The Middle East has so far been regarded as a fabled trade entrepat between Europe and Asia. However, of late things, things have changed. A modern form of Islamic trade finance blossom. And as world trade is accelerating in the region, where oil exporting countries are enjoying strong economic growth and importing more goods and services, the region is gradually transforming into a financial hotspot. And sukuk the shari'ah-compliant Islamic bond emerged.
What makes Islamic finance different?
· Islamic finance differs from conventional finance in its strict adherence to shari'ah or Islamic law, which calls for ethical and equitable finance, and strictly prohibits speculation and receiving and paying interest.
· Two of the basic tenets of Islamic finance inferred from the holy book of QURAN are: First No interest can be earned on loans and, second socially responsible investing.
· Islamic finance differs from conventional finance in its strict adherence to shari'ah or Islamic law, which calls for ethical and equitable finance, and strictly prohibits speculation and receiving and paying interest.
· Two of the basic tenets of Islamic finance inferred from the holy book of QURAN are: First No interest can be earned on loans and, second socially responsible investing.
Surge of sukuk (Islamic Bond)
· Islamic finance today is led predominantly by sukuk bonds. 'Sukuk' means certificates.
· The criteria for issuance of sukuk are the existence of the underlying assets on the balance sheet of the issuing entity, which distinguishes sukuk from conventional bond.
· Unlike the conventional bond sukuk holder enjoys proportionate share in revenue generated by the sukuk assets as well as in the proceeds of the realization of underlying assets.
· Another distinguishing feature of a sukuk is that it is not tradable in secondary market instead it held till the maturity period
Advantages:
· The primary advantage of sukuk is the enhanced quality it brings with the presence of underlying tangible assets.
· Appropriate underlying asset have capacity to not only produce the revenue streams desired by investors but allow even struggling entities to pledge their most profitable assets for sukuk financing.
· The fact that sukuk are backed by hard assets limiting the possibility of issuer default.
Problems of sukuk market:
· Liability has always been a concern for a sukuk as non existence of secondary market
· The absence of consensus Islamic benchmark rate (like LIBOR) and consequently an established benchmark yield curve is an added constraint.
· Since sukuk are invariably backed by an underlying tangible assets there is risk of lose, damage, as non-maintenance of the asset which will undoubtedly have an adverse effect on the sukuk returns.
Indian context:
As India being second largest Muslims populated country, there is good potential to have Islamic finance model. It is helpful for mobilizing and allocating capital to the best opportunities available.
Also read our previous coverage to this topic about S and P islamic index at
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