104 Islamic Finance in Practice
Whereas Islamic equity funds became popular with investors who had a
“risk appetite” for equity investment, Islamic financial institutions, driven
by the nature of their intermediation, kept demanding securities which
could behave like conventional fixed-income debt securities, but also comply
with Shari’a. In addition, Islamic financial institutions wanted to extend the
maturity structure of their assets beyond the typical short-term maturities
provided by trade finance instruments. The result is that within a short
span since the start of the new millennium, the market forsukukhas
reached an impressive size withgrowth doublingalmost each year.
Central banks in several Islamic countries also played a key role in setting
the stage for development of the capital market. They were keen to introduce
instruments that provided liquidity in the market place. Such countries
included Malaysia, Bahrain, Kuwait, Sudan, Iran, Jordan and Pakistan.
Some of these countries had tried to introduce a legal framework forsukuk
issuance, but the first successful issuance was initiated by the Malaysian
government in 1983, with the issuance of the Government Investment Issue
(GII), formerly known as the Government Investment Certificate. The main
objective of this instrument was to facilitate the management of assets in
the Islamic banking system, which, by this time, was fairly mature.
The issuance of GII was based on the Islamic concept ofqard al-hasan
(benevolent non-interest bearing loan). However, GII was not a tradable
instrument since it only represented outstanding debt that cannot be traded
under Shari’a principles. Recently, the underlying concept of GII was
changed tobai al-inahto allow it to be traded in the secondary market.
Similarly, the Central Bank of Kuwait issued interest-free certificates to
finance the purchase of properties held by nationals other than Gulf
Cooperation Council (GCC) states. Iran has also introduced the concept of
participation bonds on amudarababasis. The Central Bank of Bahrain,
however, pioneered theijaraandsalam sukuksas medium to short-term
monetary instruments that have continued to be well received by institu-
tional investors. Thus, the success of numeroussukukissuances worldwide
opened up an alternative source of funding and diversification for investors,
which is now tapped by many countries and corporations.
This increase in demand, together with the work that is underway to
standardizesukukissuance, is expected to provide further momentum to
the growth of the market. The World Bank issued its first local-currency
dominated 760 million Malaysian Ringgits ($200 million)sukukin 2005. In
the same manner, hedge funds and conventional institutional investors
have been keen to take up a significant portion ofsukukcertificates as they
search for yield pick-up and diversification. This has resulted in a large
number ofsukuksbeing issued, both public and private with the result that
the issuance ofsukuksquadrupled to $27 billion in 2006, and $39 billion in
October 2007, from $7.2 billion in 2004, as per McKinsey and Company’s
World Islamic BankingCompetitiveness report.