The Role of Sukuk in Islamic Capital Markets
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3.4.5 ANALYSIS OF SUKUK ISSUANCES IN OIC AND NON-OIC COUNTRIES
Absence of Islamic Pricing Benchmark
One of the challenges of sukuk is that its returns usually rely on the conventional market’s
benchmark rates such as the London Interbank Offered Rate (LIBOR) or the Euro Interbank
Offered Rate (EURIBOR). The use of these interest-based benchmarks in pricing raises concern
among scholars, who argue that the return is equivalent to riba (interest). From a
practitioner’s perspective, sukuk―despite their unique characteristic of being Shariah-
compliant―are commonly structured as debt-based instruments, with features similar to
conventional securities. Given their bond-like features and that they operate in a conventional
set-up where investors are familiar with the conventional pricing mechanism, this has
influenced sukuk pricing to adopt the conventional pricing benchmark. In addition, the
following are the key challenges faced when pricing sukuk:
 As a relatively new instrument, it has yet to develop its own pricing mechanism.
 There is a lack of consensus among issuers on what is a suitable Islamic benchmark rate.
 The sukuk market still faces low liquidity, lack of market depth, and lack of critical mass
for issuances. It is believed that as the sukuk market develops further, an Islamic
benchmark rate will naturally develop.
The use of an alternative pricing benchmark is most pronounced in the case of ijarah sukuk,
where sukuk holders receive their returns based on the rent of the underlying assets. Instead
of using an interest-rate benchmark, it is often argued that the pricing of ijarah sukuk should
be reflective of the rentals arising from the underlying assets.
Economic Development
Based on past sovereign sukuk issues, the core purpose of issuing sukuk has been to fund
budget deficits or related budgetary requirements, including the construction of infrastructure
projects. From the core sukuk markets (e.g. Malaysia, the GCC and Indonesia), the traction of
sukuk issues by other OIC and non-OIC countries underlines the benefits of including sukuk as
an alternative financing solution.
Due to sukuk’s intrinsic value proposition to match long-term institutional funds with the
capital expenditure for infrastructure projects, it has been a boon for countries such as
Malaysia, which have identified the private sector as its engine of growth. Although other
countries are emulating a similar trend, the inherent challenges in domestic sukuk markets
have influenced the progress of development (e.g. lack of support from NBFIs in Indonesia and
Turkey).
Regulatory and Shariah Standardization
The lack of a standardized approach to regulatory and Shariah governance has influenced the
development of sukuk markets. The international-standard benchmarks in the development of
Islamic finance have been the AAOIFI and the IFSB. The standards adopted by each member
country vary according to the policies and frameworks that have been established to govern
local sukuk markets. Countries that have implemented a centralized approach have shown
progression in terms of product development and market share of global sukuk issuance.