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Islamic Principles of Financial Engineering Islamic Principles of Financial Engineering with Special Reference to Sukuk Instrumentswith Special Reference to Sukuk Instruments

Prof. Dr. Munawar IqbalProf. Dr. Munawar IqbalFormer Chief of Research Former Chief of Research

Islamic Banking and FinanceIslamic Banking and FinanceIRTI, Islamic Development Bank GroupIRTI, Islamic Development Bank Group

UMP-DIFC SYMPOSIUMUMP-DIFC SYMPOSIUMDubai, May 3 2010Dubai, May 3 2010

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Definition of Financial EngineeringDefinition of Financial Engineering

Financial engineeringFinancial engineering can be defined as ‘the can be defined as ‘the design, development, and the implementation of design, development, and the implementation of innovative financial instruments and processes, innovative financial instruments and processes, and the formulation of creative solutions to and the formulation of creative solutions to problems in finance’. problems in finance’.

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Need for Financial Engineering in Islamic Need for Financial Engineering in Islamic FinanceFinance

Until now, the Islamic financial tools have essentially Until now, the Islamic financial tools have essentially been limited to classical modes developed centuries ago. been limited to classical modes developed centuries ago. They were developed to meet the needs of those They were developed to meet the needs of those societies. While they may serve as useful guidelines for societies. While they may serve as useful guidelines for contemporary Islamic contracts, there is no reason, contemporary Islamic contracts, there is no reason, whatsoeverwhatsoever, to be restricted only to those. Financial , to be restricted only to those. Financial markets are becoming more and more sophisticated, and markets are becoming more and more sophisticated, and competitive. In order to exploit the fast changing market competitive. In order to exploit the fast changing market environment and face increasing competition, financial environment and face increasing competition, financial engineering and innovation is engineering and innovation is imperativeimperative..

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Scope for Financial Engineering in Scope for Financial Engineering in Islamic FinanceIslamic Finance

Financial needs of both individuals and Financial needs of both individuals and businesses have changed. Engineers in modern businesses have changed. Engineers in modern finance have designed several new ways such finance have designed several new ways such as mortgages, options, derivatives, hedging, as mortgages, options, derivatives, hedging, insurance pension plans, credit cards etc., to insurance pension plans, credit cards etc., to meet those needs. We must examine what meet those needs. We must examine what needs are being fulfilled by these instruments. needs are being fulfilled by these instruments. If the needs are genuine (Islamically If the needs are genuine (Islamically speaking), then we must either adapt them for speaking), then we must either adapt them for our purposes or invent Islamic alternatives for our purposes or invent Islamic alternatives for them.them.

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Scope for Financial Engineering in Scope for Financial Engineering in Islamic Finance-Cont.Islamic Finance-Cont.

In the light of the fast changing financial scene, “In the light of the fast changing financial scene, “a needs a needs approach to financial engineeringapproach to financial engineering” is desirable, of course ” is desirable, of course within the known principles of Islamic finance.within the known principles of Islamic finance.

In this regard, the example of In this regard, the example of bay‘bay‘ salamsalam is very is very important to remember. In general, it is not allowed to important to remember. In general, it is not allowed to sell anything, which is not in one’s possession. But in sell anything, which is not in one’s possession. But in case of case of salamsalam, the Prophet (pbuh) allowed such sale , the Prophet (pbuh) allowed such sale because of “need” of the people, but laid down clear because of “need” of the people, but laid down clear rules to protect the interests of both parties.rules to protect the interests of both parties. In the following slides we will attempt to provide In the following slides we will attempt to provide necessary tools and principles for FE in modern necessary tools and principles for FE in modern times.times.

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Ten Guiding Principles for FETen Guiding Principles for FE 1.1.The Doctrine of Maximising Human WelfareThe Doctrine of Maximising Human Welfare

2.2.The Doctrine of General PermissibilityThe Doctrine of General Permissibility

3.3. Prohibition of Riba Prohibition of Riba

4.4. Prohibition of Gharar Prohibition of Gharar

5.5. Prohibition of Gambling Prohibition of Gambling

6.6. Prohibition of Selling Without Having Possession and Two Prohibition of Selling Without Having Possession and Two Deals in OneDeals in One

7.7. No pain no gain (Al- Kharaju Bil-Daman) No pain no gain (Al- Kharaju Bil-Daman)

8.8. Permissibility of Hybrid Contracts and Rules Governing Permissibility of Hybrid Contracts and Rules Governing themthem

9. 9. Principle of Relief (Istahsan) Principle of Relief (Istahsan)

10.10. The Doctrine of Necessity The Doctrine of Necessity

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The Doctrine of Maximising Human WelfareThe Doctrine of Maximising Human Welfare

The doctrine of The doctrine of maslahahmaslahah, (seeking of benefit and , (seeking of benefit and repelling of harm) is well-recognized in Fiqh. It is repelling of harm) is well-recognized in Fiqh. It is something similar to the principle of utility (securing something similar to the principle of utility (securing maximum human happiness). However, Muslim jurists maximum human happiness). However, Muslim jurists have pointed out that from a technical point of view, have pointed out that from a technical point of view, maslahahmaslahah means the securing of the objectives of means the securing of the objectives of ShariahShariah rather than maximisation of happiness rather than maximisation of happiness as seen by human as seen by human beingsbeings. However, the objectives of . However, the objectives of ShariahShariah, themselves, , themselves, aim at maximising human welfare in this life as well as aim at maximising human welfare in this life as well as the life Hereafter. (The Creator knows what is best for His the life Hereafter. (The Creator knows what is best for His creations) With this distinction in view, let us call it, “creations) With this distinction in view, let us call it, “The The Doctrine of Maximising Human WelfareDoctrine of Maximising Human Welfare”.”.

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The Doctrine of General PermissibilityThe Doctrine of General Permissibility

IslamicIslamic Ahkam Ahkam (Commandments) are broadly speaking of two (Commandments) are broadly speaking of two kinds: (1) Ibadat (worshipping) and (2) Muamalat (Dealing kinds: (1) Ibadat (worshipping) and (2) Muamalat (Dealing among human beings).among human beings).

The general rule in the field of worshipping is that an act is The general rule in the field of worshipping is that an act is worship only when permitted by worship only when permitted by ShariahShariah. On the other hand, . On the other hand, in the case of mutual dealings, the general principle is that in the case of mutual dealings, the general principle is that everything is permitted unless clearly prohibited by the everything is permitted unless clearly prohibited by the ShariahShariah. I call it “. I call it “The Doctrine of General PermissibilityThe Doctrine of General Permissibility”. In ”. In the Islamic theory of contracts, parties are free to agree on the Islamic theory of contracts, parties are free to agree on any terms as long as known Islamic rules and principles are any terms as long as known Islamic rules and principles are not violated. There is an authentic not violated. There is an authentic hadithhadith stating: stating:

حراما حلل أو حالل حرم شرطا إال شروطهم عند حراما المسلمون حلل أو حالل حرم شرطا إال شروطهم عند المسلمون “ “Muslims are free to determine the conditions of their Muslims are free to determine the conditions of their

contracts unless they make something permissible as contracts unless they make something permissible as forbidden or something forbidden as permissible”forbidden or something forbidden as permissible”

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Prohibition of RibaProhibition of Riba RibaRiba literally means increase, addition, literally means increase, addition,

expansion or growth. expansion or growth. In the Shari’ah , however, the term In the Shari’ah , however, the term ribariba refers to refers to

anything (big or small), pecuniary or non-anything (big or small), pecuniary or non-pecuniary, in excess of the principal in a loan pecuniary, in excess of the principal in a loan that must be paid by the borrower to the lender that must be paid by the borrower to the lender along with the principal as a along with the principal as a condition condition of the of the loan or for an extension in its maturity. loan or for an extension in its maturity.

In this sense, In this sense, RibaRiba has the same meaning and has the same meaning and import as the contemporary concept of interest import as the contemporary concept of interest in accordance with the consensus of all the in accordance with the consensus of all the fuqaha (jurists). fuqaha (jurists).

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Prohibition of GhararProhibition of Gharar Gharar refers to acts and conditions in contracts, Gharar refers to acts and conditions in contracts,

the full implications of which are not clearly the full implications of which are not clearly known to the parties.known to the parties.

  In economic parlance it is very close to In economic parlance it is very close to “Asymmetric Information.”“Asymmetric Information.”

It has two kinds: gharar It has two kinds: gharar yaseeryaseer (trivial) and (trivial) and gharar gharar fahishfahish (substantial). (substantial).

The first kind is tolerated since this may be The first kind is tolerated since this may be unavoidable without causing considerable unavoidable without causing considerable damage to one of the parties while the second is damage to one of the parties while the second is prohibited.prohibited.

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Prohibition of Gambling (Maysar)Prohibition of Gambling (Maysar)

يا أيها الذين آمنوا إنما الخمر والميسر واألنصاب يا أيها الذين آمنوا إنما الخمر والميسر واألنصابالشيطان فاجتنبوه الشيطان فاجتنبوه واألزالم رجس من عمل واألزالم رجس من عمل

(.(.9090سورة المائدة، اآليةسورة المائدة، اآليةلعلكم تفلحون )لعلكم تفلحون ) O Ye who believe, Intoxicants and Gambling, O Ye who believe, Intoxicants and Gambling,

(Dedication of ) stones, And (Dedication of) arrows, (Dedication of ) stones, And (Dedication of) arrows, are an abomination, of Satan’s handiwork: Eschew are an abomination, of Satan’s handiwork: Eschew such (abomination) , That ye may prosper.such (abomination) , That ye may prosper.

Gambling involves to transfer of wealth without Gambling involves to transfer of wealth without any value added. It involves that kind of risk which any value added. It involves that kind of risk which is self-created, is zero-sum game and does not add is self-created, is zero-sum game and does not add any value to the national wealth.any value to the national wealth.

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The following Hadith establishes three more The following Hadith establishes three more principles:principles:

وُل7 الل6ه5 -صلى الله عليه وسلم- س7 اُل9 ر9 وُل7 الل6ه5 -صلى الله عليه وسلم- َق9 س7 اُل9 ر9 َق9َط9ان5 ف5ى ْب9ي>ٍع< و9ال9 ر5ْب>ُح7 ر> ْب9ي>ٍعB و9ال9 َش9 ل9ٌفB و9 لD س9 َط9ان5 ف5ى ْب9ي>ٍع< و9ال9 ر5ْب>ُح7 » ال9 ي9ح5 ر> ْب9ي>ٍعB و9ال9 َش9 ل9ٌفB و9 لD س9 » ال9 ي9ح5

ن>َد9َك9 ا ل9ي>س9 ع5 م9ن> و9ال9 ْب9ي>ٍع7 م9 ا ل9م> ت9ْض> ن>َد9َك9 م9 ا ل9ي>س9 ع5 م9ن> و9ال9 ْب9ي>ٍع7 م9 ا ل9م> ت9ْض> أْبو داود(أْبو داود(((م9

1.1. Loan and Trade Contracts cannot be combined (more Loan and Trade Contracts cannot be combined (more on this later)on this later)

2.2. Two deals cannot be combined into one (more on this Two deals cannot be combined into one (more on this later)later)

3.3. Right to profit is contingent upon taking Right to profit is contingent upon taking responsibility (for loss)responsibility (for loss)

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Provision for Providing Relief (Istihsan)Provision for Providing Relief (Istihsan) Istihsan Istihsan literally means preferring something over literally means preferring something over

the other. Technically, it has been defined in several the other. Technically, it has been defined in several ways. In essence it refers to departure from a ruling ways. In essence it refers to departure from a ruling based on previous analogy (based on previous analogy (qiyasqiyas) in a particular ) in a particular situation in favour of another ruling, which brings situation in favour of another ruling, which brings about ease. Some people have criticized about ease. Some people have criticized istihsanistihsan saying it amounts to moving away from a rule saying it amounts to moving away from a rule deduced through deduced through qiyasqiyas toward the personal opinion toward the personal opinion of a jurist. However, this is not in fact the case. In of a jurist. However, this is not in fact the case. In istihsanistihsan, a ruling is preferred to another based on a , a ruling is preferred to another based on a stronger evidence, usually from texts (stronger evidence, usually from texts (nususnusus), due to ), due to consensus (consensus (ijmaijma) or to the doctrine of necessity all ) or to the doctrine of necessity all of which have sound basis in Shariah.of which have sound basis in Shariah.

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Combining of ContractsCombining of Contracts

While it is possible to modify classical contracts While it is possible to modify classical contracts to suit modern conditions, a much broader scope to suit modern conditions, a much broader scope for financial engineering exists in developing for financial engineering exists in developing new contracts. These contracts could be hybrids new contracts. These contracts could be hybrids of old contracts or may be entirely new. of old contracts or may be entirely new. However, in hybrid contracts, there are certain However, in hybrid contracts, there are certain rules that govern ‘Combining of Contracts”. rules that govern ‘Combining of Contracts”. Since almost all of contracts being presently Since almost all of contracts being presently employed involve combining of contracts, it is employed involve combining of contracts, it is worthwhile to briefly mention them. worthwhile to briefly mention them.

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Combining of Contracts-ContCombining of Contracts-Cont In principle, Islamic law should not have any objection to the In principle, Islamic law should not have any objection to the

combination of contracts in view of the Doctrine of General combination of contracts in view of the Doctrine of General Permissibility. However, some scholars have raised certain Permissibility. However, some scholars have raised certain objections to certain type of contracts being combined into objections to certain type of contracts being combined into one. They point out that since all rights and obligations one. They point out that since all rights and obligations created by contracts bunched together are to be viewed as created by contracts bunched together are to be viewed as inseparable obligations, one has to see the end result and inseparable obligations, one has to see the end result and apply the apply the ShariahShariah rule to it. What is at dispute is not the rule to it. What is at dispute is not the validity of combination of contracts in principle. The concern validity of combination of contracts in principle. The concern is with the nature and form of such combinations. Scholars is with the nature and form of such combinations. Scholars draw attention to the qualifying clause in the draw attention to the qualifying clause in the hadithhadith that is the that is the basis of the Doctrine of General Permissibility. It states that basis of the Doctrine of General Permissibility. It states that all conditions mutually agreed are acceptable “all conditions mutually agreed are acceptable “unless they unless they make something forbidden as permissible or something make something forbidden as permissible or something permissible as forbiddenpermissible as forbidden”. Therefore, in order to check the ”. Therefore, in order to check the validity of the overall deal emerging from a combination of validity of the overall deal emerging from a combination of contracts, certain parameters need be established. contracts, certain parameters need be established.

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Conditions for Combining ContractsConditions for Combining Contracts 1.1. The combination must not contradict an explicit textThe combination must not contradict an explicit text If there is an explicit text in the primary sources of Islamic law If there is an explicit text in the primary sources of Islamic law

that certain types of contracts cannot be combined, for whatever that certain types of contracts cannot be combined, for whatever reason, then any structure that involves such a combination reason, then any structure that involves such a combination becomes unacceptable. If analysed, the rationale of prohibition becomes unacceptable. If analysed, the rationale of prohibition can also be found. Some Examples are:can also be found. Some Examples are:

(i) It is prohibited to combine a loan contract with a sales (i) It is prohibited to combine a loan contract with a sales contract. contract. Rationale:Rationale:If allowed, a lender may advance the loan on If allowed, a lender may advance the loan on an interest-free basis in the loan part of the deal but they can buy an interest-free basis in the loan part of the deal but they can buy something at a cheaper price in the sale part of the deal which something at a cheaper price in the sale part of the deal which amounts to amounts to riba.riba.

(ii) The Prophet prohibited “two deals in one”. Some scholars (ii) The Prophet prohibited “two deals in one”. Some scholars take this take this hadithhadith as a general prohibition of combining contracts. as a general prohibition of combining contracts. However, actually it implies that if more than one option is However, actually it implies that if more than one option is offered, one must be chosen before the deal is finalised. offered, one must be chosen before the deal is finalised. Rationale: Rationale: Such combination amounts to Such combination amounts to gharargharar in the combined in the combined contract, which is prohibited in business contracts.contract, which is prohibited in business contracts.

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2.2. A product structured on the basis of a combination of A product structured on the basis of a combination of contracts should not be intended to circumvent contracts should not be intended to circumvent impermissible transactions. Such attempts are called impermissible transactions. Such attempts are called hiyalhiyal (legal artifices) and are not generally allowed. For (legal artifices) and are not generally allowed. For example, the Prophet (PBUH) prohibited example, the Prophet (PBUH) prohibited bay al-inahbay al-inah, , which is a sale and buy-back arrangement. For example, which is a sale and buy-back arrangement. For example, A sells his house to B for a cash price of US$500,000 A sells his house to B for a cash price of US$500,000 and simultaneously buys it back from B at a credit price and simultaneously buys it back from B at a credit price of US$600,000. It is easy to see that the end result is of US$600,000. It is easy to see that the end result is exchange of $500,000 now for US$600,000 later. This exchange of $500,000 now for US$600,000 later. This is nothing but is nothing but ribariba. The “selling” and “buying back” of . The “selling” and “buying back” of the house is inconsequential. The recent ‘sukuk debacle’ the house is inconsequential. The recent ‘sukuk debacle’ was a result of similar commitment. was a result of similar commitment.

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3. The Combination must not involve contradictory 3. The Combination must not involve contradictory contracts/conditionscontracts/conditions

Each type of contract has unique legal implications Each type of contract has unique legal implications and obligations. Contracts which are mutually and obligations. Contracts which are mutually contradictory cannot be combined. If the legal contradictory cannot be combined. If the legal consequences do not conflict each other then there is consequences do not conflict each other then there is no problem in combining them. For example, a no problem in combining them. For example, a collateral condition supports a loan contract and is collateral condition supports a loan contract and is hence acceptable. On the other hand, a condition in hence acceptable. On the other hand, a condition in a marriage contract stipulating that the spouses will a marriage contract stipulating that the spouses will live apart, defeats the purpose of the contract and is live apart, defeats the purpose of the contract and is hence not acceptable. hence not acceptable.

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4.The Combination must not involve contingent 4.The Combination must not involve contingent contractscontracts

The Prophet (PBUH) has prohibited a sale that is The Prophet (PBUH) has prohibited a sale that is circumscribed with a condition (circumscribed with a condition (baybay wa shartwa shart). If the ). If the combination is such that the execution of one combination is such that the execution of one contract is contract is contingentcontingent upon another contract, such upon another contract, such combination is not permissible. For example, Zaid combination is not permissible. For example, Zaid saying to Bakar that I sell my house to you saying to Bakar that I sell my house to you providedprovided Omar rents his house to me. Omar rents his house to me.

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The The DoctrineDoctrine of Necessity of Necessity In very exceptional circumstances, application of a In very exceptional circumstances, application of a

particular command (particular command (hukmhukm) may be ) may be temporarilytemporarily suspended. For example, eating carrion is prohibited. suspended. For example, eating carrion is prohibited. However, if someone is facing certain death due to However, if someone is facing certain death due to hunger and they have nothing but carrion to eat, the hunger and they have nothing but carrion to eat, the objective of “preserving life” dictates that they are objective of “preserving life” dictates that they are allowed to eat of carrion but only as much as is allowed to eat of carrion but only as much as is necessary to sustain life and only until something necessary to sustain life and only until something permissible to eat becomes available. This doctrine is permissible to eat becomes available. This doctrine is clearly established by Quran [Qur’an 2:173]. However, clearly established by Quran [Qur’an 2:173]. However, the same verse lays down three conditions for it to be the same verse lays down three conditions for it to be invoked: (1) The situation is that of invoked: (1) The situation is that of iztarariztarar (extreme and (extreme and unavoidable difficulty); (2) The suspension is unavoidable difficulty); (2) The suspension is temporarytemporary and (3) There is and (3) There is firmfirm intention to return to the normal intention to return to the normal hukm ASAPhukm ASAP

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Five Cs of Islamic Financial EngineeringFive Cs of Islamic Financial Engineering CCompatibilityompatibility CConsciousnessonsciousness CClaritylarity CCapabilityapability CCommitmentommitment

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CompatibilityCompatibility

That the deal is fully compatible with the That the deal is fully compatible with the requirements of the requirements of the ShariahShariah, i.e., does not , i.e., does not involve anything declared impermissible involve anything declared impermissible by Qur'an, Sunnah or by Qur'an, Sunnah or ijmaijma..

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ConsciousnessConsciousness

That the parties should consciously and That the parties should consciously and willingly agree on the conditions of the willingly agree on the conditions of the contract without any compulsion or duress. contract without any compulsion or duress. An implication of this is that any agreement An implication of this is that any agreement made in the state of unconsciousness (like made in the state of unconsciousness (like under the influence of intoxicants or imposed under the influence of intoxicants or imposed by force) is not valid.by force) is not valid.

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ClarityClarity

That the parties are fully aware of all the That the parties are fully aware of all the implications of the conditions laid down in a implications of the conditions laid down in a contract. Any ambiguity (with the exception of contract. Any ambiguity (with the exception of gharargharar yasiryasir) will make the agreement invalid. ) will make the agreement invalid. An implication is to minimize An implication is to minimize asymmetric asymmetric information.information.

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CapabilityCapability

That the parties are reasonably certain that That the parties are reasonably certain that

they are capable of complying with all they are capable of complying with all conditions of the contract. An implication conditions of the contract. An implication of this is that in general the sale of any of this is that in general the sale of any goods (or services) which are not owned goods (or services) which are not owned and possessed by the seller at the time of and possessed by the seller at the time of the contract is not valid. the contract is not valid.

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CommitmentCommitment

That the parties intend and are committed to That the parties intend and are committed to respect the terms of a contract both in letter respect the terms of a contract both in letter and spirit. An implication of this is that any and spirit. An implication of this is that any subterfuge to go around any subterfuge to go around any ShariahShariah condition condition through linguistic or legal tricks is not through linguistic or legal tricks is not allowed.allowed.

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The Case Study of Sukuk The Case Study of Sukuk

Sakk Sakk (singular of (singular of sukuksukuk) literally means cheque or ) literally means cheque or promissory note for receivable. Technically promissory note for receivable. Technically sukuksukuk refer to refer to financial instruments meant to mobilize resources from the financial instruments meant to mobilize resources from the market based on the strength of one’s balance sheet, market based on the strength of one’s balance sheet, credentials, track record, goodwill and prospects of the credentials, track record, goodwill and prospects of the proposed project. They are meant to provide an Islamic proposed project. They are meant to provide an Islamic alternative to conventional bonds. alternative to conventional bonds. SukukSukuk can play a positive can play a positive role in mobilization of savings on a vast scale. They benefit role in mobilization of savings on a vast scale. They benefit investors as well as those who have projects to finance that investors as well as those who have projects to finance that bear the promise of eventually generating sufficient revenue bear the promise of eventually generating sufficient revenue to meet the costs yet leave a surplus. Their proliferation to meet the costs yet leave a surplus. Their proliferation increases the efficiency of the financial system. Also, they increases the efficiency of the financial system. Also, they are capable of meeting credit needs of government and are capable of meeting credit needs of government and businesses in a manner that keeps credit supply linked with businesses in a manner that keeps credit supply linked with real assets.real assets.

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Sukuk- ContdSukuk- Contd Financial engineers have come up with fancy, often confusing, names Financial engineers have come up with fancy, often confusing, names

for various types where ‘engineering’ is more in names than in for various types where ‘engineering’ is more in names than in substance. The basic ideas are quite simple. substance. The basic ideas are quite simple. SukukSukuk are basically, are basically, certificates based on ownership of certain assets (or their usufruct). certificates based on ownership of certain assets (or their usufruct). Generally, these certificates are negotiable in secondary markets. They Generally, these certificates are negotiable in secondary markets. They represent ‘ownership’ in the assets (or usufruct) underlying the issue. represent ‘ownership’ in the assets (or usufruct) underlying the issue. Those with variable returns are based on Those with variable returns are based on mudarabahmudarabah or or musharakahmusharakah. . More popular are those with pre-determined, fixed incomes like the one More popular are those with pre-determined, fixed incomes like the one based on based on ijarahijarah, (lease). There are , (lease). There are sukuk sukuk based on based on salamsalam or or istisna istisna contracts. Also there are hybrid issues whose underlying assets are contracts. Also there are hybrid issues whose underlying assets are mixtures of these. mixtures of these. Murabahah Murabahah receivables being debt obligations are receivables being debt obligations are not considered fit for not considered fit for sukuksukuk issue. But they have been accepted in such a issue. But they have been accepted in such a mixture as long as they are in a minority. Due to this last point, while mixture as long as they are in a minority. Due to this last point, while sukuksukuk offer a usefully potential mechanism for secondary market offer a usefully potential mechanism for secondary market resource mobilization, they also open the way for sale of debt resource mobilization, they also open the way for sale of debt receivables (as minority share in a general receivables (as minority share in a general sukuksukuk issue). Since, the sale issue). Since, the sale of debt except at its face value is not generally acceptable by scholars, of debt except at its face value is not generally acceptable by scholars, the use of the use of sukuksukuk where debt receivable are a noticeable proportion, where debt receivable are a noticeable proportion, remain suspect from a remain suspect from a ShariahShariah point of view. point of view.

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Sukuk- ContdSukuk- Contd

Even these popular ijara sukuk got a jolt when Even these popular ijara sukuk got a jolt when the the chairman chairman of the Shariah Board of AAOIFI, made a remark in of the Shariah Board of AAOIFI, made a remark in November 2007 that about 85 percent of sukuk did not November 2007 that about 85 percent of sukuk did not comply with Islamic law because of repurchase agreements. comply with Islamic law because of repurchase agreements. That sent shock waves to the sukuk market around the That sent shock waves to the sukuk market around the globe and according to industry experts sukuk issuance globe and according to industry experts sukuk issuance dropped to around $14 billion in 2008 as compared to some dropped to around $14 billion in 2008 as compared to some $50 billion in 2007. Though $50 billion in 2007. Though Standard & Poors estimated in Standard & Poors estimated in September 2008 that the sukuk market will exceed $100 September 2008 that the sukuk market will exceed $100 billion by 2009, even with the latest hiccup, no RELIABLE billion by 2009, even with the latest hiccup, no RELIABLE statistics exist that can confirm that their estimation was statistics exist that can confirm that their estimation was fulfilled.fulfilled.

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Sukuk- ConclusionSukuk- Conclusion

‘ ‘Damage control’ efforts have started earnestly, but Damage control’ efforts have started earnestly, but my own view is that even if the sukuk market my own view is that even if the sukuk market witnesses some recovery, it will in the short-run be witnesses some recovery, it will in the short-run be only due to excess liquidity in the market. Sukuk only due to excess liquidity in the market. Sukuk will remain under clouds for some time and there is will remain under clouds for some time and there is a big challenge for financial engineers to come up a big challenge for financial engineers to come up with new sukuk structures that can reassure with new sukuk structures that can reassure investors about their Shariah-compliance. Every investors about their Shariah-compliance. Every challenge is also an opportunity and this one is a challenge is also an opportunity and this one is a trillions-dollars opportunity. Therefore, financial trillions-dollars opportunity. Therefore, financial engineers better get to their drawing boards quickly. engineers better get to their drawing boards quickly.