The global demand for sukuk bonds are expected to reach $421 billion in 2016 according to the Islamic Finance Development Report of 2013. The global economy is still recovering from the effects of the global financial crisis. Investors world over are turning to Islamic banking and their products to help steady the market and diminish the gap between the demand and supply of investments. Moves like the British export and credit agency’s decision to guarantee a sukuk bond of $913 million for four Airbus 380-800 with Emirates is inspiring confidence in investors all over the world for such financial arrangements.
Sukuks are essentially Islamic bonds that are issued in compliance to Sharia Law or Islamic financial principles. The party that issues a sukuk, sells it to the investor who then re-issues it back to the seller with a pre-determined return fee. The issuer of the sukuk also makes a promise to buy back the particular bond at a mutually decided later date at par value.
Dubai is the largest economy for sukuk bonds with a total estimated value of Dh 135 billion in sukuk listings. There are various kinds of sukuk structures that are offered by various Islamic banking and financial institutions in the UAE. Some of the popular sukuk structures are as follows:
1. Sukuk al-Ijara
The sukuk al-Ijara is regarded as the most classical sukuk structure since its issuing began in 2008. It is also the most popular kind when you consider the number of sukuks issued. Investors prefer this structure of the sukuk owing to its uncontended compliance with Sharia law. The familiarity of how it operates is another factor that draws investors to the sukuk al-Ijara. If a company owns assets that are free from any debt, the assets can be put up for sale or lease. It makes sense for such a company to opt for the al-Ijara model. EIBOR or LIBOR can be used to determine the rental payment cycle.
2. Sukuk Mudarabah
For people or organizations that do not own actual tangible assets, opting for the Sukuk Mudarabah structure is appropriate. The owners of Mudarabah sukuks are providers of capital and they own equivalent shares of the same value as their capital investment in the Mudarabah pool. Owners of such bonds can easily sell their deeds in the securities market.
3. Sukuk Murabahah
In this alternative structure, the equivalent of the Western mark-up principle is used. The issuer of the sukuk acquires the tangible assets in question and acts as a trustee on behalf of all the sukuk holders. The commodities are sold to the holders at a deferred payment. This model of sukuk is not popular owing to its rigidity and lack of negotiable instruments.
4. Sukuk Musharakah
The Musharakah structure is also suitable for organizations who do not have real tangible assets and therefore cannot avail a sukuk al-Ijara. In this type of structure, funds are mobilized for establishing or developing a business activity.
There are other sukuk structures as well which offer their purveyors the flexibility and ease to choose an investment format that best suits their needs. For more details on Sharia compliant products and financing options, visit Dubai Finance.