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Introduction
Islamic securities have become increasingly popular in over the last five years, both as a means of raising government finance through sovereign issues, and as a way of companies obtaining funding through the offer of corporate sukuk . In 2000 there were only three sukuk worth $336 million issued, but in 2004 there were 64 issues worth almost $7 billion, and in 2005 the figure will certainly exceed $10 billion with 54 issues already either fully subscribed or announced[1].
The advantage of sukuk is that they are compliant with shariah Islamic law ([17] Wilson, 2004). Sukuk are therefore attractive investment instruments for Islamic banks, takaful Islamic insurance companies and shariah managed funds that cannot invest in conventional securities that involve payment of riba or interest. In addition there are an increasing number of Muslims of high net worth who want their asset holdings to comply with Islamic law.
Aims and objectives
The paper examines the market for, and usage of, sukuk , notably as tools for liquidity management. There is also an analysis of different sukuk structures from a financial perspective. This examination includes murabahah and ijara -based sukuk , the former offering a fixed return, and the latter, the most popular form of sukuk , a variable return. The potential for other more novel sukuk structures based on musharakah partnership contracts is examined, which would offer different types of financial risk, and could be attractive for portfolio diversification.
The major criticism of ijara sukuk is that the return is usually benchmarked to the London Inter-bank Offer Rate (LIBOR) on $US dollar funds or the equivalent local rate in the case of issues in Malaysian ringgit. This is of course an interest rate, and although it is only used for pricing, and the payments associated with the ijara can be regarded as rents, the close link of the interest-based pricing with riba worries many shariah scholars ([16] Usmani, 2002). In the paper alternative benchmarks based on real rather than monetary indicators are considered as a means of overcoming this problem. Macroeconomic indicators could be used for sovereign sukuk , and company performance indicators for corporate sukuk . Data on these variables is used for simulations of possible returns, so that these can be...