ISLAMIC ISLAMIC BBOND @ OND @ SSUKUK UKUK MARKETMARKET

Possibilities & ChallengesPossibilities & Challenges

Prof. Dr. Mohd. Ma’sum Billahwww.drmasumbillah.blogspot.com

ISLAMIC BOND MARKET: ISLAMIC BOND MARKET: A PRACTICAL FRAMEWORKA PRACTICAL FRAMEWORK

• Bonds : long term debt obligations that are secured by a specified asset or a promise to pay

• Islamic bonds : no interest payment & based on Shari’ah principles

• Types of Islamic Bonds: Salam bonds Ijarah bonds Istisna’ bonds Musyarakah bonds Muqaradah or Mudarabah bonds

ISLAMIC BONDS MARKET: ISLAMIC BONDS MARKET: A PRACTICAL FRAMEWORKA PRACTICAL FRAMEWORK

• The Muqaradah & Mudarabah (Profit Sharing) Concept

in Islamic Bonds: a flexible structure without payment of coupon a sale of goods at a price covering the purchase price

(costs) it gives the right to the owner to receive his capital & at

the same time the bonds are delivered more efficient in terms of the allocation of resources it does not encourage and permit to burden the mudarib profit realized from investment will be distributed

according to agreement

ISLAMIC BONDS MARKET: ISLAMIC BONDS MARKET: A PRACTICAL FRAMEWORKA PRACTICAL FRAMEWORK

• Why Islamic Bonds? Increase demand for financial

instruments Help to gain capital in Bank

Islam’s operations – means of fund raising

No coupon rate Based on syari’ah principles

Conventional Conventional VS. VS.

Islamic Bond MarketIslamic Bond Market

A Conventional Scenario

• Primary market A financial market in which new issues of a security, such as a bond

or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds.The investment bank underwrites securities and then sells them to the public.

• Secondary MarketA financial market in which securities that have been previously issued can be resold. It could be an organized market, such as KLSE, or over-the counter (OTC) market in which dealers at different locations stand ready to buy or sell securities over the counter to whoever accept their price.

Market ParticipantsMarket Participants

• DealersDealers link buyers and sellers by buying and selling securities

• BrokersAgents of investors who match buyers with sellers of securities

• InvestorsIncludes individual investors, financial institutions, pension funds, mutual funds and governments, from around the world.

Types of BondsTypes of Bonds

• Convertible Bonds • Extendible/Retractable Bonds • Foreign Currency Bonds • Government Bonds • High Yield or "Junk" Bonds • Inflation-Linked Bonds • Zero Coupon or "Strip" Bonds

Valuing BondsValuing Bonds

The value of a bond depends on the size of its coupon payments, the length of time remaining until the bond

matures and the current level of interest rates.

• Present Value • Yield-to-Maturity • Duration• Interest Rates

An Islamic ScenarioAn Islamic Scenario

Three main steps involved in the bond issuance.

• Securitization • Bond Issuance• Trading of dept certificates

Process of Securitization using Process of Securitization using Bai’ al-InahBai’ al-Inah

Creditor Debtor

(1) Sells an asset to the creditor in cash @RM14mil

(2) Cash payment RM14mil

(3) For future date, the debtor buys back the asset for 15 mil

Issuance of Islamic Dept Certificate Issuance of Islamic Dept Certificate ((Shahadah al-DaynShahadah al-Dayn))

Two types of bonds:

• Islamic coupon bond• Islamic zero coupon bond

Trading of Dept Certificate – Trading of Dept Certificate – Discounted Discounted Bai’ al-DaynBai’ al-Dayn

For liquidity purposes, bond trading in the secondary market is crucial.

Islamic Bond MarketIslamic Bond MarketPracticalityPracticality

Muqarada Bonds an Alternative for Islamic Dept Bonds

Securitization of Securitization of MusharakahMusharakah

• Musharakah is a mode of financing which can be securitized easily.

• Especially in case of big projects where huge amounts are required.

Musharakah certificateMusharakah certificate

• Every subscriber can be given a Musharakah certificate, which represents his proportionate ownership in the assets of the Musharakah.

• After the project is started, these Musharakah certificates can be treated as negotiable instruments.

• Can be bought and sold in the secondary market.

Difference Between Difference Between Musharakah Certificates Musharakah Certificates and a Conventional Bondand a Conventional Bond

Musharakah Certificates

• Represents the direct ownership of the holder in the assets of the project.

• If all the assets of the joint project are in liquid form, the certificate will represent a certain proportion of money owned by the project.

Conventional Bond

• Has nothing to do with the actual business undertaken with the borrowed money.

• The bond stands for a loan repayable to the holder in any case, and mostly with interest.

Growth in MYR Islamic Bond MarketGrowth in MYR Islamic Bond Market

Potential Growth in USD Islamic Bond Potential Growth in USD Islamic Bond MarketMarket

Thank You Wassalam