By Professor Humayon Dar
Islamic banking and finance (IBF) is thriving, with total assets under management of the institutions offering Islamic financial services expected to reach US$2.5 trillion by the end of 2017. While a bulk of Islamic financial assets remain within Islamic banking sector, sukuk are increasingly used by governments, corporates and Islamic banks to raise more capital in a Shari’a-compliant way. There is no doubt that sukuk have played an important role in deepening capital markets, more so in the GCC. In Malaysia, sukuk are a significant component of the local capital market, a path that its neighbouring Indonesia has decided to pursuit in raising additional capital for infrastructure projects as well as public sector borrowing requirements.
While the increasing significance of sukuk in IBF has generated a lot of market excitement, there are others who prefer to take a more cautious stance on this important tool in Islamic capital markets. Academicians in particular have shown their discontent over debt-based sukuk structures. For an excellent reference on sukuk, the readers are advised to read the forthcoming book of Dr Mohd Daud Bakar on Emirates Airline Sukuk.
I believe sukuk can be developed as an effective tool for Islamic mezzanine financing, especially convertible sukuk but also plain vanilla sukuk al-ijara, if the sukuk holders are given full recourse to the underlying assets in the event of default. The basic structure of sukuk is in fact very much consistent and compatible with debt-based mezzanine financing. As so far the use of sukuk has been in capital markets, it is not entirely unfeasible to look into developing sukuk as a mezzanine financing tool for a number of industrial projects, particularly related with construction and the real estate.
Sukuk as a tool for mezzanine financing has greater potential role to play in IBF than merely a capital market debt instrument. As the real estate is a popular asset class in IBF, development of sukuk as a mezzanine financing instrument may help by way of supporting construction industry in a number of countries in the OIC. Whereas the countries in the GCC are obvious examples of boom in the real estate industry, other countries like Indonesia, Turkey, Pakistan and Egypt provide a wide range of investment opportunities in the real estate.
While lower oil prices provide an opportunity for further development of sukuk in the GCC, it is advisable to use sukuk as a debt instrument with caution. There is a need to develop more innovative sukuk structures to ensure that sukuk is at least a hybrid between equity and debt, if not an outright equity. The use of sukuk purely as a debt instrument may prove to be catastrophic, if restraint isn’t exercised in its usage.