Researching islamic bond

Researching Islamic Bond (Sukuk)
The key objective of this report is to describe the history of the Islamic capital
market and this report focuses on the history of the Sukuk market, general
principles of Sukuk, Secondary Market of Sukuk, the position of this bond in the
global market particularly in Malaysia, Saudi Arabia and other countries of Gulf
Cooperation Council. In addition, this paper concentrates more on the Structure
of the Sukuk, financial and Legal challenges, growth of Sukuk in the stock
market, present market condition of this product, and impact of the global
financial crisis on the Islamic bond market and so on.

History of Sukuk
Ali (2010, p.1) stated that the people were unaware of the concept of Islamic
capital market securities (Sukuk) market ten years ago and it was a new term to
the customers through Sukuk was the common Arabic name and Malaysia
started a sovereign Sukuk in 2002. Most interestingly, Chik (2009) stated that the
history of the Islamic capital market can be found from the First Century and the
Ottoman Empire issued esham in 1775 to overcome the problem related to the
budget deficit. On the other hand, McNamara, Ijtehadi & Yasaar (2012) stated
that the government of Malaysia claimed that they introduced a sovereign Sukuk
way back in the fiscal year 1995 (the Malaysian National Mortgage Corporation
issued the earliest Sukuk), which gained popularity in the mid-2000 due to saving
the GCC members from the debt crisis.
Moreover, McNamara et al. (2012) further stated that Malaysia was the only
active country in this industry before 1999; at the same time, Malaysia claimed
that Bahrain joined in this sector in 2001 and the Central Bank of Bahrain was

the foremost Sukuk issuer in GCC nations. However, Jobst, Kunzel, Mills and Sy
(2008, p.5) argued that Sukuk has experienced huge success within a very short
period due to the great demand to the corporate and public sector entities; in
addition, Kettell (2008, p.4) said that Sukuk market is one of the fastest rising
sectors of the Islamic finance industry due to providing several benefits to the
customers. Ali (2010, p.1) expressed that Sukuk became popular from the very
beginning because different influential factors helped to attract the customers,
such as the meaning of this term is financial certificates (Islamic equivalent of
bonds), but Islam does not permit interest-bearing bonds; in this context, Sukuk
was one of the best solutions to the customer as it complied Islamic regulation. In
addition, Jobst et al. (2008, p.5) stated that the Islamic capital market has
expanded operation rapidly because Sukuk securities offer a number of products
using competence and transparency of the capital markets to reach different
types of customers in the GCC countries and rest of the world. On the other
hand, many renowned researchers like Professor Nejatullah Siddiqui and
Professor Volker Neinhaus have already criticized this concept in the modern
Islamic perspective by stating that this bond has indeed developed as a
torchbearer of Islamic capitalism; in addition, they stated that this bond provides
little attention on the social responsibility issues. However, the following figure
describes the history of Sukuk –

Figure 1: – History of Sukuk. Source: – Rabindranath & Gupta (2009, p.15) and McNamara et
al. (2012, p.83)

Rauf (2012, p.5) presumed that the total amount of Sukuk market would be $44
billion and Malaysia would lead this industry, but KSA and the UAE would
significantly contribute the market, for instance, the market dropped in 2008 due
to global financial crisis and sustained in the worst position for a long-time, but
this industry recovered its position in 2012. However, the following figure shows
that –

Figure 2: – Historical Sukuk Issuance Volume Since 2002. Source: – Rauf (2012, p.5)

Principle of Sukuk
Bothra (2011, p.1) pointed out that the Principle of Sukuk has no determining
difference with the conventional bonds, it is a new derivative Islamic finance that
breed financial certificates with Islamic cover and the religion traders try to
explore it as a Shariah-compliant financial instrument but its actually the old wine
into the new bottle without any exception. Wan (2007, p.1) mentioned that
although as a comparatively young asset class in the Islamic capital market
Sukuk has generated tremendous success, there is huge criticism of this bond
from the viewpoint of Muslim scholars who explained that its principles are
against the Shariah law in the context of its structure and most controversial to
the core values of Islam.
Kamali (2007) added that in the Quran at Surah At-Talaq, Ayah 6 and Surat AnNisa’ [4:34] it has clearly mentioned to pay due to payment with kindness to
workers for their labor and to clear the ‘wage’ to the women for their sexual
contacts, but there is no indication to make any payment for Sukuk. Although the
modern Islamic thinkers with leading schools of fiqh have been involved in
legalizing Sukuk, the most prevailing literature of Islamic jurisprudence has been
restricted to offering money for the monetary contract, especially in the mode of
contemporary interest-based financing until it may qualify benefits and services in
accordance with lawful benefit and service. The Accounting and Auditing
Organization for Islamic Financial Institutions has identified the attributes of
Sukuk as a bond that sands with large area conflict and controversy that may
face tremendous challenges for the global finance to uphold the Islamic moral
standards of conducting business religiously where 85% of the existing Sukuks
aren’t complying with Islamic law with principals as –
Although, the theoretician of Sukuk are trying to differentiate it with conventional
bonds, the purpose and basic concept laid behind introducing Sukuk is to
providing profits or revenues to the holder of the Sukuk in accordance with the

share of the holder while that perverted theoretician would like to identify the
same payment of conventional bonds by identifying them as Riba. Within the
course of conventional bonds, the holder would get a debt certificate as a lender
and gains earning on a fixed interest basis, while the same thing has
misrepresented as ‘ownership shares of the assets’ where the Sukuk provides
profit to the holder instead interest but do not provide any clear declaration
regarding the loose sharing.
There is another initiative to differentiate Sukuk from the conventional bonds by
arguing that due to the prohibition of Riba in Islam, the conventional bonds could
not boom in the Muslim countries while Sukuk would be the best tools to play
with the honest emotion of the religious-minded mass Muslims while profit hunter
Muslim financial institutes don’t spare to cheat them. Under any circumstances,
Sukuk has no attributes that could be different from conventional bonds with the
exception of some Arabic names and terms, in both cases the investor earns
more money than his investment for providing debts, no matter what the name,
rather matter is that who pays money and for why. Money paid in exchange for
debt financing must be treated as Riba, no matter what the profit hunter financial
institutes named them at their brochure as Islam has strictly prohibited the debt
financing and the great prophet Hazrat Muhammad (Peace be upon him) advised
his followers for not to taking additional money for debts. He also advised his
friends and surrounding to conduct the life with honest earning, be a magpie and
economical for expenditure, and try to lead debts free life, for any emergence if
someone takes debts, must be provided to assist his without any hope for
addition return; on the other hand, who takes debt, must return that within the
committed time.
The Shariah law explains that money functions to generate assets otherwise
trade with assets, but itself may not consider an asset while Shariah has strictly
banned trade to making money for money or trading the future profit or interest or
riba, but the prevailing practice of Sukuk or conventional bonds have evidenced

that the capital mobilization is the important issue. The Ambiguity in
understanding Sukuk has been generated for the reason that there is no written
legislation in Islam regarding this issue, but the modern literature of Islamic
jurisprudence has been organized by the Muslim corporate bodies those who
may bias the contributors to provide an explanation in favor of Sukuk. On the
other hand, due to the lack of any regulatory bodies in the Muslim countries to
manage and administer the Islamic law harmonization in accordance with the
changing dynamics of life and technology that are restructuring with the needs of
life, the Islamic financing needed to enough brave to encounter with traditional
bonds through Sukuk without any religious coverage.
The study and practice of Fiqh is a very complicated area in Islam that need
extraordinary scholar in the area of legal study, especially to provide any new
verdict is required to know the modern human rights and theories of an open
economy, but it has evidence that people with lower quality and less academic
background are providing new verdict. Thus, the principles of Sukuk has
organized with enough vagueness while the contributors of Sukuk are facing
more than ever complaints that it has not complied with Shariah laws that may
generate new complicacy due to variations of this financial product in banking
and financial institutions of the Muslim countries and their existing practices
within the financial industry.
Other principles of Sukuk are also like the conventional bonds and put on the
market with a repurchasing accord to ensure guarantee to the borrower payback
face value on maturity, in this character of Sukuk there is nothing new that can
differentiate this Islamic financial instrument from the other traditional bonds.
Meanwhile, there is no standardization authority globally that can unify the
different Sukuks and would be guaranteed the acceptance of it to all other
financial institutes in the purpose of selling of debts or receivables which are
evidenced in the case of different Shariah boards prevailed in the market for
long. On the other hand, Sukuk has withdrawn the provision of penalties for late

payment and permitted delayed payment or redemption without facilitating any
additional scope of earning that may throw the investors in great uncertainness,
in the name of religious values Sukuk has generated further uncertainty with its
contractual terms by creating hazards with ‘Maslahah’ that denotes public

Structures of the Sukuk
McNamara et al. (2012) stated that there is no specific structure, but it has
different characteristics, which differentiate them from conventional bonds, such
as product design along with offerings, and rating systems; at the same time,
Chik (2009) said that determination of Sukuk based on the Shariah contract by
which agreement made between the issuers and investors –

Figure 3: – Structuring Sukuk. Source: Chik (2009, p.10)

Chik (2009, p.11) provided most frequent classification considering Shariah
contracts though each contract would have arisen different obligations; however,
four classified types of Sukuk are presenting in the following graph –

Figure 4: – Sukuk Structure. Source: Chik (2009, p.10)

Theoretically, there are four broad categories of Sukuk McNamara et al. (2012)
and the general characteristics are different from each other; however,
chronological developments, maturity stage, and ladder of sophistication are the
main criteria of product differentiation, for example, following table discuss for
broad categories briefly –





Murabahah, and

This type of bond highlights on securitizing Islamic receivables and it ha
to originate from Islamic approved contracts in order to create receivabl
and to ensure the rights of the holder, for instance, the most suitable
corporate approach provides rating system


Usufructs of
Existing Assets
Usufructs of

Investors of this industry would have some relationship with assets, whi
need to offer different facilities; otherwise, it has no significant differenc
with the criteria of the previous one in the aspect of financial obligations

Future Assets

like credit rating quality of the issuer. Quality of credit risk, and the
payment of rental to the Sukuk investors based on the credit standing of

Potential Services
Salam Sukuk

It is a comparatively new innovation in Islamic finance, which is
completely different from above-mentioned structures; however, investo
have to judge
the jeopardy of the business more than the credit risk of the issuer; thus,
this type of bond does not provide any assurance regarding profit payme


or principal redemption

Istisna’a Sukuk

It presents the real form of securitization because it needs the owner of t
asset to sell in true sense and the investors can focus on the cash flows


Projectbased Sukuk


Table 1: – Four broad categories of Sukuk. Source: – Self generated from
McNamara et al. (2012)
IIFM (2012) provided the data related with the breakdown of structure of
international Sukuk from the very beginning in order to identify the trend of the
issuers in the Islamic Capital market and the following figure shows that Sukuk
Ijarah is the highest position in terms of issuance and attractiveness –

Figure 5: – Breakdown of Structure of International Sukuk from 2001 to 2012 ($m). Source: –
IIFM (2012)

According to the view of Ali (2010, p.1) and Farah (2008), Sukuk considers
numerous innovative Shariah compliant forms along with a variety of particles of
Islamic forms; however, Islamic Financial Institutions provide 14 types of Sukuk –

Sukuk Ijarah
Ali (2010, p.1) and Farah (2008) stated that the main characteristics of this type
of products are it is connected to leased properties and assets, ensure equal
values; on the other hand, it can be said that sale the leased property (including
building) by issuing bond and Sukuk holders are considered as the partners in
the ownership of the property. However, Farah (2008) argued that Ijarah Sukuk
holders must receive the yearly or monthly earnings from the leased property,
investors can sell in the capital market though it involves many issues, for
instance, the supply and demand determine the value of the service like if the
demand increases than supply will increase as a consequence though other
issues remain same. On the other hand, Farah (2008) stated that The facilities
and other services determine the value of the property based on the time frame
or economic life of the service; in addition, efficient performance of the assets
raise value such as value added to the property and properly maintained property
can ask higher value; however, the following chart gives more details about
Sukuk Ijarah –

Figure 6: – Structure of Sukuk Ijarah. Source: – Ali (2010, p.13)

Generally, the product structures depend on some specific factors those cannot
be avoided by the issuers, for example, the contract agreement and legal
framework to ensure Shariah compliance as it is mostly a legal value chain more
willingly than a financial value chain (McNamara et al. 2012). At the same time,
McNamara et al. (2012) pointed out that the issuers of Sukuk Ijarah focus on
some easy, but fundamental principles of Islamic finance, which generates an
internal disagreement; in addition, It involves some commercial and tax scenarios
(Ali 2010, p.13).

Usufructs of existing assets’
According to the report of Farah (2008), this type of Sukuk carries equal value
and the issuers can lease the property in accordance with the consent of the
owner of the property; however, such certificates incorporate the rights of the
service and the owners have the opportunity to give rent and sub-rent to the third
parties and so on.
Usufructs of existing assets’

sells usufruct of an existing asset


This group are the buyers of the Sukuk

Mobilized Funds

are the purchase price of the usufructs


They would be the owners of this kind of certificate and the parties would jointly share b
benefits and loses

Table 2: – Shariah rules and requirements. Source: – Global Investment House
(2008, p.12)

Usufructs of the future assets’

Farah (2008, p.4) stated that this type of Sukuk certificates issued considering
the under constructed projects those need long-time to be completed the
projects; however, it is similar with the Salam contract, but an increase of nonleased properties, terms of the contract derived from the religious values of the
Usufructs of the future assets’

sells would be available in the future in accordance with condition


This group are the buyers of the Sukuk

Mobilized Funds

purchase price of the Sukuk

Certificate Holders

They would jointly bear both advantages and disadvantages

Table 3: – Shariah rules and requirements. Source: – Global Investment House
(2008, p.12)

Hybrid Sukuk
Chik (2009, p.24) stated that this kind of Sukuk introduced in the UAE, which was
the combination of Istisna and Ijarah; However, the following figure describe the
structure of the Hybrid Sukuk –

Figure 7: – Hybrid Sukuk (combination of Istisna and Ijarah). Source: – Chik (2009, p.24)

In the following diagram Kettell (2008, p.6) pointed out some important features
about the hybrid sukuk –

Figure 8: – Hybrid Sukuk (combination of Istisna and Ijarah). Source: – Kettell (2008, p.6)

Contractor’s Sukuk
Farah (2008, p.4) stated that when any contractor or suppliers issued sukuk for
existing commodities and offered these certificates during a contracted time in
the future; however, it carries equal values in accordance with the description of
the security and the sukuk holders contribute in the financing, for instance,
educational or health programs and they receive one-fourth return.

Sukuk al Murabaha Structure
Global Investment House (2008, p.9) stated that Murabaha Sukuk is issued by
the merchant or his agent and carries equal values, but it can not be traded in the
secondary market at a negotiated price as its sale of debt at a pre-negotiated

price or complying the system of Riba; however, the following figure shows the
structure of this type of Sukuk –

Figure 9: – Sukuk al Murabaha structure. Source: – Global Investment House (2008, p.9)

According to the report of Global Investment House (2008, p.9) and Farah (2008,
p.4), the concept of this Sukuk based on Istisna’a contract and it trades only in
the primary market and these are not liquid for which the investors’ perspective
are different in this segment.

Sukuk al Musharaka
Global Investment House (2008, p.11) stated that Murabaha Sukuk issued by
Several corporate entities or the agents to finance a project; organizations
considered it an alternative due to their superiority to the issuer’s equity and the
investors contribute the capital amount to the issuer, which gives them the
opportunity to penetrate the market as joint venture agreement with the financing
parties. Nevertheless, the next chart shows the Sukuk al Musharaka structure –

Figure 10: – Sukuk al Musharaka structure. Source: – Global Investment House (2008, p.11)

Global Investment House (2008, p.9) reported that this Sukuk carry equal values
and losses from the Musharaka business are shared in proportion to the capital
investment, but the profits distributed among the parties of the agreement at a
predetermined basis; in addition, Farah (2008, p.5) and Ali (2010) stated that
structure of Mudarabah and Musharaka is different considering capital

investment. At the same time, this type of certificate has issued at the initial stage
in order to remove the dilemmas and weaknesses of the Sukuk al ijara structure;
however, it was complied with all regulations and become highly popular in the
international market (Ali 2010).

Istisnaa Sukuk
AlSaeed (2012, p.56) stated that SPV issues Istisna certificates to elevate funds
for the projects to pay the contractors and title of the properties is transferred to
the SPV, which is leased or sold to the end purchaser and the profits distributed
among the certificate holders; the next figure shows the structure of Istisnaa
certificates –

Figure 11: – Sukuk al Istisnaa structure. Source: – AlSaeed (2012, p.56)
Istisna certificates

the manufacturer or suppliers are the main issuer’s


the purchasers of the products to be produced

Mobilized Funds

are the cost of the products

Certificate Holders

They expected to get the products or the selling price of the manufactured goods

Table 4: – Shariah rules and requirements. Source: – Global Investment House
(2008, p.12)

Salam Sukuk
AlSaeed (2012, p.52) stated that the main function of this certificate is to
mobilizing Salam capital and this certificate created and sold by an SPV
considering all standard Shariah requirements; furthermore, the subsequent
diagram shows the structure of the Istisna sukuk –

Figure 12: – Sukuk al Salam structure. Source: – AlSaeed (2012, p.52)
Salam certificates

They are the sellers of the goods of Salam


Purchasers of that items

Mobilized Funds

These are considered purchase price of the commodity, which the Salam capital

Certificate Holders

Entitled to the Salam commodity, the
selling price or the price of selling the on parallel Salam basis, if any

Table 5: – Shariah rules and requirements. Source: – Global Investment House
(2008, p.13)

Sukuk in Saudi Arabia
Rabindranath & Gupta (2009) stated that KSA is observing unparalleled
economic growth and engaging in various development projects for which it is
essential to have available sources of long-term financing for both the public and
private sectors though it has the largest investor bases in the GCC countries. At
the same time, Rabindranath & Gupta (2009) argued that the financers have not
shown their interest in the long-term projects considering the issues related to
financial benefits as well as return on investments, which was one of the most
significant causes to leave the large projects at the initial stage of planning.
Therefore, it was very essential for the country to introduce such bonds to
implement and carry on large projects in the adverse economic condition in the
global financial market though it faced severe problems at the very beginning of
its operation to comply with all the provisions of Shariah law and other financial
barriers. Rabindranath & Gupta (2009, p.4) expressed that it was too hard for
issuers and the customers to follow strict rules of Islamic law, but the
establishment of a new stock exchange removed these problems though the
entire process had taken a long time to cover all issues in this regard. As a result,
the size of Sukuk market of KSA is relatively small considering the size of the
bond market of Malaysia and other GCC member states; for instance, there are
only two large issuers according to the report of Tadawul and these are SABIC
and SEC (SAMA 2011 and Rabindranath & Gupta 2009, p.1).

According to the annual report of SAMA (2011, p.82), the stock exchange
introduced the latest electronic market to trade Sukuk along with bonds in the
middle of 2009 and issued Rls 28.0 billion Sukuk as well; in addition, the Capital
Market Authority had passed new regulation and implemented the regulatory
framework in order to increase the number of customers. As a result, it became
easier for the four-brokerage companies to join Tadawul to offer financial
intermediary services; SAMA (2011) reported that KSA share price increased by
8.2% in 2010 and total investment funds went up by 5.2bn and became 95bn
within a year. However, CMA is responsible to adopt a legal framework to control
the domestic capital market under the provisions of the Corporate Governance
Regulations though it does not give any specific framework for this bond market
since the characteristics of different types of Sukuk are different, for instance,
some bond structures would not make any debt obligation (Rabindranath &
Gupta 2009, p.4).
According to the annual report of SAMA (2010, p.82), the total amount of issued
Sukuk was Rls 28 bn at the end of 2009 and there were only five issuers among
them SABIC issued three items and SEC issued two items; however, SAMA
(2011) reported that total amount of issued bonds increased by more than Rls 7
bn. In addition, the total issued Sukuk in 2010 was more than Rls 35 bn (SAMA
2011, p.82) and three new issuers joined this industry; however, the following
gives more details to show the differences between the position Sukuk in the end
of 2009 and 2011 in the stock exchange of KSA –

Figure 13: – Tradable Sukuk and bonds in Tadawul during 2009. Source: SAMA (2011, p.93)

Figure 14: – Tradable Sukuk and bonds in Tadawul during 2011. Source: SAMA (2011, p.93)

At the same time, Al-Ghorairi (2011, p.104) argued that sukuk played vital role for
the growth of the insurance sectors of the KSA since growth rates were amazing;
moreover, Sukuk evidenced popularity in the Saudi Islamic capital market; so, AlGhorairi provided the following chart in order to show market share of Sukuk in
the GCC market –

Figure 15: GCC Sukuk Issuance in 2011. Source: Al-Ghorairi (2011, p.122)




United Arab Emirates


Saudi Arabia






Brunei Darussalam










Table 6: – Breakdown by country. Source: – Rabindranath & Gupta (2009, p.14)
The above-mentioned figure demonstrates that Saudi Arabia holds 30% share of
the GCC Sukuk markets, which was the second-largest market in this zone; in
addition, the above table demonstrates that KSA holds the third position in the
global Sukuk market by capturing more than 12.7% total share. However,
Rabindranath & Gupta (2009, p.14) stated there are three types of Sukuk issuers
in this country, such as, 47% of issuers were sovereign, 33% issuers were quasisovereign and only 20% were corporate issuers; in addition, there many sectors,
which presents in the next figure –









Power and Utilities


US $


Financial Services








Oil and Gas




Leisure and Tourism








Real Estate








Table 7: – Breakdown by sectors and currency. Source: – Rabindranath & Gupta
(2009, p.14)

Economic and financial challenges
Jobst et al. (2008, p.12) stated that the recognition of fundamental reference
assets as well as security designs, return of capital, the absence of structural
features that are not permissible in the Islamic context (such as, repayment
assurance and credit augmentation), frequently-used risk management
instruments are not acceptable to most shariah scholars and so on. However,
Jobst et al. (2008, p.12) further addressed that asset management mechanism
particularly the trading of a debt security is one of the greatest economic
challenges of the issuers and regulators; in addition, interest rate or credit risk
management system, loss of issuers’ confidence because of limited historical
performance in some places, and lack of product development in the industry. At
the same time, Jobst et al. (2008, p.12) raised some other financial challenging

issues, such as the characteristic “buy & hold” investment strategy, tax
disincentives to issue Sukuk, and the case with conventional debt funding and so

Legal and regulatory challenges
According to the report of Jobst et al. (2008, p.13), it is essential to comply with
the provisions of both commercial and shariah law and Islamic jurisprudence is
neither specific nor bound by the doctrine of binding precedent and maintenance
of the regulatory standards in the aspect of shariah compliance and the absence
of broadly familiar legal principles. At the same time, other key legal challenges
are the contradictory legal framework for asset control along with bankruptcy
rules for the investors in non-Islamic nations, vague creditor rights and
enforcement of asset claims; furthermore, there are different Islamic
organizations like Islamic Financial Services Board, IIFM, and so on, those
provide several recommendations for the development of Sukuk structures.

Bonds and Sukuk market in the GCC market
According to the report of Kuwait Financial Centre (2012, p.1), the issued Sukuk
market experienced gradual improvement year by year from 2003 though it was
decreased in 2010 slightly due to the adverse impact of global economic
downturn, for example, from 2004 to 2011, the total amount increased by $63290
million. On the other hand, Markaz Research (2012, p.4) stated that the amount
of total conventional bonds market had increased significantly in 2009, but it was
decreased within two years; however, the following figure and table gives the
information about the collective Bonds Market of GCC –

Figure 16: – GCC collective Bonds Market from 2003 to 2012. Source: – Kuwait Financial
Centre (2012, p.1)






US $m






Figure 8: – GCC Conventional Bonds Market from 2003 to 2012. Source: –
Kuwait Financial Centre (2012, p.1)

Sukuk Issued in the GCC countries

The above mentioned table and figure demonstrate that aggregate bond market
experienced success, which influenced the new issuers to incorporate and
contribute in the market, but following data of Kuwait Financial Centre (2012, p.1)
represented that the total amount of issued Sukuk decreased by US$ 8869
million within four years; following table gives more data about Corporate and
Sovereign Sukuk –






Corporate Sukuk





Sovereign Sukuk










Table 9: – Sukuk Issued in the GCC countries from 2007 to 2011. Source: – Self
generated from Kuwait Financial Centre (2012, p.5)
From this table, it also can assume that corporate issuers have showed less
interest in the fiscal year 2008 and 2010 due to severe external barriers and
adverse economic condition in the GCC countries; at the same time, the amount
of sovereign issued Sukuk had also decreased from 2009 and the amount was
same in 2011 (Kuwait Financial Centre 2012, p.5).

Country / year






Saudi Arabia















Table 10: Sukuk issues in GCC member states from 2006 to 2010. Source: Selfgenerated from Farah (2008) and
In the GCC bond market the UAE hold the strongest position by issuing 66.49%
of total Sukuk and Qatar was the second largest situation by issuing 15.60% of
total Sukuk in the GCC market; however, the following figure demonstrates about
other GCC countries –

Figure 17: Sukuk issues in GCC member states in 2011. Source: Kuwait Financial Centre (2012,

Among the GCC members, Oman has not concentrated in this sector while the
central bank issued only US $2.8 million; the market of Saudi Arabia decreased
gradually from the fiscal year from 2006, for instance, total amount of issued
sukuk was more than 37% in 2007, but it decreased by 21.4% within four years –

Figure 18: Bonds and Sukuk Issued in the GCC Region in 2011. Source: Markaz Research
(2012, p.4)

From the trend of the Sukuk issuers in this zone, it can be argued that the policy
maker of the UAE have concentrated on the diversification economy and issued
more sukuk to hold largest share of the capital market, for example, total amount
of issued sukuk the UAE was approximately 58% in 2006 and it decreased by

7% in 2007. However, this situation of the UAE Sukuk market had changed by
the next four years and increased by 15.5%.
On the other hand, Markaz Research (2012, p.2) stated that GCC central banks
are responsible to control the levels of domestic liquidity while more than 20% of
total bonds considered sukuk; however, the next figure shows the amount of
issues and number of issuers –

Figure 19: GCC Central Banks Local Issuances. Source: Kuwait Financial Centre (2012, p.2)

Breakdown by Sector







Governments of different countries are the more active players in th
sukuk market in terms of both value and number of issuers, for
example, the Dubai government announced a US$ 6.50 bn debt
issuance program in 2009




This sector augmented US$ 8.60 bn through fifty issuances;

Transport and



Only one issuer of KSA has developed this sector by $3.90 bn


& 1.4%

Power and



Five issuers have developed this sector by US$ 2.70 bn

Oil and Gas



In 2011, numbers of issuers have increased in this period

Real Estate



Few issuers due to lack of investors

Table 11: – GCC Bonds Market Sector Breakdown H1 2012. Source: – Selfgenerated from Kuwait Financial Centre (2012, p.3)

Growth of Sukuk in 2012 in Stock Market
Rahman (2012) reported in the Gulf News that the global Sukuk market grew by
$141.5 bn, and reached more than US$ 292 bn; at the same time, Reuters
(2012) represented that GCC Sukuk market particularly corporate and
infrastructure segment would experience excellent growth due to several
reasons, such as, increasing oil prices help to lift GDP growth in this zone.
However, Reuters (2012) pointed out some other potential factors those
influence the Sukuk market in the MENA region, for instance, positive rating
actions across GCC Sukuk portfolio over 6 months, rise reliance rate on the
Islamic equivalent of bonds, stable regional economy and capital market,
financial system’s sound liquidity, accommodative monetary policies and so on.

Moreover, Reuters (2012) reported that unpredicted global economy, diverse
property markets in this region, and continuous political crisis remain the main
challenges available alternative conventional bonds, a niche market instrument,
clog growth channels, Sukuk structures involve Deficiencies and problems in the
secondary market related with investor rights, transparency, and illiquidity. In
addition, Rahman (2012) further reported that there are some negative factors
that can create hindrance for the development of the Sukuk market, for example,
documentation problems, criticisms of the learners and researchers, market of
Oman shows little growth, lack of issuers in some countries, lack of an Islamic
megabank, and the dilemmas due to the Arab Spring. At the same time, Reuters
(2012) and Rahman (2012) further reported that Sukuk issuance beaten
conventional bonds in the GCC zone; however, the next figure gives the
information about comparison of conventional and Sukuk –

Figure 20: comparison of conventional and Sukuk. Source: Kuwait Financial Centre (2012, p.3)

Rating Breakdown by Number of Issuances
AlSaeed (2012, p.63) stated that IIRA Bahrain Monetary Agency –

Figure 21: GCC Central Banks Local Issuances. Source: Kuwait Financial Centre (2012, p.6)
and Markaz Research (2012, p.8)

Secondary Market of Sukuk
Harvey and Cosgrave (2012, p.1) pointed out that the Islamic asset managers
have engaged to arrange capital from the Sukuk with a tradition that the primary
buyer would preserve their Sukuk certificate until the maturity, such theoretical
alignment of the introducers have generated enough obstacles to establishing
the secondary market of the Sukuk. Another theoretical dilemma of the ancestors
of Sukuk is that they have in mind that they would only sell this financial product
to the religious-minded Muslims not to the other religious followers. Due to the
fractional outlook, they could not take into account the global market and failed to
design the product features in accordance with the other international bonds that
prevailed in the market. During the introduction of Sukuk, the initiators thought
that they would keep the product purely with Islamic attributes, while trading of
debts certificates with fixed rates would particularly align with some uncertainty of
success or failure which Islam has identified as ‘Gharar’ and made it strictly
restricted, so Sukuk need not have a secondary market. The trading that
conducted in the secondary market would be based on the fixed rate of return
that any rational person would explain it as an interest and the Islam identified it

as Riba and without any hesitation made it strictly prohibited by the law of AlQuran, no Fiqah would be adopted in this regards. On the other hand, the price
of any financial commodity in the financial market goes up depending on the
rumors and greediness or hunger for a quick profit that the civilized society
identifies as a trend of Gambling and Islam has pointed it as the ‘Maisir’ which is
severely restricted in the lifestyle of the Muslims. Thus, the ancestors Sukuk has
failed to realize that it may have emergence for the secondary market to a
competitor in the global market with its success and uniqueness by crossing the
border barrier of the religious outlook.
Rauf (2012, p.4) explored that there are twenty-two banks enlisted in the London
Stock Exchange (LSE) are offering Islamic financial products and services where
at least eighteen banks are the issuer of Sukuk with a capital accumulation of
US$ 10 billion while 60% of the global Sukuk issuers are from Middle East
countries, 30% from Asian and rest 10% from Western countries. In Luxembourg
Stock Exchange, there are fifteen Islamic Financial Institutes who are the issuers
of Sukuk with a capital accumulation of Euro 5 billion, which is a remarkable
indication of Sukuk in the western financial arena. In the Stock Exchange of
Dubai, there is second-highest number of Sukuk issuers enlisted with remarkable
capital accumulation while the western financial institutes in France, the Irish
Republic, and the USA have started to introduce Sukuk in their market and there
are almost 40 funds promoted by the different investment companies.
Considering the tremendous success of Sukuk in the global financial market, the
issuers of the Sukuk have drawn their attention to the secondary market and
looked for the theoretical explanation regarding the incorporation of the
secondary market; they have already hired some Fiqah practitioners to find the
way out to legalize secondary market from the Islamic viewpoints. Although by
the contribution of Quran and Sunnah, there is no chance to legalize the Riba,
Maisir, and Gharar, the trading of Sukuk in the secondary market has aligned
with the same attributes it is the discretion of the Fiqah practitioners, how they

provide a prescription to introduce or incorporate secondary market with the aim
to gaining further growth in the Sukuk market. The Fiqah practitioners may
suggest not to use religion integration in the secondary market, on they can
provide new theories with the debt trading in the secondary market, which may
generate new debate in the religion as well as Islamic financing institutes
Al-Saeed (2012, p13) argued that the Saudi Stock Exchange has started its
journey in 2007, but still, now there is no formal secondary market for Sukuk
trading in KSA, the Tadawul has engaged function of regulating the market
trading for tradable shares and stocks, the emergence of trading Sukuk has been
gaining more importance with rising demand for long-term financing. It is notable
that due to ethical dilemma, religious radicalism, the backwardness of the
product feature and regulatory framework the growth of Sukuk and its secondary
market has been seriously hampered although there is rising demand for longterm financing while equity or governmental financing is not sufficient to meet the
rising market demand for capital needs in the private and public sector. In the
KSA market, due to lack of secondary market the investors are less interested to
involve their money for Sukuk thinking that while they face any emergency to
liquidate the Sukuk certificate they cannot bring back cash by trading that, only
the idle domestic money goes to involve at Sukuk and there is no attraction to
attract further investors.
Tariq (2004, p.60) explained that the demand for any product of the primary
market is deeply interlinked with the expansion and growth of the sustainable
secondary market for that financial instrument, different researches
demonstrated that the Muslim savers and investors have no major reluctance to
the conventional financial products. The investors of most Islamic countries have
no strong reservation to invest in conventional bonds or western banking, thus, if
local law does not impose any embargo most investment would go to the
conventional bonds due to the absence of secondary market and the Sukuk

certificate holders may not align with any burden of risks for not timely liquidation.
There are some countries where Islamic financial products like Sukuk has
amalgamated the traditional secondary market granting them tradable attributes,
in other Islamic countries they are trying to introduce further Islamic secondary
market while the primary objectives of the Islamic secondary market Islamic color
to attract the investors suffers from religion emotion including the marketability of
Sukuk. On the other hand, the Islamic secondary market establishment is deeply
concerned with the superior informational flow, easy access to the market and
hindrance free movement of the investors without any pressure investor would
allow to trading his Sukuk certificate at any moment that he feels appropriate and
it would be individual’s choice when he decides for liquidation.

Sukuk in the Global market
Y-Sing (2012) reported that 2012 was a challenging year for the new entrants of
Sukuk market, such as Oman and Egypt; however, the Sukuk market
experienced huge success in 2012 because the market leaders have recovered
from the financial crisis, and transform agendas and change some policies to
give facilities in accordance with the Islamic law and so on. Y-Sing (2012) and
Reuters (2012) presented the report of Ernst & Young, which included that Egypt
and Iraq had scrutinized the Sukuk market in order to develop a legal framework
to introduce Shariah-compliant products, and Libya had already implemented
Islamic banking regulation; however, established and new banks have focused
on the Islamic Sukuk products throughout the MENA region. On the other hand,
Ernst & Young (2012) and Y-Sing (2012) reported that the entire industry
expected to reach more than $1.80 trillion by 2013; however, the traders of this
industry are under continuous pressure to increase profit margin from Islamic
banking because the characteristics of such banking system still behind from
conventional banking. From 2008 to 2011, aggregate return on equity for Islamic
banking was merely 11.60%, which was more than 3.70% less than from other
banking sectors; however, this sector faces many problems. such as sub-scale

procedures, inadequate engagement with customers, fundamental jeopardy
culture, imperfect market segmentation, and lack of scientifically oriented value
proposition (Ernst & Young 2012).
Y-Sing (2012) reported that provided following data to describe sales growth –



Supplementary notes



KSA experienced the largest sales in 2012 and SEC sold $1.75 bn of notes due in
2017 and 2022



It occupied in the second largest position in terms of sales and completed over $4
billion offerings and the yield on more than 2% percent notes due in 2018



This country experienced huge success from the very beginning of operation and
3.928% dollar- denominated Islamic notes due in 2015

Table 12: – largest sales in 2012. Source: – Self generated from Ernst & Young
Saudi Gazette (2013) reported that the volume of sukuk issuance in the first
quarter of 2012 was more than $66, GCC issuances amplified near 112%
(excluding Kuwait and Qatar) and the secondary market grew to $211 bn;
Malaysia dominated the market by holding more than 70% and issuing $46.8 bn
sukuk in first quarter and $18 billion in the second quarter; however, the next
figure shows –

Figure 22: – Sukuk
Issuance by country (Second quarter 2012). Source: Saudi Gazette (2013)

From the last five years tread of the sukuk market, it can be said that Malaysia
has always hold the top position in the global market and the following figure
related with in the comparison between Malaysian and global Issuance, for
instance, this country has captured more than 73% share in 2011 –

Figure 23: – Comparison between Malaysian and Global Issuance from 2005 to 2011. Source: –
Rauf (2012, p.6)

IIFM (2012, p.6) stated that corporate issuers are more interested about this
segment in order to raise fund for the different purpose complying laws –

Figure 24: -Breakdown of global sukuk issuance in terms of issuer status. Source: – IIFM (2012,

According to the report of Ernst & Young, top twenty Islamic banks captured
more than fifty percent of global Islamic banking assets and focused on the
seven new emerging markets to implement expansion plan; in addition, industry
continues to record robust growth with 16% enhancement in the last 3 fiscal
years. However, Global Investment House (2008, p.17) stated that the UAE is in
the largest position in terms of number of issuers, for instance, among 137
issued about 58 issues were from the UAE; however, the subsequent chart
demonstrates about Sukuk Issuance in terms of number of issues –

Figure 25: – International Sukuk Issuance from 2001 to 2007. Source: – Global Investment
House (2008)

On the other hand, the total number of issues in the global market was only 295
and the share of US$ issuance in the sukuk market declined (only 10 sukuk
issues were denominated) from the fiscal year 2007; however, the next charts
show that Malaysian Ringgit was in the highest position in terms of number of
issues –

Figure 26: – Global
Sukuk Issues in $bn. Source: McNamara et al. (2012, p.120)

McNamara et al. (2012, p.111) stated that Malaysia issued the greatest value of
sukuk in the fiscal year 2008/09; on the other hand, the central bank of Gambia
and Bahrain had played vital role to issue more sukuk at that time frame, but the
aggregate value of issuance from the African country was undersized than vale
of other countries –

Figure 27: – Global Sukuk Issues by nation of Issuer 2009. Source: McNamara et al. (2012,

Here, it is significant to note that the amount of issued corporate sukuk had
increased dramatically from the fiscal year 2006 and Global Investment House
(2008) demonstrated that corporate issued sukuk reached by $22385 million
from within five years, but sovereign issued sukuk experienced comparatively
lower growth due to several factors –

Figure 28: – Corporate and Sovereign Sukuks Issued. Source: – Global Investment House (2008)

Impact of the global financial crisis on Islamic Bond
McNamara et al. (2012, p.109) stated that Sukuk issuance dropped from $34
billion to more than %15 billion from 2007 to 2008; however, this fall was

continued and reached only $2 billion in the global market; at the same time,
number of total issuers were 174 in 2008, which decreased dramatically since
their was only 36 issuers in the first quarter of 2009 –

Figure 29: – Global Sukuk Issues (2008 – 2009 YTD). Source: – McNamara et al. (2012, p.109)


From the above discussion, it can be said that Sukuk is one of the most
significant pillars of the capital market to raise funds, but this product faced
several problems in order to comply regulation. On the other hand, the position of
these products dropped dramatically during the recessionary period, but it
experienced outstanding success in 2012; therefore, the issuers and investors
are willing to expand the market particularly in the MENA and GCC region in the

Ali, R. (2010). An overview of the Sukuk market. Web.
AlSaeed, K. S. (2012). Sukuk Issuance in Saudi Arabia: Recent Trends and
Positive Expectations. Web.
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Chik, M. N. B. (2009). Sukuk: Shariah Guidelines for Islamic Bonds. Web.
Ernst & Young. (2012). Global Islamic assets are expected to reach $ 1.8 trillion
by 2013. Web.
Farah, A. F. (2008). Sukuk (Islamic Bonds) and Development Financing. Web.
Global Investment House. (2008). Sukuks – A new dawn of the Islamic finance
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Harvey, D. & Cosgrave, B. (2012). Liquidity and secondary markets in Islamic
finance. Web.
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Kamali, M. H. (2007). A Shari‘ah Analysis of Issues in Islamic Leasing. Web.
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Report. Web.
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Arabia. Web.
Rahman, S. (2012). Global Sukuk issuances hit $121b in 2012. Web.
Rauf, A.L. (2012). Emerging Role for Sukuk in the Capital Market. Web.
Reuters. (2012). TEXT-S&P report says GCC Sukuk issuance beating
conventional bonds. Web.
SAMA. (2010). Annual Report of Saudi Arabian Monetary Agency. Web.
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Finance. Web.

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