Finance & Islamic Finance Essay

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Considered as one of the fastest growing segment of the Islamic financial services industry, sukuk has become an emerging asset class for conventional and Islamic investor and issuers alike. Nonetheless, a clarification on sukuk issued by the AAOIFI in 2008 asserts that many sukuk issuances to date have compromised some of the Shariah rquirements relating to sukuk issuance and trading. In sum, there exists a divergence between the theory and practice of the sukuk industry. Elaborate Shariah issues relating to the development of the sukuk market. Answer1 Sukuk market started and evolves when the financial markets first attempted to develop shariah-compliant debt instruments involved securitising traditional Islamic financing instruments. Such attempts are: • In Pakistan, from 1980 onward, the issuance of mudaraba certificates after a law was passed giving legal recognition to the certificates. This involves the establishment of partnership companies with investors, and the company managers sharing the profits, but only the financiers will bear any losses. However, in 2008 the original law was amended to ensure better protection for the investors on the mudaraba companies under the regulatory supervision of the Securities and Exchange Commission of Pakistan. • In 1983, Bank Islam Malaysia initiated to use debt instruments to be securitising mainly on the murabaha financing. The bank would purchase a commodity on behalf of a client and resell it to the client for a mark-up, with settlement through deferred payments. The first instrument was issued by the Shell oil company’s Sarawak subsidiary in 1990, with Bank Islam Malaysia as the arranger. This type of arrangement has the banks financial committed to a long-term basis rather than they could have used its capital for further financing. To overcome this circumstance, the banks have to attract third-party

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