Sukuk benefits and its essential infrastructure for developing Sukuk market.

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  • Saturday, 11 June 2016 07:31

While the first new instrument of the financial market, i.e. lease Sukuk, started to be offered since the end of last year and the Exchange Organization is preparing to develop this instrument as well as other Istensa in the current year. This article will compare this instrument with other common instruments that have fixed earnings and will explain its generic advantages and risk as well as necessary infrastructures. Similarities and differences between Sukuk and bonds based on the economic report provided by Fars News Agency: instruments with fixed earnings such as joint investment funds with guaranteed profits and earnings have been used in Iran for some years, while bonds are facing certain obstacles due to religious issues. Therefore, it could be said that Sukuk and bonds have at least 5 differences and 4 similarities. With regard to differences, first Sukuk is indicative of the ownership of a particular asset, while bonds are indicative of debt commitment. In other words, the relationship between the issuer and purchaser of bonds is like loan-provider and loan-receiver, and the interest rate for the loan in fixed, thus resulting in Riba.

The second point is that the asset subject to Sukuk securities needs to be permitted from the standpoint of Sharia. However, with regard to bonds, even the assets that Islam does not accept them, could back the securities. Thirdly, the validity of bonds depends on the credit of the issuer and is thus measured, while the validity of Sukuk does not depend on the issuer but on the value of the asset that is backing the Sukuk. In addition, the sale of Sukuk in secondary markets is regarded as sale of the ownership of an asset, but the sale of bonds is indeed the sale of debt. The fifth difference is that Sukuk provide the possibility of increasing the original asset and thus the value of Sukuk themselves, while the original debt in bonds could not be increased. In contrast to these five difference, the similarities between Sukuk and bonds include that they could be liquidated in secondary markets, their credit ranking is done by ranking institutions, they have the possibility of increasing the credit and variety with regard to design and offering.
Different advantages of Sukuk:
Sukuk have a variety of different advantages and some scholars are of the conviction that these types of Islamic securities are the bridge between capital market and monetary market. The advantages could be stated in six aspects. On the basis of this report, Sukuk increase the liquidity of the originator. On the other hand, the assets that have low liquidity or are non-cash are excluded from the confidential contract and cash will replace them. Moreover, although some parts of the assets are separated from the originator corporation, the originator would still be able to use such assets. The fourth advantage is that since Sukuk is asset-backed, they have lower risks and thus reduce the costs of financing. Another solution for reducing the costs of financing is using the credit increase. The fifth advantage is that Sukuk provide the possibility of turning assets into securities, thus helping to the development of capital market. If a secondary market is provided for trading Sukuk, then their potential for liquidation will increase as well.