Sukuk: global issues and challenges.

Author:Hanefah, Mustafa Mohd


Islamic finance is gaining popularity worldwide for more than three decades and demand for Islamic financial instruments is also growing rapidly. Among the Islamic financial instruments, Sukuk has become the main attraction among banks, corporations and customers. Sukuk is the Islamic asset-backed financial instrument issued by Islamic financial institutions according to the Shari'ah.

Although it is commonly referred to as Islamic bonds similar to conventional bonds, they, however, are not the same. Sukuk is not the counterpart of conventional bonds as commonly referred to in many articles. Conventional bonds are interest bearing debt instruments, but Sukuk, on the other hand, are assets-backed financial instruments. Sukuk are not interest bearing financial instruments but rather Sukuk holders have a right of ownership in the assets or properties of the corporation or the issuer (Vishwanath & Sabahuddin, 2009). Interest is forbidden in Islam so Sukuk does not bear interest to the holders, but they have a right to the profit made by the company. Losses are also to be shared among the Sukuk holders and the issuer according to the contract between the two parties.

The basic principle behind the Sukuk is that the holder has an undivided ownership interest in a particular asset and is therefore entitled to the return generated by that asset. The classic Sukuk structure involves an acquisition of a property asset by a special purpose company (SPC). The SPC funds itself by the issue of Sukuk, declaring a trust in favor of the Sukuk holders. The Sukuk holders then receive a return based on the rental income of the asset (Wilson, 2008a).

Sukuk therefore are considered as certificates of equal value that represent an ownership interest in tangible assets. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) based in Bahrain has issued guidelines that emphasize the differences between Sukuk and conventional bonds. AAOIFI is mainly responsible for formulating and implementing international Islamic finance standards in the market. Currently AAOIFI has issued 85 standards and is supported by 200 institutional members (

There are 14 different types of Sukuk described as permissible in the AAOIFI Shari'a standard 17 Investment Sukuk. Muhammad Taqi Usmani, Chairman of the Shariah Council, outlines the following differences between Sukuk and the conventional bonds. First, bonds do not represent ownership on the part of the bond holders in the enterprises for which the bonds were issued. Rather, they document the interest-bearing debt owed to the holders of the bonds. Second, regular interest payments are made to the bond holders. The amount of interest is determined as a percentage of the capital and not as a percentage of actual profits. Third, bonds guarantee the return of principal when redeemed at maturity, regardless of whether the enterprise was profitable or otherwise.

Furthermore, the issuer of conventional bonds is not required to return more than the principal and the agreed amount of interest. Whatever profits may have been earned by the enterprise accrue entirely and exclusively to the issuer. So the bond holders have no right to seek a share in the profits beyond the interest.

These characteristics are not to be found in Sukuk. However, many Sukuk in the market today have the same characteristics of the conventional bond. Furthermore, the Sukuk contract must explicitly abide by Shari'ah and that a Shari'ah board must monitor its implementation (Oliver Ali Agha & Grainger, 2009).

The above are a number of issues concerning Islamic finance, ranging from compliance to Shari'ah and more importantly issues concerning financial reporting and disclosures. At present, majority of the Islamic financial institutions worldwide use AAOIFI standards for reporting and disclosures only as a guideline. These standards are not mandatory. Many jurisdictions including Malaysia prefer companies to use International Financial Reporting Standards (IFRS) in their reporting and disclosures for consistency and international comparability. Malaysian Islamic financial institutions do not use AAOIFI standards for financial reporting and disclosures because they are not mandatory (Mohd. Edil Abd. Sukor, 2008). Are AAOIFI standards compatible with IFRSs? Should there be two different standards for Islamic financial instruments? Can they be harmonized?

The purpose of this paper is to discuss the importance of Sukuk as a financial instrument in the global financial markets and issues concerning valuation, measurement and disclosures according to the IFRSs and the AAOIFI standards.

The next section briefly describes the importance and growth of Sukuk globally, followed by its structure, how it differs from the conventional bonds, and the last section discuss issues concerning financial reporting and disclosures according to IFRS and AAOIFI standards, the possibility of harmonization for international comparability.


Sukuk market continues to grow rapidly across the globe in the first six months of 2012. According to the statistics, at least $68 billion worth of sukuk was issued during the first half of 2012, an increase of 36 percent on the same period in 2011 (, 2012). According to the same report, the rapid progress by sukuk worldwide indicates that at least $100 billion of sukuk will be sold by the end of 2012 which will make it a record year. (2012), also reports that Malaysia issued more than 70 percent of global sukuk in the first six months of 2012 since the country is the global hub of Islamic finance sector. Saudi Arabia the largest oil producing country in the world has grabbed the second position after Malaysia by issuing 13 percent of global sukuk overpowering the United Arab Emirates. The kingdom made a record issuance of sukuk for the first time and tops all the Gulf Cooperation Council (GCC) countries.

Malaysia continued to dominate with generous issues to fund infrastructure development. After the huge issues from Projek Lebuhraya Utara-SelatanBerhad (PLUS) in January and besides the regular issues from Bank Negara Malaysia, Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) closed a MYR3.5 billion sukuk program in the domestic market.

Malaysia sold tranches under an innovative Wakala MYR3 billion program at the end of June, issued by Johor Corporation, a state investment firm. Khazanah Nasional came back to the market with a successful issue of a seven-year benchmark exchangeable sukuk of $357.8 million via Pulai Capital. The offer received an overwhelming demand from investors underlining the market's strong confidence in Khazanah's credit-worthiness(, 2012).

According to (2012), the Gulf region witnessed the sale of $13.7 billion of sukuk in the first half of 2012 with a significant comeback for neighboring Yemen to the sukuk market. From the UAE, Emirates Islamic Bank, the Shari'ah-compliant sister of Emirates NBD, sold a $500 million third tranche of its $1 billion program, which came on the heels of a previous similar issue in January. The UAE, through its corporate and sovereign issuers, sold $4.3 billion of sukuk.

Saudi Arabia secured top ranking in the GCC with $8.8 billion sukuk sale. The General Authority of Civil Aviation's (GACA) $4 billion sukuk was the first sovereign to come from the kingdom, followed by Tasnee's first privately placed Islamic bond. Saudi banks increasingly sold sukuk through Saudi British Bank followed by Saudi Fransi marketing a benchmark sukuk in the international markets (, 2012).

Sukuk offerings, while still concentrated in the Gulf States and Malaysia, are rapidly growing businesses with involvement by private companies, state enterprises, sovereign governments, Islamic financial institutions, and also non-Muslim international institutions. The increasing interest of non-Muslim participants in Islamic Shari'ah-compliant financial system, further promotes the...

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