Risk Management in
Islamic Financial Instruments
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This slowdown in the Sukuk industry in 2008 is partly due to the global economic downturn,
and the international sukuk market faced lower levels of liquidity, resulting from declines in oil
prices and less investor confidence (Ilias, 2009). Although the sukuk market has made a
recovery in issuance to $20 billion during 2009 (IFSL, 2010), the market is still being tested by
the lack of investor confidence following a series of high profile sukuk defaults (Muhamed and
Radzi, 2012).
A.2.3 Diversity among Sukuks
Sukuks, since their early inception, have evolved as an innovative financial instrument to cater
different financing needs. Sukuks raise funds through different contractual setups for different
purposes. Khaleq (2012) provides a set of examples on the diversity of scope and contractual
obligations used in Sukuk issuance.
Sovereign Sukuks aim to raise funds for state governments and are similar to
sovereign bonds in terms of scope. For example: Pakistan issued an Ijara-based
Standalone sukuk in 27 January 2005 followed by Dubai issued an Ijara-based
Programmed sukuk in 3 November 2009.
Private Sukuks are used to raise funds for corporations and are similar to corporate
bonds in terms of scope. For example: Durrat KhaleejAl-Bahrain (Istisna’a and Ijara-
based sukuk, 25 January 2005); Al Thani (Musharaka based sukuk, 3 October 2007).
Quasi-Sovereign aim to raise funds for public private partnerships and are in between
sovereign bonds and corporate bonds in terms of scope. For example: Dubai World
(Mudaraba-based, 3 July 2007), Nakheel (Equity Linked, 14 December 2006).
In economic terms, there are three common types of sukuk, namely fixed-income sukuk, asset-
backed sukuk (ABS), and hybrid sukuk (Zawya, 2009).
A.2.4 Case on Kuala Lumpur Sentral Pvt. Ltd. (KLSSB): A Success Story
Although a diverse range of sukuks exist in the sukuk industry, a simple case of sukuk issued
by a Malaysian corporation is considered in this segment. Abdullah et al (2012) provides a
lucid description and detailed analysis of Kuala Lumpur Sentral Pvt. Ltd. (KLSSB) that has
issued sukuk musharakah in 2006. Figure A.1 illustrates the structure of the sukuk.
A.2.4.1 The Issuer and the Agent
Kuwait Finance House (Malaysia) Ltd. (KFHMB) was engaged as the Shariah Advisor for the
sukuk issued by Kuala Lumpur Sentral Pvt. Ltd. (KLSSB). Under the arrangement, KLSSB enters
into a musharakah agreement with the eligible investors for the purpose of undertaking a
Musharakah Venture. The interests of the investors in the Musharakah Venture are