The Role of Sukuk in Islamic Capital Markets
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3.2.5 LEVEL OF FINANCIAL INTERMEDIATION AND DIVERSIFICATION OF INVESTOR
BASE
The presence of strong NBFIs in an ICM is a key element in strengthening the liquidity of the
primary and secondary markets. NBFIs play an important role in enabling the government to
execute its funding strategy under a wide range of market conditions, thus minimising long-
term execution and refinancing risks. Through intermediation by NBFIs, there will be
increased funding efficiency, hence alleviating the negative economic and financial effects of
heftier government debt, including the crowding out of banking credit to the private sector. In
a mature market, the investor base should ideally include both domestic and foreign investors
and all types of institutions — ranging from commercial and retail banks to corporate
treasuries, insurance companies, mutual funds, pension funds and individual investors.
Based on the World Bank’s sustainable development goals, there is a push for effective
utilization of available resources and greater resource mobilization for private sector
spending. The global financial crisis had highlighted the constraint on traditional banking vis-
a-vis supporting long-term productive investments. BASEL III’s tighter regulatory
requirements on financial institutions further dampen banks’ capabilities to sustainably
provide long-term financing solutions. This opens the door for NBFIs as capital providers.
3.3 COMPREHENSIVE ASSESSMENT OF SUKUK STRUCTURES
Based on our assessment of sukuk structures, issuances and investments, each jurisdiction
adopts Shariah standards and regulatory frameworks that have been approved or accepted by
the local governing bodies (e.g. Shariah advisory boards and securities exchanges). To provide
a better understanding of the differences between sukuk structures, issuances and
investments, we have segregated our analysis according to the following geographical areas:
1. Arab countries
2. Asian countries
3. African countries
4. Non-OIC countries
3.3.1 ARAB COUNTRIES
The issuance of sukuk in Arab countries has predominantly been undertaken by the GCC
countries (i.e. Saudi Arabia, the UAE, Bahrain, Qatar, Kuwait and Oman). Other Arab nations
such as Jordan have also been successful in promoting sukuk issuance.
Based on Chart 3.1, ijarah contracts constitute a large portion of sukuk issuances by
sovereigns. Notably, the AAOIFI’s Shariah standards exert a significant influence on the type of
Shariah principles used in the issuance of sukuk in this region. The AAOIFI’s requirement that
any trading of sukuk must be backed by the ownership of tangible assets, usufructs/services or
a mixture of tangible and intangible assets has resulted in a marked preference for ijarah.
Nevertheless, the requirement of having to secure available unencumbered assets has pushed
the commercial decision by governments and corporates to adopt wakalah contracts, which
comprise a hybrid of murabahah receivables and ijarah assets or any other tangible assets.
This trend is depicted in Chart 3.2.