Managing Financial Risks: Sukuk in the Dominant Malaysian Financial Landscape

Topics: Sharia, Islamic banking, Malaysia Pages: 25 (7311 words) Published: February 25, 2013
Student name:Omid Anwari
Student number:s0934127
Study name:MA Politics, Society and Economics of Asia
Course name:Economic development in Southeast Asia
Supervisors:Pr. D. Henley and Dr. T. Lindblad
Academic year:2012-2013

Contents

Introduction3

Islamic finance and its basic fundamentals4

Malaysia: A Leading Islamic Finance Jurisdiction6

Sukuk9

Sukuk vs. Conventional Bonds12

Malaysian Sukuk Market14

Conclusion20

Bibliography21

Introduction

Financial activities concerning Islamic finance (in line with the principles of the Shari’ah) have grown significantly in recent years, the Islamic finance sector shows a growth of 15% a year.[1] Worldwide, there were 300 Islamic financial entities operating in 2006 with total assets counting over $300 billion and assets under management (AuM) counting $400 billion. Islamic financial products are also establishing a foothold in Europe. The market for sukuk (Islamic financial securities), worth $100 billion, seems promising.[2] In 2004, Germany issued the first European-based sukuk.

It has even been mentioned that Islamic finance could have decreased the impact of the credit crunch. However, the exact impact is unknown and certainly a point of discussion and research. What we do know is that the Dow Jones Islamic Finance Index decreased 2.74% in September 2008, while other financial indexes decreased with 20% over the same period.[3] Besides, regardless of whether the Islamic finance market is affected by the credit crunch or not, a clear consequence of the credit crunch is that Western investors are not ready to invest easily anymore. Meanwhile, in the Arabic countries there is much (oil) wealth and there are enough investors who are looking for investment opportunities. However, they are often looking for Shari’ah compliant products. Hence, the issuance of sukuk seems to be an ideal way to attract investments from the Middle-East and Southeast Asia.

The purpose of this essay is to study Islamic finance system, and in particular the new Sukuk phenomenon. This will be realized with descriptive study. In order to understand this Islamic financial product, a general understanding of Islamic finance requires. Moreover, Islamic finance and Islamic economics both originate from Islamic law, and therefore, it is important to discuss the principles from religious perspectives. The main question in this first chapter is: What is Islamic finance and what are its basic fundamentals? To make above mentioned system understandable, I will use Malaysia as my research area. In this second chapter, I will give some background about Malaysia as a leading Islamic finance centre. Once the basics of Islamic finance in Malaysian perspective are clarified, sukuk structures will be examined. In this third chapter my main question is: What is Sukuk and how it works? Here, I will give some attention to the two most common sukuk structures, namely sukuk al-ijarah and sukuk al-mudarabah. In my firth chapter, I will discuss the similarities and differences between sukuk system and conventional bond system. In chapter five, I set a step back and will discuss the Malaysian sukuk Market. Here, I will examine the development of sukuk market in Malaysia. I also pay attention to future directions and the problems should be solved. At the end I will conclude my results in a conclusion chapter. Last but not least, you will find my used bibliography. Islamic finance and its basic fundamentals

The rebirth of fundamental Islamic values in many parts of the world has manifested itself on the economic front as well, with a number of Muslim countries moving toward the transformation of their economic systems, especially the banking system, to conform more closely with the precepts of Islam. Broadly speaking, Islamic economics, defines a complete system that prescribes specific patterns of economic behavior for all individuals. Examples...

Bibliography: Ang, J.B., Financial Development and Economic Growth in Malaysia, Routledge, New York, 2009
Ibrahim, R., Malaysian dominance in the issuance of Sukuk tradable & liquid Market, Bashayer, Vienna, Austria, 2012
Bank Negara Malaysia, Shari’ah Resolution in Islamic Finance, 2nd edition, 2010
Dar al-Istithmar, Sukuk: An introduction to the Underlying Principles and Structure, 2006
Hashimoto, H., The Finance in the capital market and credit rating in Malaysia, Centre for China and Asian Studies, Nihon University College of Economics, Tokyo,
Islamic Financial Services Industry Development: ten-year framework and strategies, 2007
Jobst, A.A., The Economics of Islamic Finance and Securitization, IMF working paper, 2007
M
M.Z.M. Zin et al., The Implementation of Sukuk in Islamic Finance, in IPEDR, volume 10, IACSIT press, Singapore, 2011
M
M.T. Usmani, An introduction to Islamic Finance, Kluwer Law International, The Hague, 2nd editions, 2008
Malaysia: Bond Market Guide
N.J. Adam and A. Thomas, Islamic Bonds: your Guide to Issuing, structuring and Investing in Sukuk , Euromoney Books, London, 2004
Salah, O., Islamic Finance: Structuring Sukuk in the Netherlands, Wolf Legal Publishers, Nijmegen, volume 1, 2010
S.T. Faroukhi and B.M. Nafi. ed., Islamic thought in the twentieth century, I.B. Tauris, London/New York, 2004
Sukuk Guidelines, Security Commission Malaysia, August 2011
Vendaros, A.M. ed., Current Issues in Islamic Banking and Finance: Resilience and Stability in the present System, World Scientific Publishing Co., Singapore, 2010
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[3] N.E. Muller and C.P. Hooft, Islamitische bank is veiliger’, Financieel Dagblad, 10 oktober 2008
[4] Jobst, A.A., The Economics of Islamic Finance and Securitization, IMF working paper, 2007, pp
[5] R. Wilson in S.T. Faroukhi and B.M. Nafi ed., Islamic thought in the twentieth century, I.B. Tauris, London/New York, 2004, pp. 210
[6] M
[7] The most often-quoted sources on the subject are Siddiqi (1980), Ariff (1982) and Mirakhor (1986).
[12] quoted from: Salah, O., Islamic Finance: Structuring Sukuk in the Netherlands, pp. 18
[13] CIA World fact book, 2011-2012
[15] Ang, J.B., Financial Development and Economic Growth in Malaysia, Routledge, New York, 2009, pp. 41-44
[16] Background Notes on Malaysia found at www.state.gov.
[35] S.Cakir and Faezeh Raei, Sukuk vs. Eurobonds: Is there a difference in Value-at-Risk?, IMF working paper, October 2007
By contrast Moody’s Investors Service, 2008 speaks of $39 billion by mid-2007 and $90 billion by end-2007 sukuk issuances globally
[40] Dar al-Istithmar, Sukuk: An introduction to the Underlying Principles and Structure, 2006, pp.7 (http://www.assaif.org/Sectors/Capital-Markets-Sukuk/Sukuk-Principles-and-Structures#/6)
[41] M.T
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