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Islamic bond or
sukuk is well described as 'Trust Certificates' or 'Participation
Securities' that grants the investor a share of an asset along with the
cashflows and risk commensurate with such ownership. The central merit of
the sukuk structure is that it is based on real underlying assets. The sukuk
ijarah for example (an Islamic bond which applies a sales and lease
arrangement) is an asset-backed instrument providing continuous security to
the investor.
This approach discourages
over-exposure of the financing facility beyond the value of the underlying
asset, given that the issuer cannot leverage in excess of the asset value.
The issuance of sukuk is a relatively recent phenomenon. It began in
Malaysia in 1990 with the small issuance of RM120 million (US$30 million) by
Shell Malaysia and has progressed to the largest issuance size to date of
RM10 billion (US$2.7 billion) by Rantau Abang Capital Berhad. Impressively
for what began as a 'conventional' financial system, around 75% of all
Malaysian corporate financing was conducted using Islamic principles in
2005.
Global sukuk market has been growing tremendously for the past few years and
Malaysian sukuk represents 67% of the total. The sukuk market brings with it
many benefits to both issuers and investors. Issuers can benefit from the
huge increase in liquidity in the Islamic world, and can tap on these new
relatively-lower-cost sources of funds. Despite corporate issuers,
multilateral agencies such as International Finance Corporation (IFC) and
International Bank for Reconstruction and Development (IBRD) have also
followed the footstep by issuing sukuk in Malaysia for financing development
projects.
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