GIFC08: Sukuk issuers urged to be more care

By Habhajan Singh
Issuers of sukuk should re-examine the make-up of their product to ensure that it does not suffer the same fate as conventional bonds, an Islamic banker told a conference yesterday.
Parties involved in structuring sukuk, the closest cousin of conventional bonds, should be mindful to ensure that it does not go the way conventional bonds have gone in the ongoing global financial crisis, said OCBC Bank Malaysia Bhd's head of Islamic finance Alhami Mohd Abdan. He was one of the speakers at the Second Global Islamic Finance Conference (GIFC) 2008 in Kuala Lumpur.
Minister in the Prime Minister's Department Datuk Seri Dr Ahmad Zahid Hamidi officiated the two-day function which is organised by GlobalPro Consulting Sdn Bhd. In his presentation entitled 'Product development and implementation of Islamic finance', Alhami noted that the Western asset-backed securities (ABS) bubble-crashed primarily due to the questionable quality of the underlying assets, although the fundamental principles of securitisation are not without its merits. For the sukuk securitisation process, he said among the fundamental requirements for Shariah endorsement are that the nature of the assets securitised be tangible and economically viable.
New sukuk issues in 2007 reached a record high of about US$47 billion (RM168.28 billion) and the outstanding global sukuk market surpassed the US$100-billion mark, according to Bank Negara Malaysia (BNM). Up until August this year, BNM governor Tan Sri Zeti Ahtar Aziz, in a speech earlier this month, said sukuk had held its ground with a total global issuance now exceeding US$14 billion, and is expected to exceed US$200 billion in 2010.
Dr Aznan Hasan, a Shariah scholar from the International Islamic University Malaysia (IIUM) and a former member of the BNM Shariah Advisory Council, said that the demand for Shariah advisors is increasing, especially in auditing, product development and financial engineering. On the apparent divergence between Shariah views in Malaysia and the Middle East, he said that while efforts should continuously be made to narrow the gap in the divergence of opinion, "we should also approach these differences of opinion as a source of strength, rather than a source of weakness".
In his opening address, Ahmad Zahid praised BNM's role in ensuring the success of Islamic banking in Malaysia as the sector has continued to register significant growth since its introduction.
"Islamic finance has, thus far, remained positive, despite the current challenging global financial environment, thanks to rules that forbid the sort of risky business that is felling the mainstream institutions.
"The strength in Islamic finance is derived from Shariah principles, the key pillar of Islamic finance that has contributed towards its overall stability and resilience," he said.
Ahmad Zahid said Shariah injunctions require that financial transactions be accompanied by an underlying productive activity, thus giving rise to a close link between financial and productive flows. (By Habhajan Singh, The Malaysian Reserve, Oct 30, 2008, Page 8)