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Tracking the progress of sukuk

The sukuk's popularity has skyrocketed since debuting a mere few years ago. Bilal Aquil charts the progress of sukuk issues and discusses how they have become so widely used in the Gulf states
Islamic capital markets are booming, demonstrated by the increase in sukuk issues. The current sukuk issuance is about US$10bn and 
growing at an unprecedented rate. Recent sukuk issues have been oversubscribed—in some cases by 150%, which illustrates the potential of this instrument. Sukuk is commonly described as an ìIslamic bond.
However, this is a very general definition, and it would be better described as Islamic investment certificates (sukuk certificate), which represent an undivided beneficial ownership of an underlying asset. It is important to make this distinction, as it is not an alternative to an interest-based security. 
Sukuk allows Islamic institutions to invest in compliance with the Shariah (Islamic law), which means avoiding payment and receipt of riba (interest or making unjust enrichments), avoiding gharar (gambling or speculating future outcomes) and not investing in haram (forbidden) businesses.
The Shariah encourages trade and making a lawful return on capital if the capital provider is prepared to share the risks in the business venture. 
Other Islamic prohibitions include the trading of debt contracts at a discount and forward foreign exchange transactions (which involves risk and speculation).
The structure of each transaction has to be approved by a board of Shariah scholars and, therefore, be compliant with the principles of Islamic finance.

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Long and short structures

Dr Humayon Dar discusses hedge funds and how they may be made palatable for Islamic investors
Islamic hedge funds have created a stir in Islamic and wider financial markets, both attracting criticism on Shariah grounds and a call for rethinking on the issue of risk management in complex Islamic financial structures.
Professor Mahmoud El-Gamal, a renowned critic of Islamic economics and finance, attacks Islamic hedge funds on the grounds that they attempt to achieve high returns with the help of excessive leverage. 
Notwithstanding such criticisms, the initial question-mark over hedging to eliminate or minimise risk in Islamic structures is now giving way to acceptance of risk-mitigating strategies. Shariah scholars, originally sceptical of hedging against risk, have now started advocating effective risk management in Islamic structures and deals.
After all, it makes economic sense if a fund manager can devise a Shariah-compliant strategy to offer certain returns even on the investments based on profit-loss sharing. Thus, Shariah sense is not necessarily always at odds with economic sense. 
In a simple framework, it makes perfect economic sense if a fund manager issues PLS certificates to invest in ijara sukuk to offer certain (fixed) returns to certificate-holders. Similarly, if a fund manager opts for investments in some kind of murabaha certificates, the expected return is more or less fixed.
Of course, the risk involved cannot be completely ignored, even in case of interest-based transactions, but it is also true that risk in murabaha- (or interest-) based transactions is significantly lower than equity-based investments.

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Boom in low- to mid-end sector

Investors eyes have been focused on prestige developments in the UAE, but the demand will bottom out soon. Richard August says the developments to consider are for the housing of the workforce.
The market in the UAE continues to evolve, giving rise to an increasing number of attractive investment opportunities. Abu Dhabi, Dubai and Sharjah, in particular, are the emirates that are currently experiencing substantial growth in their property market.
This is both in terms of size of market and property values. The population growth across the region is substantial, driven by ex-pats who are attracted to the area by the quality of life, employment prospects, relative political stability and the regionís favourable tax environment. 
The UAE already has a relatively liquid property market, with investors trading property assets fairly frequently. Acquisition costs in the country are comparatively low, as registration fees stand at up to just 2.0%. Additionally, there are significant assets being traded in the high-end residential market, with investors forward-funding entire residential blocks, particularly in the marina area of Dubai and the Palm developments. Supply is likely to exceed demand in the next two years. But it will focus on the low- to mid-end residential market.
This is driven by most of the population inflow coming from Asia, attracted by the employment prospects—this inflow is largely low- to mid-income workers, creating strong demand in the residential rental market. Population growth is increasing at a steady rate of more than 8% a year and demand for housing is growing, but supply is low, as developers have focused more on the upper end market, targeting the holiday home buyers rather than the expanding resident workforce. With little in the pipeline to meet this demand, rental and capital growth will be strong.

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Location, location, location...

The attractions of Dubai as a location for Islamic finance are manifold, writes Khalid Yousaf
Dubai is fast becoming a global centre for the US$280bn+ Islamic finance industry. This is partly due to the establishment of the Dubai International Financial Centre (DIFC), which offers an internationally recognised regulatory and supervisory environment that provides credibility for Islamic finance institutions and Islamic investors. 
The DIFC aims to be the Middle Eastís premier financial centre.
Situated at the heart of a region of 42 countries with more than two billion people and a combined GDP of US$1.8 trillion, estimates put the total wealth of the regionís high net worth individuals at more than US$1.5 trillion. Significantly, in excess of US$1.8 trillion of regional assets are invested outside the region. Against this background, the DIFC is well positioned to attract major players in the global Islamic finance industry. 
The Dubai government has established the DIFC as an onshore financial centre with the aim of creating a financial community similar to that of New York, London or Hong Kong.
The visionary leadership of HH Sheikh Mohammed, the crown prince of Dubai, was the force behind the formation of the DIFC, whose catalytic role will boost economic growth and development in the region. DIFC-licensed institutions will benefit from a renewable 50-year tax holiday, 100% foreign ownership and no restrictions on foreign exchange or capital/profit repatriation.

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Overcoming compliance issues

For software that enables a bank to offer Islamic finance, it needs to satisfy the requirements of a Shariah council, showing a clear audit trail with no price being put on money itself, writes Michael Corcoran
We are at the start of an immense change in the way many people bank. The international banking community is waking up to the demand from its customers for Shariah-
compliant financial services, with a significant number of the large banks researching this market.
For all the potential market gains, this sector poses considerable technological challenges in developing and implementing Shariah-compliant systems. What compliance issues are raised by Islamic banking? Should banks choose packaged software or should they develop their own? Is there scope to tailor packages for individual banks?
Banks are used to dealing with compliance issues: it is part of their business. In most countries they are subject to local and international accounting regulations, such as Basel II and IAS standards. Transgression can mean damaged reputations, lost opportunities, or even fines. 
Entering the Islamic banking market raises a different series of compliance issues and therefore risks over and above the general international regulations.
First and foremost, Islamic banks face a level of regulation imposed by their officiating national Shariah council. Interpretations can vary between these groups, and so what may be acceptable to one may not be to another. For example, the Shariah council in the UK argues that todayís Islamic mortgages comply with the requirements of Shariah law, whereas other experts have fiercely disagreed.

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Certification for the growth of the market

Recognised standards need to be established for the provision of well-trained personnel for positions in Islamic finance. It is clearly in everyoneís interests long term, writes Dr Mohd Daud Bakar
Human development in Islamic finance is as critical as other parts of the anatomy of Islamic finance. Training of personnel requires a comprehensive, systematic and goal-directed structure.
There have been many approaches towards developing human capital. Some take the form of seminars and conferences. Many seminars and conferences have been organised to cover either the wide range of issues or one dedicated issue or theme in one particular event.

Seminars and conferences are, relatively speaking, ideal for well-established personnel in Islamic finance. Beginners would normally find themselves lost, if not confused.
On the other hand, training has been designed in the form of workshops meant for either the open market or in-house participants. Unlike seminars, workshops adopt a bottom-up approach in building the blocks of knowledge. Efforts in line with this are still lacking. 
Furthermore, the availability of well-resourced documented materials or study guides for the participants are few and far between. A module of high quality content and a clear-cut learning outcome are very much lacking.

Existing workshop handouts are not adequate for self-learning and professional development if these are benchmarked with other professional training modules, such as CFA and ACCA. Some universities and colleges offer rigorous academic Islamic finance programmes with a view to preparing graduates for the industry. Such courses lead to either a diploma or a specialist Islamic finance MBA.