Risk Management in
Islamic Financial Instruments
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More recently, BinMahfouz and Hassan (2014) provide empirical evidence that the Sharia
screening process does not seem to have an adverse impact on the absolute or the risk
adjusted performance of Islamic equity mutual funds in Saudi Arabia, compared to their
conventional counterpart equity mutual funds. This is regardless of the subgroup examined, or
the market benchmark. In addition, the systematic risk analysis shows that, in most cases,
Islamic equity mutual funds in Saudi Arabia tend to be significantly less exposed to market
risk, compared to their conventional counterpart equity mutual funds and market benchmarks.
Thus, the assumption that Sharia investment constrains lead to inferior performance and
riskier investment portfolios, because of limited investment universe, seems to be rejected.
A.2. SUKUK FAILURE AND LESSONS LEARNED
This section begins with an overview of the concept of sukuk, its evolution and a brief account
on statistics on sukuk defaults, followed by two cases on sukuk issuances: a success story and a
default story. Finally, in the concluding segment, some key lessons learned from the sukuk
failures are summarized based on the existing literature on sukuk.
A.2.1 The Concept of Sukuk
AAOIFI defines sukuk as “certificates of equal value representing undivided shares in
ownership of tangible assets, usufructs and services or (in the ownership of) the assets of
particular projects or special investment activity”. Sukuks are commercial papers that provide
an investor with ownership in an underlying asset. Essentially, it is an asset-backed trust
certificate evidencing ownership of an asset or its usufruct. Although the objective of sukuk is
to provide a stable income, its structure must adhere to the principles of shariah. Besides,
unlike conventional bonds, sukuk need to have an underlying tangible asset transaction, either
in ownership or master lease agreement.
In addition, Sukuks can be of various types, depending on the underlying contracts or
principles of financing and trades used in the structuring process. The AAOIFI has issued
standards as guidelines for 14 different types of sukuk, which can be classified as tradable and
non-tradable, and development and industrial project financing. However, the most common
principles used in sukuk structuring are mudharabah, musharakah, murabahah, ijarah, BBA ,
salam, and istisna‟ (Abdullah et al, 2011).
A.2.2 Trends in Sukuk Industry
The sukuk industry has grown since the mid-1990s with the increasing demand for a Shariah
compliant, predictable income security. The recent years have witnessed a strong growth in
global sukuk issuance, which led to explosive growth in 2007. However, following the global
subprime crisis, the sukuk market did not do well, and the global sukuk issuance had declined
by more than 50% by then end of 2008. This is the first such drop since 2001, the inception of
the sukuk industry.