Islamic Bond (Sukuk) is playing a vital role in the global Islamic financial market and its introduction had become the need of the time to expand Islamic banking activities in Bangladesh. The Sukuk sector continues to grow as a unique platform for enhancing greater integration of the global economic and financial systems. It offers a wide-range of benefits to the economy in terms of liquidity management, fund-raising, balance sheet management and securitisation.
A sukuk is an Islamic financial instrument, similar to a bond as like in Western finance that complies with Islamic religious law commonly known as Shariah principle. The issuer must make a contractual promise to buy back the bond at a future date at par value.
Bangladesh Bank has moved to make Islamic bonds popular by enhancing the volume of Islamic Bond Fund and creating scopes of the bonds’ multiple uses. In this connection, a high-powered 10-member working committee of five Islamic banks had been formed in June 2019 to examine the possibility of introducing repo facility from the central bank against the Islamic bonds to meet short-term liquidity requirement of the Shariah-based Islamic banks and non-banking financial institutions (NBFIs) as an alternative of Call Money. Meanwhile, after a long discussion, a set of policy has been finalised by the Security & Exchange Commission (SEC) for capital market of our country and a gazette notification has been published in this connection on May 22, 2019.
The modern Western word “cheque” appears to have been derived from “sakk” (singular of sukuk), which during the Middle Ages referred to a written agreement “to pay for goods when they were delivered” and was used to “avoid money having to be transported across dangerous terrain”. Sukuk had become an extremely popular when it was first issued by Malaysia in 2000. Bahrain followed the same in 2001. Later Malaysia introduced green Sukuk as like green banking of BB.
As per BB data, currently two Islamic bonds – three-month Bangladesh Government Islami Investment Bond (BGIIB) and six-month BGIIB – are available in operation and outstanding balance of these two bonds stood at more than Tk 104 billion as on May 25, 2019 that is being used as a pool of fund – only for the Islamic banks and NBFIs.
Islamic law prohibits “riba,” or interest. To circumvent this, sukuk were created in order to link the returns and cash flows of debt financing to a specific asset being purchased, effectively distributing the benefits of that asset. Sukuk investors receive profit generated by the underlying asset on a periodic basis while bond investors receive periodic interest payments. Bonds and sukuk are initially issued to investors. Both are considered to be safer investments than equities.
Different types of sukuk are issued based on different structures of Islamic contracts (Murabaha, Ijara, Istisna, Musharaka, Istithmar, etc.) depending on the project that the sukuk is financing.
In countries where Sukuk has been introduced, Islamic banks and financial institutions are using it to operate their liquidity management. Many Islamic countries have introduced the tool to mobilise long-term funds from the global market.
According to Islamic Financial Service Industry Stability Report 2018, Saudi Arabia has issued the largest share of Sukuk issuance (38.81%) whereas Malaysia possesses 32.88%. Now, Malaysia is the global leader in terms of the Sukuk market, issuing US$17.74 billion worth of the Islamic bond in 2014, over 66.7% of the global total of $26.6 billion.
The Southeast Asian country also accounts for around two-thirds of the global outstanding of the Sukuk market, controlling $178 billion of the global total of $350 billion and forecasted that global market will be expanded US$ of 500 billion within the next five years.
A mix of Sukuk actively traded in the secondary market helps manage liquidity for Islamic financial institutions. For instance, a bank with excess liquidity may opt to invest in Sukuk which affords it a return and can also be traded. Sukuk can also serve as a tool for fund-raising to fulfil corporate objectives when the need for funds arises. In the event of need of having an optimum balance between debt and equity on the corporate balance sheet, it offers the solution. It can also be used by an institution or a corporate to unlock funds tied up in assets through monetisation for the purpose of reinvestment.
The number of clients of our Islamic banks is much higher than those in Malaysia, but the latter is now controlling 70% of the asset shares of Islamic banks of Asia whereas Bangladesh possesses only 5%. Malaysia has frequently been issuing different products like Sukuk to popularise Islamic banking.
The BB formed committee has been finalised 13-point policy recommendation to bring dynamism in the country’s Islamic bond market. Accordingly, the authorities concerned should develop proper mechanism to ensure providing short-term liquidity support to the Islamic banks and NBFIs through potential Islamic bond like the conventional ones.
In conventional financial markets, borrowers turn to banks for loans or tap into capital markets. The conventional banking market is viewed as an indirect financing market since borrowers deal with banks which play an intermediary role by channelling surplus funds mobilised to the parties in need.
Capital markets are seen as direct financing because firms directly engage with investors without going through the banking market. In the conventional structures, bonds serve as evidence of a loan from an investor to the issuer and repayment reflects both the loan capital as the principal and the interest.
Recently business conglomerate ACI Limited verbally approached the SEC for approval of Sukuk and it will be the first ever Sukuk in Bangladesh capital market if everything is to be found in order.
(Mr. Rahaman is a banker and freelance contributor. Email: [email protected])
