ISLAMIC B S UKUK MARKET Possibilities & Challenges Prof. Dr. Mohd. Ma’sum Billah

ISLAMIC BOND MARKET: A 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: A 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: A 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 VS. Islamic 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 Market A 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 Participants Dealers Dealers link buyers and sellers by buying and selling securities Brokers Agents of investors who match buyers with sellers of securities Investors Includes individual investors, financial institutions, pension funds, mutual funds and governments, from around the world.

Types 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 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 Scenario Three main steps involved in the bond issuance. Securitization Bond Issuance Trading of dept certificates

Process of Securitization using Bai’ al-Inah CreditorDebtor (1) Sells an asset to the creditor in (2) Cash payment RM14mil (3) For future date, the debtor buys back the asset for 15 mil

Issuance of Islamic Dept Certificate (Shahadah al-Dayn) Two types of bonds: Islamic coupon bond Islamic zero coupon bond

Trading of Dept Certificate – Discounted Bai’ al-Dayn For liquidity purposes, bond trading in the secondary market is crucial.

Islamic Bond Market Practicality Muqarada Bonds an Alternative for Islamic Dept Bonds

Securitization of Musharakah Musharakah is a mode of financing which can be securitized easily. Especially in case of big projects where huge amounts are required.

Musharakah 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 Musharakah Certificates and 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 Market

Potential Growth in USD Islamic Bond Market

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