Diversification of Islamic Financial Instruments
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The Islamic finance industry has evolved regulatory perspective wise over the last couple of
decades. With introduction of addendums to financial laws in Muslim countries to initiate
Islamic banking as the origin of Islamic regulatory framework the industry is moving to global
standards. Major Islamic finance destinations, like Malaysia, Pakistan, Turkey, UAE, Indonesia
etc. have now separate regulatory laws which govern Islamic finance in their jurisdictions.
Newer entrants to Islamic finance are working towards developing standalone Islamic
financial laws to govern the growing industry. These efforts have gained pace with the efforts
of global Islamic finance regulatory bodies like IFSB, AAOIFI, IIFM etc. The international
regulatory bodies have been able to harmonize regulations and reporting of Islamic finance
globally while maintaining the diversity of Islamic financial products. The evolution of
regulatory frameworks has strengthened the Islamic financial industry by introducing risk
management and financial reporting standards to assist the rapid growth of the industry. The
regulatory evolution has been discussed in detail in the following sections.
2.4.1 SUKUK MARKET
Sukuk which is plural for sakk, refers to an investment certificate. It could also mean a trustee
certificate. Sukuk, it appears, have been used extensively by Muslims in the Middle-Ages as
papers denoting financial obligations from commercial activities. Being a fund-raising product,
Sukuk have often been referred to as “Islamic bonds” and subjected to comparison with
conventional bonds. While the objective of a Sukuk issuance may be the same as that of a bond,
i.e. to raise financing, there are many differences between the two instruments. To begin with,
one has to keep in-mind that there is no such a thing as “debt” financing in Islamic finance. The
only debt there is in Islam, is Qard-ul-hassan, which is a benevolent loan. That is, one which
does not have a compulsion on repayment. Given this, while Sukuk are intended to raise
external financing just like bonds, their operational, legal, and regulatory frameworks are
vastly different. We will address some of these differences later.
Sukuk are perhaps the most successful and most visible Islamic finance product today. Given
the range and international diversity of Sukuk issuers, it is obvious that Sukuk have become an
internationally accepted Islamic finance product.
Sukuk instruments can be structured in multiple manners by adopting from more than one
Islamic contract. Sukuk are often structured on multiple contracts in order to have a needed
risk profile and/or a desired cash flow stream. Table 11 briefly discusses different types of
Sukuk according to contract nature.
The global Sukuk markets had been thriving for nearly a decade but have faced a slowdown in
the recent years, with main reduction in global sovereign Sukuk after the Malaysian central
bank ceased issuing short-term Sukuk and the GCC economic downturn.
The history of Sukuk starts of from a demand from financial institutions and governments as
Shariah compliant financial institutions required Shariah compliant investment instruments to
absorb their surplus liquidity. Although the Sukuk issuances have grown rapidly, the issue of
excess liquidity requiring to be absorbed still stands given the limited supply of Sukuk relative
to demand.
The general appeal of the Sukuk has attracted issuers from all aspects, sovereigns, corporates,
and financial institutions. The demand side of Sukuk is a captive market as all Islamic financial