Sukuk Markets : A Proposed Approach for Development

Abstract

The issuance of sukuk, as an instrument in Islamic finance, has been growing in recent years. Many policy makers and businesses are looking at the sukuk markets as sources of long-term financing. The paper identifies key issues impeding further development of sukuk markets globally, namely, standardization of structures and practices, investor protection concerns relating to insolvency and governance regimes, and market liquidity. The paper also offers approaches in developing domestic sukuk markets and in accessing the international market. The authors suggest that, in developing domestic sukuk markets, policy makers use a framework similar to that of the development of conventional bond markets, that is, by establishing (1) well-functioning money markets, (2) efficient primary markets and securities-offering regimes, (3) a robust and diversified investor base, (4) a market infrastructure that facilitates trading, price transparency, and efficient clearing and settlement of transactions, (5) derivatives market and hedging tools to support risk management by issuers and investors, and (6) a credible legal and regulatory framework. In accessing the international market, the issues policy makers or potential sukuk issuers should consider include awareness of and knowledge of sukuk, legal foundation, taxation, governance, and obligors' credit rating.