Sukuk Structure risk Islamic finance and systemic stability

8/14/2019 Sukuk Structure risk Islamic finance and systemic stability

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Structural Risksin Sukuk designs

Dr. Tariqullah Khan,

Professor of Islamic Finance
http://www.qfis.edu.qa/


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Sukuk as engineered and

structured products

Architectssetting the principles,

norms and guidelines (Shariah &

legal scholars);

Engineers - (product developers &

arrangers)

Plumbers - (other professionals)

Influencersindependent

scholars, Muftees, media

Investors and users

Ethical principles;

Faith and social norms;Best practice standards;

Operational

guidelines and

documentation

Architectural

Elements of design

Architectural players


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structural risks are totally

undesirable


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Narrow but

stable

Unstable but

not narrow

Noise among players increases vulnerability


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Preconditions for

structural/architectural stability

Consensus among lead

architectural players about

key architectural elements

Non-existence

of noise


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Noisy architecturalplayers

and

structural risk in thedesign of Sukuk


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Promise to repurchase the Sukuk assets at

the initial price is not permissible

Noisy architectural players

example 1

Sukuk and their Contemporary Applications open source document 2007 by

Muhammad Taqi Usmani, President of the AAOIFI Shariah Council

Promise to repurchase the Ijarah Sukuk

assets at the initial price is permissible

AAOIFI Sukuk Resolution 2008


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OIC Fiqh Academy

Resolution No. 188 (2012) of OIC Fiqh Academy on the subject of Sukuk

The issuer or the partner or the agent must not

undertake any of the following: Purchase of sukuk or their

assets in their nominal value or for a prefixed price so that

it ensures the capital. -------------------

The decisions issued by the Board come into effect from

the time of its issuance and do not affect the previous

contracts and from among them are the sukuk.


example 2


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Prospective Holders should note that differentShariah advisers, and Saudi courts and judicial

committees, may form different opinions on identical

issues and therefore prospective Holders may wish to

consult their own legal and Shariah advisers to receivean opinion if they so desire.


example 3


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Structural basis of Financial

Market Products

Equity shares Bonds

Ownershiprisk of the

asset (price

risk)

Credit risk of

the issuer &

interest rate

risk


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Asset

pricerisk

Interest

raterisk

Credit

risk

Bond

Equity

Independent Shariah

scholars

Structural risk free Sukuk

Sukuk


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Asset

pricerisk

Interest

rate

risk

Credit

risk

BondEquity

Paid Shariah Advisors

Structural risk free Sukuk

Sukuk


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Repurchase at

initial price is

required

Repurchase at

initial price is not

permissible

But noisy

argument

But firm

argument


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More noise No noise

Independent

Shariahscholars

Paid ShariahAdvisors

Lack of consensus on

architectural

elements

Consensus on

architectural

elements


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Sukuk Structural Riskbundled nature

of credit, price and return risk

Sukuk

Credit

risk

Interest

rate risk

Asset

price risk

Bond

Equity

Consequence

of disputes

and noise

between

Shariah

scholars


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Can the market have this

type of a product?Independent Shariah

ScholarsNo, because it

has credit risk and the rate

of return risk is actually

interest rate risk

Paid Shariah Scholars

No,

because rating and pricing is

not possible


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Structural risk in Islamic bank

financing

Independent Team

Murabahah

financing is a

genuine asset

purchase

Paid Team

Tawaruq is acomprehensive

financing

mechanism


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7% interest

10% interestFinancing Scenario-1: If we make lending as the core

commercial activity of banks, financing gets out of the real

economy and this scenario is the real possibility as lending will

be primarily based on ratings and credit risk.

5% interest

15% interest

BANK Murabahah

for asset

$100Tawaruq

$100

Tawaruq

$100

Tawaruq

$100

Tawaruq

$100

Tawaruq

20% interest

$100 $100 $100 $100 $100

Pitfall of Tawaruq

$100

Financing Scenario-2: If we make genuine Murabahah

as the core business of banks, this scenario prevails,

where financing cannot get out of the real economy.

In this scenario, we can benefit from the advantages

of the fractional reserve banking system but at the

same time also avoiding the excessive and unhealthy

credit creation by banks.

Financing Scenario -3: But if we make non-genuine

Murabahah like Tawaruq as the core business, this

scenario prevails which is almost similar to Scenario -

1, where financing gets out of the real economy.


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Structural risks existbecause as if the key

architectural players areonly independent and

paid Shariah scholars


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Structural risks causewealth losses as well as

hamper growth anddepth of the Islamic

capital markets


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Avoiding structural risk

an imperative for

Islamic capital marketdevelopment


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Avoiding structural risk

for resilience andstability


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Finance Ministers;

Central Bank Governors;Islamic Bankers;

Sukuk Issuers and dealersInvestors

Independent scholars

Key architectural

players are actually


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Looking ahead - Apex Islamic Finance

Board is the need to avoid structural

risks of industry


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Do you know that Executive Education Program of QFIS offers:

Course on Sukuk andIslamic Capital

Markets?


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Thank you

[email protected]

Documents

Sukuk Structure risk Islamic finance and systemic stability