Recent years have seen a surge in the issuance of Islamic capital market securities (Sukuk) by corporate and public sector entities in response to increased demand for alternative investments in the wake of a rapidly growing Islamic economy. As the Sukuk market develops, new challenges and opportunities for debt managers emerge, owing in large part to enabling capital market regulations and financial innovation aimed at establishing greater Shariah compliance inclusivity. This few lines will attempt to explain and analyze the Definition of Sukuk development. The paper will examine the NASDAQ Dubai Sukuk structure and provide details on the impact of Sukuk in the development of the UAE economy.
Definition of Sukuk
Sukuk also known as "Islamic bonds." It is Arabic word that means 'certificates,' 'Islamic bonds,' and 'Islamic security.'
However, Islamic investment certificates are a more accurate translation of the Arabic word. The distinction is that, at its most basic, a bond is a contractual debt obligation in which the issuer is contractually obligated to pay bondholders on specified dates. The process of pooling assets or issuing certificates, on the other hand, is known as (Taskik) Islamic Securitization. Securitization was defined as "a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk, where credit risk of an underlying pool of exposures is transferred in whole or in part" by Basel. It is also the process of pooling a collection of debt obligations, such as mortgages, and then dividing that pool into portions that can be sold as securities in the secondary market.
What is the Distinction between Sukuk and Bonds?
The primary distinction between Sukuk and conventional securitization bonds is that Sukuk either results in the creation of Islamic Promissory Notes (IPN) or requires the existence of an underlying financial asset. Shariah, for example, encourages contract documentation, after which these documents can serve as securities and thus become financial assets. As a result, a security cannot be considered totally or completely separable from the assets it represents, which means that there are no Sukuk unless there is first a contract.
In this context, Sukuk cannot be used to raise funds simply by issuing a document with no underlying assets, as is the case with conventional bond issues. For example, in the issuance of zero-coupon bonds, the bonds are issued prior to the receipt of proceeds, i.e., the creation of debt, under the Sukuk system. Furthermore, traditional investors incorporate and government bonds in the hope of capitalizing on favourable interest rate developments. When fixed-rate bond prices rise while variable market indices fall, capital gains accumulate.
Investing in Sukuk issuances entails funding trade or the production of tangible assets. Sukuk are inextricably linked to real-world sector activities. As a result, there will be no short-term speculative movement of funds or potential financial crises. Sukuk investors have an inherent right to information about the use of their investments, the nature of the underlying assets, and other details that would be considered redundant in conventional investments. This will aid in the implementation of market discipline.
According to the preceding analysis, there are two major or primary criteria in the creation of Sukuk. First, there must be no interest rate attached to it, whether fixed or floating. Second, it must be the result of an underlying Islamic transaction. However, the next step is to discuss some aspects of improving the competitiveness of Sukuk structures by overcoming some of the undesirable underlying risks. As a result, we will explain Sukukal-ijarah, its features, and the steps to be taken in the documentation of this Sukuk this structure.
Sukuk's Impact on the UAE Economy
Standard and Poor's estimates that 20% of investors willing to invest billions would now choose an Islamic financial product over a conventional financial product with a similar risk-return profile on their own. This indicates that the Sukuk is being used more frequently. This is especially common in the United Arab Emirates and other Gulf Cooperation Council (GCC) countries. Sukuks worth $20 billion first appeared on the market in 2006. They came in a variety of shapes and sizes. Companies have begun to look for ways to diversify their funding sources through Sukuk. Despite the fact that Sukuk are actively used by companies in Kuwait, Bahrain, Saudi Arabia, and Qatar.
Despite the fact that Malaysia led the Sukuk issue market in 2006. The UAE economy has been impacted by NASDAQ Dubai's issuance of Sukuk. Sukuk structures have served a variety of purposes, and they are rapidly evolving in response to the needs and demands of issuers and investors.
They could be simple sale and leaseback structures, such as the $1 billion Dubai Department of Civil Aviation Sukuk issued in 2004, or they could be complex trust finance Sukuk structures, such as the $2.53 billion trust finance Sukuk issued by Aldar Properties in March 2007, demonstrating the flexibility of Islamic finance principles (NASDAQ Dubai, 2014). Sukuk are used to raise corporate finance for acquisitions or working capital. There are numerous examples that demonstrate how Sukuk has evolved into a diverse, internationally acceptable instrument.
Because of the growth of the sukuk market, the UAE economy has become more diverse and driven by the private sector. NASDAQ Dubai has used sukuk development to diversify the UAE economy by creating a platform for the global financial capital market, with the goal of establishing the UAE as a centre for Islamic economy.
People who favor Islamic financial systems have always preferred Sukuk investments. As a result, it is critical to determine the target market. The UAE has been identified as the most appealing location because it has developed a strong market for Sukuk. The cost of issuing Sukuk is higher or equal to that of traditional bonds. This has a negative impact on the overall success of Sukuk. In terms of marketability, Sukuk also faces significant challenges. When compared to traditional bonds, it is having an impact because investors are unable to trade.
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