The Islamic Capital Market

In an Islamic capital market, market transactions are done in ways that do not conflict with the inner voice of Muslims and the religion of Islam. The Islamic capital market is free from activities that are not allowed by Islam such as interest (riba), excessive uncertainty (Gharar) , gambling (Maysir), short sales and financing any activities that is considered harmful to society. The Islamic capital market is a segment of the general capital market in Malaysia and it plays a vital role in producing financial development for Malaysia. The Islamic capital market runs parallel with the conventional capital market. The Shariah Advisory Council was established to screen, evaluate and identify the procedure of listed stock for organizations listed and to be listed on Bursa Malaysia for Shariah compliance status. As of today there are different capital markets products that are accessible for Muslims who only seek to invest and transact in the Islamic capital Market.

An example of a product from the Islamic Capital Market is Sukuk Finance or also known as Islamic Bonds. The Accounting and Auditing Organisation defines sukuk finance as certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs (the legal right to use and enjoy profits and enjoy profits of something belonging to another) and services or (in the ownership of) the assets of particular projects or special investment activity. Sukuk is about a finance provider having ownership of real assets and earning a return sourced from those assets. With Sukuk, certificates are issued which are linked to an underlying tangible asset and which also transfers the risk and rewards of ownership. The underlying asset is managed on behalf of the Sukuk Holders. Sukuk finance could be appropriate for the securitisation of the leasing portfolio.

There are two types of Sukuk which are Assed-Based Sukuk (Sukuk Al- Ijarah) and Asset-Backed Sukuk. An Asset based sukuk is raising finance where the principal is covered by the capital value of the asset but the repayments to sukuk holders are not directly financed by these assets. An Asset Backed sukuk is raising money where the principal is secured by the capital value of the asset however the profits and reimbursements to the sukuk holders are directly financed by these assets. It is the same arrangement as the securitisation where assets are transferred to a special purpose vehicle and the returns and repayments are directly financed by the income from the assets.

On simpler terms, Asset Based Sukuk is financing acquisition of assets of assets or raising capital through sale and lease back. The first step is a sukuk holder subscribes by paying an issue price to a special purpose vehicle (SPV) company. In return, the SPV issues certificates indicating the percentage they own in the SPV. The SPV uses funds raised and purchases the asset from the obligor also known as seller and in return the SPV receives the ownership. Then, the SPV acting as a lessor, leases the asset back to the obligor under an Ijarah agreement. The obligor or lessee pays rentals to the SPV, as the SPV is the owner and lessor of the asset. The SPV then makes periodic dispersions (rental and capital) to the sukuk holders. An Asset Backed Sukuk is securitisation of Leasing Portfolio. In an asset backed sukuk, the sukuk holders subscribe by paying an issue price to a SPV company. Consequently, the SPV issues certificates showing the rate they possess in the SPV. The SPV will then buy a portfolio of assets, which are as of now producing a wage stream.

The SPV at that point gets the title deeds to the leasing portfolio. The lease assets will acquire positive returns, which are currently paid to the SPV organization. The SPV at that point makes periodic dispersions (rental and capital) to the sukuk holders. With an asset based sukuk, ownership of the asset lies with the sukuk holders through the SPV. Subsequently, they would need to keep up and safeguard the asset. The instalment of rental gives the return and the last redemption of the sukuk at a pre-concurred value. As the obligor is lessee, the sukuk holders have recourse to him if default occurs. This makes this sort of sukuk more similar to debt or bonds