Turkey’s Asset-Leasing Companies and Trust Certificates
Turkey is a prime example of a country that has emulated the recognition of trust certificates. To facilitate the
issuance of sukuk, the Turkish government in February 2011 passed vital legislation to allow the formation of
asset-leasing companies (ACLs) or SPVs, including tax-neutrality measures. The ACLs are specifically
incorporated to enable the issuance of certificates under a framework provided by the Capital Markets Board
of Turkey’s Communiqué. The first approved Shariah principle had been the ijarah structure, which allows
ALCs to purchase assets and lease them back to the obligor.
Effectively, the ALCs finance the acquisition of such assets using funds raised by the issuance of certificates;
the lease-rental payments from the obligor mirror the profit distributions due under the certificates. The
cashflow from the lease rentals is used to service profit distributions to the sukuk investors.
Source: Republic of Turkey Ministry of Finance, General Directorate of Revenue Policies