Stepping out from the Conventional Bond’s Shadows

Sohail Zubairi of Dubai Islamic Bank’s unit Dar al-Sharia, likens Sukuks as the step-sister of Conventional Bonds. According to him, Sukuk is heading in the wrong direction because it is replicates the Conventional Bond. New issuance of Sukuk completely dried up because Islamic banks were structuring them incorrectly from the start, According to him, authentic Sukuk issues should involve the company targeting investors first with a business proposal and inviting them to invest in the company or project. The company would also say how much it expected to generate from the project and the size of a potential return, payable regularly. The practice is however the opposite where companies looking to issue Sukuk had been approaching banks with a proposed sum of money they wanted to raise and soliciting bids — much like they would do if they were seeking to issue Conventional Bonds. “Sukuk collapsed because the starting point was conventional. If the starting point would have been correct, I’m sure we would still have been up and running but the Sukuk market is unlikely to rebound until bonds do as it is so intertwined,” Zubairi said.

Again, this highlights the fact that Sukuks are not debt instruments and should not be treated as such. Bankers and Shariah advisers/consultants must take the bold step of issuing Sukuks in the right and proper way instead of mimicking the mechanics of the Conventional Bond. Almost all Islamic banks in Malaysia offer corporate financing products identical to those offered by their conventional counterparts. They may be called by different names such as Murabahah Term Financing or Istisna’ Project Financing but the modus operandi save for some buying and selling activities are practically identical to that of the conventional alternative. I am of the opinion that these products are quite redundant as a Sukuk serves the same purpose but since the market equates Sukuks with Bonds, it often used to fund large ticket items and not to fund smaller scare projects which are traditionally funded through bank loans.

Sukuks need to step out from the shadows of the Conventional Bonds and stop behaving like a debt instrument.