Sukuk and Islamic Investment

Islamic finance govern by Shari’ah law , as per Shari’ah law interest is strictly restricted in Islam.Free debt help is allowable without taking any interest, or these can be treat as to help anyone, without taking any interest from the lender. As interest is against the Islamic law bond market not develop in the Islamic world. Most of the Petroleum exporting countries are investing there surplus amount in the US free debt help bonds and they not taken interest on investment. Sukuk is invested to protect the religious value and also to increase the Muslim investment market.Malaysia is the largest issuer of the sukuk bonds ,sukuk is not only famous in islamic market but also some European and American countries issued sukuk bonds to get the islamic investment of rich middle east countries.Sukuk is also consider as a portfolio investment to diversify the investment.

A major challenges facing Islamic financial products like sukuk bonds are the lack of liquidity.According to S&P, there are more sukuk listed in Dubai than any other else, but the secondary market is virtually non-existent. Further, the bulk of sukuk are over-the-counter instruments,with listed sukuk accounting of only 20-255 of outstanding sukuk is issued worldwide; that is, $10-15 bn so far, says the rating agency. Zeti contends that creation of persistent supply of Islamic papers and instruments that would upgrade the secondary trading of instruments and greater depth of the market is the hour. According to her, another factor that could help futher expand the market for Islamic finance products would be to bring in greater diversity in the market for Islamic financial institutions and portfolio manager to manage their funds effectively. Pricing issues also pose significants challenges to the unhindered growth of the market. There is the need for developing a relevant benchmark for efficient and credible pricing. For example , if sukuk is issued based on the Ijarah principle, and if it uses the property as its underlying assets then actual rate of rental may be explored to be used to determine the rate of return on the instrument. However, it may then fluctuate depending upon the demands and supply for that property. Shari’ah experts, who have a full understanding of the mechanics of sukuk, should play an important role in ensuring its proper pricing as well as governance, she suggests.

Taking Islamic finance products global is another challenges as it requires harmonization of standards and practices between those of regional Islamic finance and international standards. Zeti suggests that full support has to be accorded to the international standard setting organizations such as Islamic Financial Service Board (IFSB) and to the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) to formulate appropriate standards that would strengthen the Islamic Financial system.The Malaysia based IFSB has already formulated the prudential treatment for sukuk investment by the Islamic Financial Institution s as specified in the Capital adequacy standards and has also undertaken a set of initiatives to strengthen the framework and practices in the Islamic money market.

Also, lack of rating is another major issue. Given the complex legal structure, it adds to the cost and complexity of rating. Further rated instruments are almost non-existent in the Middle East.
However, global rating agencies such as S&P, however, feel that there is a way out. “the provisions of Islamic debt instruments may add level of complexity to rating analysis long stading methodologies and rating scales are sufficiently broad so far to incorporate the varied features of Islamic debt financing,”It said in recent report. Islamic finance largely centers on assets-backed approaches and sometimes involves a degree of risk-sharing more commonly born by equity investors.In practice,however,as illustrate d in the sukuk that Standard & Poor’s has rated, binding guarantees and other contractual obligations can place transactions firmly in the debt category.