14.

Prospects and challenges of

developing sukuk Islamic debt
markets around the world
Mohamed Ariff, Munawar Iqbal and Shamsher
Mohamad

14.1 INTRODUCTION

The sukuk securities or Islamic asset-backed debt securities truly started

to be offered in organized markets as publicly listed instruments only in
2000, so at the time of writing it is a 12-year-old market. There is a record
of its first private issue in 1978 in Saudi Arabia, after an article in Islamic
Economic Studies some years earlier had suggested this instrument to be a
suitable and safe debt instrument with safeguards for investors and being
consistent with ethics long since forgotten in issuing debt instruments in
past Islamic empires. It has since been widely accepted as an Islamic finan-
cial product for debt-raising with one important principle, namely asset
ownership of part of the assets of a borrower which gives this instrument
asset backing, a unique feature in debt markets. Historical reference to
sukuk is found in the records of the Abbasid Empire established in circa
900 soon after Islam spread to the Byzantine region in what is known
today as Jordan, Iraq, Palestine and Syria.
The sukuk instrument has in the contemporary period become an
ethics-based Islamic financial instrument already issued either as private
issues or as public issues in some 12 locations as at 2010, to provide both
short- and long-term funding arrangements. Four more financial centres
are actively putting together reforms as at 2011 to start markets for issues
of this new instrument. In terms of sukuk market size, Malaysia has par-
ticularly emerged as the major player with international interest in raising
large sums of money in a manner different from that of conventional debt
market. Bahrain, though it has about 5 per cent of the same market by
value, is none the less the second Islamic finance hub if the presence of
other Islamic financial institutions in Bahrain are taken into account. In
just a decade, therefore, the total sukuk issue of nearly 2000 cases amounts

206

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 206 01/05/2012 07:47

 Prospects and challenges of developing sukuk markets around the world 207

to US$1200 billion, or just under 2 per cent of the international bond

market issues: see BIS source cited in Chapter 2.
Broader press reports suggest that this market is growing at an annual
rate of 20 per cent, while the conventional bond market is not growing at
more than 5 per cent per year. In fact issues of conventional bonds and
sukuk declined significantly during 2007–2009 during the Global Financial
Crisis. From the comments of some of the contributors to this book, it
appears that the room for growth in this market is to be found mainly in
the 56 Muslim majority countries and in international hubs such as the
UK, Switzerland, Hong Kong, Singapore and so forth, where private
issues by high net worth investors and governments are driving the growth
because of the reputational quality of these centres lending credibility to
issue quality.
If the GDP share of such Muslim-majority countries is taken as about
13 per cent of the world GDP in PPP terms, it is possible to suggest that
the room for future development of this market is to be found in the less
banked and less securitized centres in North Africa, the Middle East,
Central, South and South-East Asia. The future prospects will be from
harnessing the savings of Muslim populations for funding development
in each of the 56 Muslim majority nations. This would also require trans-
action costs to be lowered, the financial infrastructure to become more
efficient, and the returns to investors to be higher than they are at present
during this early phase of building the market. These issues have been doc-
umented, in particular the current high yield in sukuk securities compared
to identically rated conventional bond markets.
In this chapter we examine the prospects for this predicted growth in
section 14.2. The issues confronting this market are discussed in section
14.3. The chapter ends with comments on important issues confronting
the sukuk as a special Islamic debt financing instrument as well as a special
type of equity instrument to raise entrepreneurial capital.

14.2 PROSPECTS

The most commonly-structured sukuk debt instrument is the bai bithaman

ajjal mudaraba or BBA, which dominates as the most popular issue in
Malaysia. This sukuk instrument has the normal structural features – finite
period, profit-share, SPC, and so on – but it provides pay-offs at regular
intervals at a constant growth rate starting as a normal annuity payment
from the first period. It is asset-based, but not necessarily asset-backed
(an important issue that has been just resolved with new rulings) and is
also traded in exchange markets. Available statistics suggest that there is

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 207 01/05/2012 07:47

 208 The Islamic debt market for sukuk securities

a great deal of interest in this instrument, which is being fine-tuned to be

consistent with the AAOFI regulations after the 2008 notice of possible
violation of some principles, in particular the need for asset-backing rights
of the lenders.
The other popular security is the ijara sukuk, which derives its pay-off
as fixed payments (similar to the conventional bonds) at regular intervals
with pay-off of the original sum borrowed at the maturity period (see
Chapter 12 for a case) so it is akin to the lease payments in conventional
leases. Available statistics suggests that this is the most dominant instru-
ment in Bahrain. Issues in Dubai are mainly Islamic products, whereas in
Malaysia there is a vibrant conventional bond market that exists side by
side with the sukuk debt market: see Ariff, Cheng and Neo (2009).1 There
are four more instruments that are issued, but these form a minor portion
of the sukuk markets.
The prospect for growth of these two popular and the other four less
popular specialized securities is good. For example, private corporation
issues, which dominate the BBA and ijara issued by both governments
and private firms, are mostly tradable issues in exchanges, and are more
appealing to investors for one good reason. The yields are higher than in
the similarly-rated conventional bonds by an amount ranging from 20
basis points to about 200 basis points in some cases. These instruments are
also easier to track since the pay-offs are, though legally not fixed, predict-
able with less uncertainty even at the maturity value since that too is fixed
(a point of continuing debate) in most cases. In the BBA, the pay-offs grow
at constant rates, and in the ijara, the pay-offs are received as fixed cash
flows. These two instruments are likely to be attractive fund-raising instru-
ments at this early stage of the sukuk debt market development. Given the
12-year history, investors need instruments that are very close to those of
conventional bonds for them to have confidence.
Use of this market to raise public finance is also increasing, but not as
fast as the demand by private firms. That this instrument is ideal for secur-
ing domestic debt by giving ownership of state assets to the public via the
SPC at the time of issue of the instruments is an attractive idea to raise vast
sums of money from the public for projects that benefit the public while
also providing incomes to the savers. Note that the savers placing their
savings in bank savings accounts earn just about two-thirds of returns
compared to returns achieving after placing them in sukuk instruments.
First, sukuk instruments avoid currency risk in sovereign debt issued in
foreign currencies, so they are less risky. This is especially true in the post-
Breton Woods era from 1973, and since 2011, given the worldwide revul-
sion for sovereign debt raised without reference to the ability of the states
to have sufficient incomes to service the loans: the debate on overhang

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 208 01/05/2012 07:47

 Prospects and challenges of developing sukuk markets around the world 209

of sovereign debt has been raging across the world since October 2010.
Second, the public has a stake in the assets of the government so they
would be less reluctant to finance the government, expenditures as such
expenditures would benefit the very same people.
Look around the Muslim countries, where there is too much foreign
borrowing while infrastructure demands are still high, yet this new instru-
ment is ideal for raising the money needed instead of raising taxes to do the
job. But little is known about how in historical periods this instrument was
used to raise public finance: some reference is found in Chapter 5, though
specific details of how much and for what purposes are not yet researched.
So there is a need for a search of the archives in Arabic, French, English,
Turkish and Urdu languages to understand this matter.
Another attraction is that the ijara-type sukuk are ideally suited to raise
long-term funds by agencies of governments such as electricity companies,
toll-road operators as well as by governments with SPCs holding treasury
assets or usufructs that provide incomes to investors where default is less
likely. The fact the yield is higher for this instrument than an equivalent
conventional note ensures that the investors would favour this over the
conventional bonds, whether the buyer is a Muslim or non-Muslim, in
any of the 56 IDB member countries. The wealthy lenders are seeking
high returns for their savings in private sukuk marketing centres in Zurich,
London, Frankfurt, and elsewhere.
If infrastructure funding is suitably met by sukuk, then these countries
need to build the infrastructure for the sukuk market to function well
so they can speedily tap the funds from the savings of their people for
infrastructural development of the type the Islamic Development Bank is
promoting across 56 member countries. Instead of borrowing in foreign
currencies, and so incurring a high-risk funding fraught with exchange
rate risk, from the World Bank or IBRD (some from the infamous Paris
Club), sourcing the money in one’s own currency would be much less
risky.
Complex instruments have their own use in the Islamic debt market.
The income patterns of economic agents are variable, so the structuring of
products must match the patterns of the income stream. A manufacturer
may need working capital to get its product on the shelves. Such a funding
need is ideally matched in istisna sukuk as working capital: a joint venture
deal with no certain income would find a musharaka sukuk ideal.
Banking regulation requires some level of statutory reserves in OIC
countries. That means there is a market for local instruments to be held
by banks to meet the reserve requirements, not forgetting additional
reserves needed as liquidity reserves. Therefore, the prospect for central
bank issues of bills and notes for reserve and liquidity purposes will be

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 209 01/05/2012 07:47

 210 The Islamic debt market for sukuk securities

well served by Islamic Investment Notes. This is found in Malaysia but

is not yet found in most other places. Thus, complexity is needed, but at
this early stage of sukuk debt market development, any contract that looks
like conventional bonds is more likely to be appealing to investors, which
explains the popularity of the BBA and ijara sukuk as the most popular
ones. As pointed out by Nasser Saidi, there is an urgent need to build
infrastructure and market process to tap the savings of the public through
these short- and long-term instruments. The prospect for growth in these
instruments is very attractive, and will happen in the next decades.
Further specialized contracts are attractive in toll road construc-
tion, in agriculture, mining, and so on. Istisna, salam and other special
contracts offer higher yields than in conventional finance to tap needed
funds in those  several critical areas of rural development in many
OIC (Organisation of Islamic Countries) nations. The salam contract, a
forward contract based on SPCs owning the future assets, was first issued
in Bahrain, and it is finding its way in other markets as well. Several
financing situations in agriculture and mining would ideally find these
contracts a suitable means of raising money. Special project funding is
possible with istisna contracts to provide working capital during the build-
ing stage turnkey projects as working capital while, after the building is
done, an ijara contract would raise the money for governments to buy the
turnkey projects in building schools, ports, airports and roads. There is a
good prospect for these contracts if properly marketed.

14.3 HOT-BUTTON ISSUES FOR DEVELOPMENT

OF THE MARKET

Throughout this book, the contributors have identified critical issues

for the continued and orderly development of Islamic financial markets
and specially sukuk markets. In this section, an attempt will be made to
highlight the issues and pinpoint strategies for resolving these issues. We
identify seven priority areas for attention.

14.3.1 Regulatory Plurality

The conventional debt market spans some 110 countries with public
trading of very standard bonds developed over some 400 years. In a
typical day funds amounting to US$500 billion are easily raised because
the markets are well established and have high liquidity: notably there is a
great deal of standardization of different products. Despite its already very
established nature, the AOSCO (Association of Securities Commissions)

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 210 01/05/2012 07:47

 Prospects and challenges of developing sukuk markets around the world 211

as a coordinating body provides a large number of continued improve-

ments and uniformity to the regulatory framework under which exchanges
are organized and trade is made in an orderly fashion. The Islamic
products markets are not yet coordinated since there are many regula-
tory bodies, and the products are also not standardized. This increases
uncertainty and, more importantly, increases contracting costs.
In Islamic finance, there are some 12 sukuk locations with more already
getting ready to enter this market in the near future, so this number is
likely to increase in the near future as there will be many more OIC coun-
tries scrambling to secure funds in the next decades as economic develop-
ment is already picking up in all these countries. In Islamic finance, there
is a multitude of market regulators but no single coordinating body. There
is one regulatory body in each of these locations, yet there has been no
attempt to have a common regulatory framework until recently in 2008,
when regulatory differences prompted some attempts to cobble a degree of
cooperation. It is still a work in progress, and an AOSCO type of interna-
tional body is needed in addition to the rule-making body formed in 2008.
This state of affairs is not conducive to investor confidence.
Yet there is no consensus to have a coordinating organization for the
purpose of law-making and for supervision and enforcement. This issue
needs to be addressed quickly; if not, the domain privilege enjoyed by each
market regulator, for example Malaysia, will prompt less cooperation at
later stages of development when parties would want the status quo to
prevail. A suggestion is to work with the IOSCO to study the feasibility
of working with that body to engage in this urgent need for regulatory
oversight.

14.3.2 Shari’ah Opinions Too Many

A somewhat similar issue to the above has been raised with regard to
shari’ah supervisory matters. While there are national Shari’ah Boards
or Councils in each of the market locations, there is less coordination in
terms of documentation and standardization of fatwas (opinions) already
issued as clear guides in understandable forms: we may develop the kind
of tax matter rulings that are found in government tax office opinions
on questions on taxation issues as are often published as tax opinions
in developed countries. Neither is there a central consultative body to
smooth differences before differences or non-compliance become a thorny
issue at the level of the market. Potentially, any dispute (such as the 2008
fatwa on asset-backing) becomes a red flag for investors to raise their
guard against investment in these markets.
Critical reports point to the existence of some 300 shari’ah experts

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 211 01/05/2012 07:47

 212 The Islamic debt market for sukuk securities

dominating the market place and earning an unjustified amount of money,

which has often been described in less complimentary terms. There is a
crying need to train professionals in an accredited manner by reputable
institutions to stem the tide of the dominance of the market by religious
scholars with little understanding of economics or finance. That in fact
makes their advice suspect, and introduces a severe element bordering on
orthodoxy in what is a straightforward commercial transaction respond-
ing to the changing situations requiring re-interpretations of rules devel-
oped for a different era in Islamic empires of the past before the advent of
modern instruments such as bonds.

14.3.3 Basic Fundamentals in Designing sukuk

Munawar Iqbal is perhaps the first to provide a common theme, a kind of

set of minimum conditions, for designing Islamic financial products. He
does this by identifying ten precepts that must be obeyed in any design of
Islamic products. He even gives further assurance that following the ten
precepts would make a product pass the test of being shari’ah consistent,
not just compliant, almost always. This is the first time that such a broad-
based guideline is attempted for sukuk markets: see Chapter 4. More
discussion and agreement on this sort of framework will enhance the repu-
tation of the product design process, given the personal interest of compen-
sation of shari’ah experts who depend on the institutions employing them
and paying them. There is an incentive for this group of experts not to
address this matter because it is too complex to be reduced to simple rules.
Despite the claims of shari’ah experts, these design principles are simple
and ought to be simple, as they have been practised for centuries to suit
the changing circumstances in the commerce of Islamic countries. The
only complexity in decision-making is their relevance to modern-day
conditions in financing modern economic activities. This key issue should
receive careful scrutiny in each regulatory site because the principle of
conscious deliberation to amend principles to suit changing circumstances
is a long established legal tool in Islamic jurisprudence. Yet the current
crop of shari’ah experts seem to be unable or more likely unwilling to go
beyond quoting the past principle developed centuries ago, long before
the West took over financial transactions in Muslim countries. Because of
presumed complexity promoted by self-interest of such experts and also
the locked-in positions they enjoy as insiders of financial institutions, the
average time taken to design sukuk securities is twice as long as in other
debt markets.
The cost of transactions is too high with so many side contracts in what
is at the centre just a debt contract. No one has yet identified the average

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 212 01/05/2012 07:47

 Prospects and challenges of developing sukuk markets around the world 213

cost of originating a sukuk security taking into consideration the exorbi-

tant fees of the experts. In major investment banking centres, the cost of
origination is about 0.75 to 1 per cent of the issue cost in conventional
bond markets. There is no documentation of cost in sukuk issuance.
Standardization attempts of the type recently made by the AAOFI indi-
cates that regulators and market players are aware of this issue. Speedy
research and solutions to this problem will assist in the development of the
sukuk markets.

14.3.4 Origination, Marketing and Listing

This is a highly developed area with years of innovations in the regula-

tory framework to protect investors. Procedures for valuing the securi-
tization process to ensure correct valuation and application of modern
book-making procedures to discover market price for initial issue have
been developed over 90 years in conventional debt markets. The received
wisdom of investment banking over some 90 years has to be adapted to
the very different provisions in the securitization process in sukuk markets.
Obviously it is being successfully done, as the reader will have learned
from Chapter 12. Yet more is needed.
This is where there is need for innovation. For example, how does an
originator estimate the risk of the cash flow pay-offs coming not from
the total firm but from the SPC? The current practice is to look at the
firm, not the SPC alone. Should not the incomes or market value of SPC
assets be more difficult to assess than the incomes of a whole firm, given
the portfolio effect being absent in the SPC? Neither is there certainty in
the income streams of the SPC, which means that the originator needs far
more nuanced understanding of how to model the credit risk embedded in
the SPC.
This challenge has not been researched well enough to model how the
risk of the SPC should be estimated. Ratings companies have adapted
more incorrectly by adopting conventional practices that appear to ignore
this special character of sukuk, which, we believe, is the root cause of
higher riskiness of this type of debt instrument. Hence the higher yield in
the market may be explained as being consistent with higher riskiness of
sukuk.

14.3.5 Islamic Securities Quality Rating

Michael Skully has commented that the challenge to rating a sukuk is more
complex than is the case of straightforward conventional bonds. This is
an important statement, and is a cornerstone of the origination process

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 213 01/05/2012 07:47

 214 The Islamic debt market for sukuk securities

in sukuk markets. Leaving this aside, the marketing of such instruments

should seek to reach the clientele in a very different way from conventional
debt markets. Putting up a roadshow in ways similar to that in conven-
tional bond issue origination is not the way to approach this ethics-based
investment promotion. As far as it could be verified, marketing the issues
has targeted the same clientele as in the conventional bond markets except
for the nicety of holding roadshows in high-net-worth locations in major
Muslim cities. Is that meeting the call for ethical investment?

14.3.6 Liquidity of Sukuk Instruments

A market expert has estimated in this book that the liquidity of listed
sukuk instruments is less than 1 per cent of the outstanding value!
Another, a regulator, has commented that the market is one where the
securities are held to maturity and about 40 per cent of the issues are taken
up by financial institutions. These statistical facts appear to suggest that
sukuk markets need to think about how to spur liquidity. Without liquid-
ity markets are known to die, and sukuk markets have not been there long
enough to assure that such a fate is unlikely. In futures exchanges one in
seven new financial futures products fail for lack of liquidity. Given the
fact that even conventional bond issues have low liquidity, it behoves well
to investigate how serious are the liquidity shortfalls in Islamic financial
instruments as well as if there are sufficient issues for institutions to hold
as reserves. This is an area of urgent research priority.
Lack of liquidity is perhaps another reason why the yields in the sukuk
markets are significantly higher than in the bond markets for an identical
term and quality rating. We tend to think that the higher yield is actually
coming from the higher-risk profit-share basis of sukuk design and not
from illiquidity. But this needs to be verified, and there is thus a need to do
this as a serious inquiry to retain investor confidence in this market. Apart
from these, structural changes need to be introduced – for example market
makers need to be appointed to create liquidity. Another alternative
would be to have quotes at which market makers would buy an issue; this
information should be posted by specially appointed brokers and dealers.
Liquidity is a priority area for sustaining markets, and this requires careful
analysis.

14.3.7 Public Awareness of Application

It has been some 21 years since the first private sukuk was offered in
Malaysia (Shell Corporation issue in 1990): public-traded issues have
come on stream from 2000. Yet the public awareness of the basics of

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 214 01/05/2012 07:47

 Prospects and challenges of developing sukuk markets around the world 215

sukuk instruments is poor, literature is not available even at the counters

of banks. What the customer gets is a tiny pamphlet extolling the virtues
of instruments, and hardly any attempt is made to provide technical
details to customers either at the window or at public promotion gather-
ings. One should compare the expense and publicity given to new issues of
shares in stock exchanges. A lot of money is raised via the sukuk issues,
much more than in share markets. Yet the promotion effort, even in the
major Malaysian market, is not as extensive as is seen in conventional
fund-raising events. Something is not entirely right.
A public awareness programme is a way to educate the public, especially
the masses whose small savings may add up to a lot if they are convinced
by the usefulness of the instruments and made aware of the significant
higher yields and higher risk of sukuk securities. Mass marketing was the
way the finances for the World War were secured in the 1940s and that is
in recorded history, for example how designers invented the flower bond.
Efforts in this direction have to come from associations and individual
Islamic financial institutions, especially the larger ones, funding public
awareness campaigns. Perhaps it would lead to more demand for sukuk
debt instruments when the average Ahmad and his family have a stake in
the market. That would also increase the acceptance of the new products
as more discerning clients would find them useful.
For example a diminishing musharaka sukuk is an ideal instrument for
elderly people to buy high-yielding annuity type investments and earn a
high return over a finite period. Such instruments, if traded in exchange
markets, can yield funds for medium-sized firms from the public. Such
instruments can be a boon to old retirees who are about to take out large
savings from pension funds such as the employee provident funds or
superannuation funds.

14.4 CONCLUSION

Early stage growth statistics from the experiences of new financial instru-
ments (for example the derivative instruments in the 1980s) suggest that
at the take-off stage, their growth rates are exceptional. So is the case of
sukuk markets, where the growth rate is reportedly in excess of 20 per cent
per year. One of the contributors to this book estimates a time trend that
shows a very high demand for many more years, in fact, decades to come
for sukuk financing to grow. Hence, growth is likely to be a big driver for
this market, and that is a good thing, we all agree.
On the supply side, we have increasing revenues which ends up as
savings in governments and in private savings in more and more growing

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 215 01/05/2012 07:47

 216 The Islamic debt market for sukuk securities

OIC economies. Traditional sources – bonds and fixed deposits – are

extremely low in yield, especially since 2007, after the recent great finan-
cial crisis. Average yields for a AAA rated bond rarely exceed 5 per cent.
So, savers as investors are looking elsewhere to increase their investment
returns. By providing asset ownership in the firm, to which the inves-
tors lend their money, sukuk offers greater safety than is the case in bank
deposits and conventional bond markets. But, given the low visibility of
what sukuk is, it is unlikely these advantages will be known to investors,
unless it is promoted as a selling point while also ensuring that investor
protections are in place in times of default. For example, Dubai World
did not provide investor protection although some of the debt was held as
sukuk certificates at the time this company’s investors were about to expe-
rience either a haircut or a re-negotiation of debt, although SPC was in the
contract! This innovative product as a reasonably safe lending instrument
should be promoted by the industry, as should the institutions developed
to enhance investor protection as intended in the design of the products.
Although just six types of securities are actually being offered to-date –
these do exist in the 12 centres – there are eight more complex instruments
that could be issued as the market instruments to market them slowly to
suit special needs of firms needing special types of funds. In other words,
more complex instruments to meet diverse needs of firms will emerge
soon. One worrying trend is the dominance of two basic types: ijara and
BBA. The reasons for this, though not yet known from any well-designed
research, are perhaps to do with investors at this stage of market develop-
ment. The investors appear to desire instruments closer in character to the
conventional bonds, which have been familiar instruments for centuries.
In fact these two popular instruments are very bond-like, making them
easy to value and for pre-issue yields to be estimated.
Our opinion is that the market will begin to experiment with more
complex instruments just as complex derivatives were designed in the
1990s, whereas the initial derivatives in the 1970s were simple ones that
came earlier at the early stage of these markets. Derivative markets grew
from just three markets around the world to some 60 markets in 2011
selling about 1700 products. All this happened in just over 44 years.
Hence, complexity in the sukuk market is likely to be the next challenge
to come.
In short, not only is the prospect for sustaining the high growth good for
Islamic finance; the prospect for more complex instruments to be issued
is rather high as we enter the second decade of growth in sukuk markets.
After all the 48-year-old Islamic banking started with a single product, the
two-tier mudaraba savings account! This would also be a welcome change
since more trained staff are entering the market place with knowledge of

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 216 01/05/2012 07:47

 Prospects and challenges of developing sukuk markets around the world 217

designing complex instruments, while the clientele base is also changing

dramatically, especially in wholesale private sukuk markets, and includes
high net worth people as well as ordinary investors.
In terms of prioritizing the issues, we would place the six issues as
follows: (1) liquidity and (2) regulatory levelling and (3) shortage of intelli-
gent shari’ah experts are likely to be the growing concerns that will occupy
a great deal of attention from governments and the market makers, as well
as researchers. The investors are watching new developments in respect
to these three items. If these issues are not resolved speedily, the progress
made to date may reverse because a tower of Babel in the regulatory
world and an unwillingness of investors to trade in the instruments in the
market are likely to sow discord and slow the build-up of liquidity. That
would clearly stunt the growth potential and the future prospects for the
industry. There are historical examples of financial market failures when
liquidity failures continued to plague new product offers.
With this note of caution, we feel these key issues, and many before
them, will be tackled in due course of time to set the sukuk Islamic debt
market on an orderly growth path in more than the current 12 locations
in the world.

NOTE

1. M. Ariff, F.F. Cheng and S.K. Neo (2008), Bond Markets in Malaysia and Singapore,
Selangor, Malaysia: University Putra Press.

Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad - 9780857936202

Downloaded from Elgar Online at 03/30/2017 11:34:26PM
via University of Melbourne

M2890 - ARIFF TEXT.indd 217 01/05/2012 07:47