Subject: CORPORATE FINANCE (FIN505)
Research About
AN OVERVIEW OF ISLAMIC FINANCE
Under Supervision of
Dr. / Menan Etab
Prepared By
1. Eng./ Mahmoud Mohamed Elkomy………310202362
2. Eng./ Ahmed Shaban Mokhtar…….…….310202335
3. Eng./ Ahmed Abdel Raheem Ahmed…….310202320
4. Eng./ Hisham Soliman Mansour…………310202305
Abstract
Islamic finance has started to grow in international finance across the globe, with some
concentration in few countries. Nearly 20 percent annual growth of Islamic finance in recent years
seems to point to its resilience and broad appeal, partly owing to principles that govern Islamic
financial activities, including equity, participation, and ownership. In theory, Islamic finance is
resilient to shocks because of its emphasis on risk sharing, limits on excessive risk taking, and
strong link to real activities. Empirical evidence on the stability of Islamic banks, however, is so
far mixed. While these banks face similar risks as conventional banks do, they are also exposed to
idiosyncratic risks, necessitating a tailoring of current risk management practices. The
macroeconomic policy implications of the rapid expansion of Islamic finance are far reaching and
need careful considerations.
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Contents
Abstract .................................................................................................................................................. 2
1. Islamic and Conventional Finance ............................................................................................... 5
1.1 What is Finance? ........................................................................................................................... 5
1.2 A BRIEF HISTORY OF ISLAMIC FINANCE9 ........................................................................................ 5
1.3 Basic Differences between Connectional and Islamic Banking ....................................................... 6
2. The framework of Islamic Finance .............................................................................................. 8
2.1 Key Principles of Islamic Finance ........................................................................................... 8
2.2 Three Principles Govern Islamic Finance ................................................................................ 8
2.3 Key Instruments of Islamic Finance ............................................................................................ 9
2.3.1 PLS Financing Products.................................................................................................... 10
2.3.2 Non-PLS Financing Products............................................................................................ 10
2.3.3 Fee-Based Products .......................................................................................................... 12
3- The Islamic capital market and conventional capital market............................................................... 13
3.1 Capital Raising: ........................................................................................................................... 14
3.2 Investment Vehicles: .................................................................................................................... 14
3.3 Risk Management: ....................................................................................................................... 14
3.4 Regulatory Framework: ............................................................................................................... 15
3.5 Investor Behavior and Ethics: ...................................................................................................... 15
3.6 Distribution of Returns: ............................................................................................................... 16
3.7 Role of Intermediaries: ................................................................................................................ 16
4- The main features of Sukkuk and how they are used in the Islamic capital market, (investigate the
experience of Egypt in issuing Sukkuk) ................................................................................................. 17
4.1 Understanding Sukuk................................................................................................................... 17
4.2 Sukuk vs. Traditional Bonds ........................................................................................................ 18
4.3 Sukuk as Engines of Growth in Islamic Capital Markets: ............................................................. 19
4.4 The Future of Sukuk .................................................................................................................... 19
4.4.1 Sustainability: ........................................................................................................................... 20
4.4.2 Innovation: ............................................................................................................................... 20
4.4.3 Regulation: ............................................................................................................................... 20
4.4.4 Technology ........................................................................................................................... 21
4.5 Egypt's Journey with Sukuk: A Story of Milestones and Future Potential...................................... 22
4.5.1 Lack of Clear Regulatory Frameworks:....................................................................................... 22
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4.5.2 Limited Standardization: ........................................................................................................... 22
4.5.3 Streamline Issuance Processes: ................................................................................................. 22
4.5.4 Strengthen Sharia Compliance: ................................................................................................. 22
4.5.5 Mitigate Risks: .......................................................................................................................... 22
4.6 Numbers and facts: ...................................................................................................................... 23
4.7 Challenges and Opportunities for Growth: ................................................................................... 23
4.8 The Road Ahead: Building a Robust Islamic Capital Market ........................................................ 24
4.9 Looking Ahead: Overcoming Challenges and Embracing Opportunities ...................................... 24
5- Reference.......................................................................................................................................... 25
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1. Islamic and Conventional Finance
1.1 What is Finance?
Finance is defined as the management of money and includes activities such as investing,
borrowing, lending, budgeting, saving, and forecasting. There are three main types of finance:
(1) personal, (2) corporate, and (3) public/government.
Origins of Islamic finance and conventional finance.
The Islamic finance sector has grown because of increased demand for Shariah-compliant goods
from financiers in the Middle East and other Islamic countries, as well as from investors around
the world, making it a global industry.
1.2 A BRIEF HISTORY OF ISLAMIC FINANCE9
The first Islamic financial institutions of the modern era were created in the 1960s. In Egypt, a
small interest-free savings bank was established at Mit Ghamr, in the Nile Delta, in 1963, and over
the next three years it opened eight more branches in other localities. In 1967 they were all either
closed or merged with government banks, most likely for political reasons.10 Also in 1963, the
Pilgrims’ Fund (Tabung Haji) was set up in Malaysia to provide facilities for Muslims wishing to
save for the hajj (pilgrimage to Mecca). It flourished, and it now provides a wide range of services
to its 9 million depositors.11 In 1974 the Organisation of the Islamic.
Conference (OIC, now Organisation of Islamic Cooperation) launched the Islamic Development
Bank as a multilateral lending institution to provide Sharî‘a-compliant funding to development
projects in member countries. It began its operations in 1977. Around the same time several major
Islamic commercial banks were established, the first being Dubai Islamic Bank, in 1975, and Faisal
Islamic Bank of Sudan and Kuwait Finance House, both in 1977. Iran transformed its banking
system in the 1980s, in the aftermath of the 1979 Islamic Revolution. Around the same time
Pakistan tried – and failed – to Islamise its entire banking sector. Sudan followed suit, with more
“success” due to its economic and political isolation.
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It is no coincidence that Islamic finance took off in the 1970s. It was aided by a general religious
revival that was most dramatically manifested in the emergence of the Islamic Republic of Iran
and in the instauration of Islamist regimes in Pakistan under Muhammad Zia ul-Haq and in Sudan
under Omar al-Bashir. In addition, the oil shocks in 1973 and 1979 meant a huge increase in the
revenues of producers such as the Gulf monarchies, which promoted Islam as a counterweight to
Arab socialism. Since then, the sector has spread to other regions of the world – notably to
Southeast Asia, but also to Western countries with large Muslim communities and to sub-Saharan
Africa. Moreover, it has diversified from banking into insurance and reinsurance, stocks and bonds,
mutual funds… mirroring the massive growth in FDI and portfolio investment since the 1990s. On
the other hand, political tensions after 9/11 prompted many Muslim investors to repatriate part of
their savings and reconsider their investments. Islamic finance has become a huge industry, with a
total worth more than $2 trillion, more than a thousand.
1.3 Basic Differences between Connectional and Islamic Banking
A. CONCEPTUAL
ISLAMIC FINANCE
• Islamic finance are not money lending institutes; rather they are working as trading or
investment company.
• Islamic finances are working based on socio religious laws that prohibit giving and
taking of interest.
• Islamic finance also avoids those transactions which are declared haram in Islam such
as gambling, debts.
• Islamic finances are working because of socio religious laws that prohibit giving and
taking of interest.
• Islamic finance does not support those businesses which are involved in trading of
Haram products, and cause harm to society such as alcohol, tobacco, etc.
CONVENTIONAL FINANCE
• Conventional finances are involved in a business of lending & borrowing of money
because of interest.
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• Conventional finance usually finances all types of industries whether they are
beneficial or harmful for society.
• There are no such restrictions in Conventional finance. Interest based activities are
common.
B. BUSINESS MODEL & GOVERNING FRAMEWORK
ISLAMIC FINANCE
• Business model of Islamic finance is based on trading activities, Islamic finance
actively participate in trade and production-based processes.
• Islamic finance has governing framework based on Sharia'h. A strong sharia'h
supervisory board or Sharia'h advisor board is established to approve all products
and transaction of Islamic finance Sharia'h supervisory board check and approve
product development at every level.
CONVENTIONAL FINANCE
• Conventional finances are only involved in lending money, they are acting as
money lenders, and they do not participate in any kind of trade or business.
• No such sharia'h board is present in Conventional finance.
C. PRODUCT LEVEL IMPLEMENTATION
ISLAMIC FINANCE
• The products of Islamic finance are usually asset based and includes trading of
assets, renting of asset and participation on profit & loss basis.
• Islamic finance any loan given by the bank must be interest free.
CONVENTIONAL FINANCE
• The products of Conventional finance are interest based; money is considered as a
commodity.
• Both deposit and financing side of Conventional finance loan based. Interest is
earned and paid.
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D. D-RELATIONSHIP BETWEEN BANKER AND CUSTOMER
ISLAMIC FINANCE
• Islamic finance, the relationship varies as per nature of product.
• If there is a sale transaction the role of Seller and Buyer respectively.
CONVENTIONAL FINANCE
• The main relationship is of creditor and debtor.
2. The framework of Islamic Finance
2.1 Key Principles of Islamic Finance
Islamic economics and finance derive from immutable principles rooted in the rulings of
the Shari’ah legal code. Unlike legal systems that are limited to secular aspects of daily life,
Shari’ah jurisprudence does not distinguish between religious and other aspects of life, including.
transactions falling under either the political, economic, or social sphere (muamalat). In Islamic
economics, productive human activity is mandatory. Islam does not endorse every human wish,
and it prohibits on moral grounds activities related to tobacco and other drugs, alcohol, pork
products, gambling involving money and non-money assets (maysir), speculation, pornography,
and armaments and destructive weapons.
2.2 Three Principles Govern Islamic Finance
2.2.1 Principle of equity: Scholars generally invoke this principle as the rationale for the
prohibition of predetermined payments (riba), with a view to protecting the weaker contracting
party in a financial transaction. The term riba, which means “hump” or “elevation” in Arabic, is
an increase in wealth that is not related to engaging in a productive activity. The principle of equity
is also the basis for prohibiting excessive uncertainty (gharar) as manifested by contract ambiguity
or elusiveness of payoff. Transacting parties have a moral duty to disclose information before
engaging in a contract, thereby reducing information asymmetry; otherwise, the presence of gharar
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would nullify the contract. The principle of equity and wealth distribution is also the basis of a 2.5
percent levy on cash or in-kind wealth (zakat), imposed by Shari’ah on all Muslims who meet
specific minimum levels of income and wealth to assist the less fortunate and foster social
solidarity.
2.2.2 Principle of participation: Although commonly known as interest-free financing, the
prohibition of Reba does not imply that capital is not to be rewarded. According to a key Shari’ah
ruling that “reward (that is, profit) comes with risk taking,” investment return has to be earned in
tandem with risk-taking and not with the mere passage of time, which is also the basis of
prohibiting Reba. Thus, return on capital is legitimized by risk- taking and determined ex post
based on asset performance or project productivity, thereby ensuring a link between financing
activities and real activities. The principle of participation lies at the heart of Islamic finance,
ensuring that increases in wealth accrue from productive activities.
2.2.3 Principle of ownership: The rulings of “do not sell what you do not own” (for
example, short-selling) and “you cannot be dispossessed of a property except on the basis of right”
mandate asset ownership before transaction. Islamic finance has, thus, come to be known as asset-
based financing, forging a robust link between finance and the real economy. It also requires
preservation and respect for property rights, as well as upholding contractual obligations by
underscoring the sanctity of contracts.
2.3 Key Instruments of Islamic Finance
In Islamic finance, the term “loan” refers only to a benevolent loan (qard al hasan), a form
of financial assistance to the needy to be repaid free of charge. Other instruments of Islamic finance
are not referred to as “loans’ but rather as financing modes falling under one of the three categories:
Profit-and-loss sharing (PLS), non-PLS contracts, and fee-based products.
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2.3.1 PLS Financing Products
PLS financing is closest to the spirit of Islamic finance. Compared with non-PLS financing, its
core principles of equity and participation, as well as its strong link to real economic activities,
help promote a more equitable distribution of income, leading to a more efficient allocation of
resources. There are two types of PLS financing: musharakah and mudârabah.
• Musharakah is a profit-and-loss sharing partnership and the most authentic form of
Islamic financing.6 It is a contract of joint partnership where two or more partners provide capital
to finance a project or own real estate or movable assets, either on a permanent or diminishing
basis.7 Partners in musharakah have a right to take part in management; they seem to bear the
greatest risk among all Islamic financing modes with the potential for earning the highest reward.
However, whereas profits are distributed according to pre- agreed ratios, losses are shared in
proportion to capital contribution.
• Mudârabah is a profit-sharing and loss-bearing contract where one-party supplies funding
(financier as principal) and the other provides effort and management expertise (mudarib or
entrepreneur as agent) with a view to generating a profit. The share in profits is determined by
mutual agreement but losses, if any, are borne entirely by the financier, unless they result from
the mudarib’s negligence, misconduct, or breach of contract terms. Mudârabah is sometimes
referred to as a sleeping partnership because the mudarib runs the business and the financier
cannot interfere in management, though conditions may be specified to ensure better management
of capital. Islamic banks mainly make use of mudârabah financing to raise funds; mudârabah
contracts are also used for the management of mutual funds.
2.3.2 Non-PLS Financing Products
Non-PLS contracts are most common in practice. They are generally used to finance consumer
and corporate credit, as well as asset rental and manufacturing. Non-PLS financing instruments
include murâbaḥah, ijārah, salam, and istisna’.
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• Murâbaḥah: is a popular Shari’ah-compliant sale transaction mostly used in trade and
asset financing.9 The bank purchases the goods and delivers them to the customer, deferring
payment to a date agreed by the two parties. The expected return on murâbaḥah is usually aligned
with interest payments on conventional loans, creating a similarity between murâbaḥah sales and
asset-backed loans. However, murâbaḥah is a deferred payment sale transaction where the
intention is to facilitate the acquisition of goods and not to exchange money for more money (or
monetary equivalents) over a period. Unlike conventional loans, after the murâbaḥah contract is
signed, the amount being financed cannot be increased in case of late payment or default, nor
can a penalty be imposed, unless the buyer has deliberately refused to make a payment. Also, the
seller has to assume any liability from delivering defective goods. Murâbaḥah transactions are
widely used to finance international trade, as well as for interbank financing and liquidity
management through a multistep transaction known as tawarruq, often using commodities traded
on the London Metal Exchange (LME).10 However, in some jurisdictions, tawarruq transactions
are not considered compliant with Shari’ah principles.
• Ijārah is a contract of sale of the right to use an asset for a period of time. It is essentially
a lease contract, whereby the leaser must own the leased asset for the entire lease period. Since
ownership remains with the leaser, the asset can be repossessed in case of nonpayment by the
lessee. However, the leaser is also responsible for asset maintenance, unless damage to the leased
asset results from lessee negligence. This element of risk is required for making ijārah payments
permissible. A variety of ijārah takes a hire- purchase form, whereby there is a promise by the
leaser to sell the asset to the lessee at the end of the lease agreement, with the price of the residual
asset being predetermined. A second independent contract gives the lessee the option to buy the
leased asset at the conclusion of the contract or simply return it to the owner.
• Salam is a form of forward agreement where delivery occurs at a future date in exchange
for spot payment.13 Such transactions were originally allowed to meet the financing needs of
small farmers as they were unable to yield adequate returns until several periods after the initial
investment. A vital condition for the validity of a salam is payment of the price in full at the time
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of initiating the contract, or else the outcome is a debt-against- debt sale, which is strictly
prohibited under Shari’ah. The subject matter, price, quantity,
and date and place of delivery should be precisely specified in the contract. In the event that the
seller can neither produce the goods nor obtain them elsewhere, the buyer can either take back
the paid prices with no increase or wait until the goods become available. Should one of the parties
fail to fulfill their contract, the bank will get back its initial investment, but will have to accept
the lost profit. To reduce exposure to credit risk, the bank may ask for a financial guarantee,
mortgage, advance payment, or third-party guarantee.
• Istisna’ is a contract in which a commodity can be transacted before it comes into
existence. The unique feature of istisna’ (or manufacturing) is that nothing is exchanged on the
spot or at the time of contracting. It is perhaps the only forward contract where the obligations
of both parties are in the future. In theory, the istisna’ contract could be directly between the end
user and the manufacturer, but it is typically a three-party contract, with the bank acting as
intermediary. Under the first istisna’ contract, the bank agrees to receive payments from the client
on a longer-term schedule, whereas under the second contract, the bank (as a buyer) makes
progress installment payments to the producer over a shorter period.
2.3.3 Fee-Based Products
Islamic banks offer a wide spectrum of fee-based services using three types of contracts, wakalah,
kafalah, or ju’ala. They are usually auxiliary to the main murâbaḥah and mudârabah transactions,
though they generate various types of fees and commissions. The fee-based services provided by
Islamic banks include bank transfers, issuing letters of credit and guarantees, credit cards, and
offering collection and safe-custody services, mostly used in trade financing. Wakalah results from
the bank acting as the agent of a customer in a trade transaction or issuing a letter of credit
facility.15 Kafalah is a financial guarantee whereby the bank gives a pledge to a creditor on behalf
of the debtor to cover fines or any other personal liability. It is widely used in conjunction with
other financing modes or documentary credits. Ju’ala is essentially an istisna’ contract that is
applicable for rendering a specified service as opposed to the manufacturing of a product.
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3- The Islamic capital market and conventional capital market
The Islamic capital market and conventional capital market differ significantly in their principles,
operations, and products due to the adherence to Shariah principles in Islamic finance. Let's break
down the key functions of capital markets and highlight the differences between the Islamic and
conventional approaches in each function:
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3.1 Capital Raising:
Conventional Market:
In the conventional market, companies raise capital through debt (bonds) and equity
(stocks). Interest-based debt instruments are common.
Islamic Market:
In the Islamic market, companies raise capital through equity-based instruments
such as Mudarabah (profit-sharing) and Musharakah (partnership), as well as through
Sukuk (Islamic bonds) which represent ownership in tangible assets, avoiding interest-
based transaction.
3.2 Investment Vehicles:
Conventional Market:
Investment vehicles include stocks, bonds, mutual funds, ETFs, options, and
derivatives, many of which may involve interest-based transactions and speculative
activities.
Islamic Market:
Investment vehicles are structured to comply with Shariah principles. Examples
include Shariah-compliant stocks (companies operating in permissible sectors), Sukuk,
Islamic mutual funds (which invest in Shariah-compliant assets), and Islamic real estate
investment trusts (REITs).
3.3 Risk Management:
Conventional Market:
Risk management often involves conventional insurance products, options, futures,
and other derivative instruments.
Islamic Market:
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Risk management adheres to Shariah principles, prohibiting contracts involving
excessive uncertainty (Gharar) or gambling (Maysir). Instead, risk-sharing mechanisms
such as Takaful (Islamic insurance) and Wakalah (agency contract) are utilized.
3.4 Regulatory Framework:
Conventional Market:
Regulation is generally based on secular laws and regulations tailored to each
country's financial system.
Islamic Market:
Regulation is guided by Shariah principles and supplemented by Islamic finance
standards set by regulatory bodies such as the Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB).
3.5 Investor Behavior and Ethics:
Conventional Market:
Investor behavior is guided by profit motives, and investments may involve
speculative activities.
Islamic Market:
Investors adhere to Shariah-compliant principles, which include avoiding
investments in businesses involved in activities such as alcohol, gambling, tobacco, and
other haram (forbidden) industries. Ethical considerations play a significant role in
investment decisions.
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3.6 Distribution of Returns:
Conventional Market:
Returns are distributed based on the terms of the financial contracts, which may
include fixed interest payments, dividends, or capital gains.
Islamic Market:
Returns are generated through profit-sharing mechanisms or assetbacked
structures. In profit-sharing contracts like Mudarabah and Musharakah, profits are
distributed based on pre-agreed profit-sharing ratios.
3.7 Role of Intermediaries:
Conventional Market:
Intermediaries such as banks, investment banks, brokerage firms, and insurance
companies play a significant role in facilitating transactions and providing financial
services.
Islamic Market:
Islamic financial institutions operate in compliance with Shariah principles,
offering products and services that adhere to Islamic law. They include Islamic banks,
Islamic investment banks, and Takaful companies.
These differences reflect the distinct philosophical, ethical, and legal frameworks underlying
Islamic finance and conventional finance. While both markets serve the function of allocating
capital, their approaches vary significantly due to their respective principles and guidelines.
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4- The main features of Sukkuk and how they are used in the
Islamic capital market, (investigate the experience of Egypt in
issuing Sukkuk)
A sukuk is a sharia-compliant bond-like instruments used in Islamic finance. Sukuk involves a
direct asset ownership interest, while bonds are indirect interest-bearing debt obligations. Both
sukuk and bonds provide investors with payment streams, however income derived from a sukuk
cannot be speculative which would make it no longer halal.
4.1 Understanding Sukuk
With the rise of Islamic finance, sukuk have become extremely popular since 2000, when
the first such products were issued in Malaysia.
Fast forward to current times, and sukuk are used by Islamic corporations and state-run
organizations alike around the globe, taking up an increasing share of the global fixed-income
market.
Islamic law prohibits what's known as "riba," or what we understand as "interest" in the
West. Therefore, traditional, Western debt instruments cannot be used as viable investment vehicles
or ways to raise capital for a business. To circumvent this, sukuk were created in order to link the
returns and cash flows of debt financing to a specific asset being purchased, effectively
distributing the benefits of that asset. This allows investors to work around the prohibition outlined
under Sharia and still receive the benefits of debt financing. However, because of the way that
sukuk are structured, financing can only be raised for identifiable assets.
Thus, sukuk represent aggregate and undivided shares of ownership in a tangible asset as
it relates to a specific project or a specific investment activity. An investor in a sukuk, therefore,
does not own a debt obligation owed by the bond issuer, but instead owns a piece of the asset that's
linked to the investment. This means that sukuk holders, unlike bond holders, receive a portion of
the earnings generated by the associated asset.
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[Link]
4.2 Sukuk vs. Traditional Bonds
Sukuk and conventional bonds do share similar characteristics, but also have important key
differences:
Similarities Key Differences
• Both provide investors with payment • Sukuk involves asset ownership while
streams. bonds are debt obligations.
• Bonds and sukuk are issued to investors • If the asset backing a sukuk appreciates
and may be used to raise capital for a firm. then the sukuk can appreciate whereas
•
Both are safer investments than equities. bond yield is strictly due to its interest rate.
•
•
Sukuk investors receive profit generated Assets that back sukuk are halal whereas
by the underlying asset on a periodic basis bonds are often riba and may finance non
while bond investors receive periodic sharia compliant businesses or fuel
interest payments. speculation.
• Sukuk valuation is based on the value of
the assets backing them while a bonds
price is largely determined by its credit
rating.
[Link]
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4.3 Sukuk as Engines of Growth in Islamic Capital Markets:
Within the dynamic landscape of Islamic capital markets, Sukuk serve as a versatile tool for capital
formation and fundraising. Here's a closer look at some key applications:
• Financing Infrastructure Development:
Governments and corporations can leverage Sukuk to raise capital for critical infrastructure
projects. Investors become partial owners of the infrastructure asset and earn returns based on the
revenue it generates (e.g., toll collections from a Sukuk-financed highway). This fosters a sense of
shared responsibility and incentivizes efficient project management.
• Facilitating Corporate Expansion:
Companies seeking to expand their operations or acquire new assets can utilize Sukuk issuance.
Investors acquire ownership in the assets purchased with the Sukuk proceeds and share in the
company's profits generated from those assets. This aligns investor interests with the company's
long-term growth prospects.
• Sharia-compliant Government Borrowing:
Governments can leverage Sukuk for public expenditures or deficit financing. Sukuk can be
backed by specific government assets or future revenue streams, with investors receiving returns
linked to the underlying asset's performance. This provides a Sharia-compliant alternative to
conventional government bonds.
4.4 The Future of Sukuk
The future of Sukuk looks promising, especially with the increasing demand for sharia-compliant
financial instruments and the growing interest in Islamic finance. Sukuk has already proven to be
a valuable tool for raising funds and financing infrastructure projects around the world. According
to a report by S&P Global Ratings, the issuance of Sukuk in 2020 exceeded $140 billion, which is
a significant increase compared to the previous year. Furthermore, the report suggests that the
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demand for Sukuk is expected to continue to grow, especially in the Middle East, Southeast Asia,
and Africa, where governments are actively promoting Islamic finance.
To fully understand the future of Sukuk, it is essential to examine the current trends and challenges
in the market. The following are some of the insights from different points of view:
4.4.1 Sustainability:
Sukuk has the potential to play a significant role in promoting sustainable finance, as it
aligns with the principles of environmentally friendly and socially responsible investments. In
recent years, there has been a growing interest in green Sukuk, which funds projects that have a
positive impact on the environment. For example, Malaysia's Tadau Energy issued the world's first
green Sukuk in 2017 to finance solar power projects.
4.4.2 Innovation:
To remain competitive, Sukuk issuers need to innovate and develop new structures and
products that meet the evolving needs of investors. For instance, there is a growing demand for
Sukuk that are tradable and have secondary market liquidity. In response, the International Islamic
Financial market (IIFM) has developed the master agreements for Islamic repo and reverse repo
transactions to support the development of the secondary market for Sukuk.
4.4.3 Regulation:
The regulatory landscape for Sukuk varies from country to country, which can create
challenges for issuers and investors. To promote greater standardization and harmonization of
Sukuk regulations, the Accounting and Auditing Organization for Islamic Financial institutions
(AAOIFI) has developed Shariah standards for Sukuk. These standards provide guidance on the
structuring and documentation of Sukuk, as well as the disclosure and reporting requirements.
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4.4.4 Technology:
The use of technology, such as blockchain, can facilitate the issuance and trading of Sukuk,
making it more efficient and transparent. For example, in 2018, the Islamic Development Bank
issued a Sukuk using blockchain technology, which reduced the issuance time from two weeks to
a few days.
The future of Sukuk looks bright, with the market expected to continue to grow and evolve.
Sukuk has the potential to contribute to sustainable finance, promote innovation, and benefit from
advancements in technology. However, to fully realize its potential, it is essential to address the
current challenges and continue to develop the market through innovation and standardization.
The Future of Sukuk - Unlocking the Potential of Sukuk: Exploring the World of Islamic Finance
[Link]
Kouser/publication/332487706/figure/fig5/AS:762904395673601@1558901990175/SukukMa
[Link]
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4.5 Egypt's Journey with Sukuk: A Story of Milestones and Future Potential
Egypt's foray into Sukuk issuance began in the early 2000s, primarily targeting infrastructure
projects. However, initial efforts faced limitations due to:
4.5.1 Lack of Clear Regulatory Frameworks:
The absence of robust legal frameworks surrounding Sukuk issuance created uncertainty
for investors regarding asset ownership and risk mitigation.
4.5.2 Limited Standardization:
The early Sukuk offerings lacked standardization in structure, making it challenging for
investors to compare and assess risks across different issuances.
Recognizing the immense potential of Islamic finance for economic development, Egyptian
authorities embarked on a series of regulatory reforms in the 2010s. These reforms aimed to:
4.5.3 Streamline Issuance Processes:
Simplifying procedures for issuing Sukuk reduces costs and administrative burdens for issuers,
making the instrument more accessible.
4.5.4 Strengthen Sharia Compliance:
Establishing clear guidelines and a robust legal framework ensures adherence to Islamic
principles, fostering investor confidence and market integrity.
4.5.5 Mitigate Risks:
Regulations addressed potential risks associated with specific Sukuk structures, creating a more
predictable environment for investors, and fostering market stability.
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4.6 Numbers and facts:
• A significant milestone was achieved in February 2023 with the issuance of Egypt's first-ever
sovereign Sukuk for $1.5 billion. This successful issuance attracted strong investor demand,
showcasing the growing confidence in Egypt's Islamic finance sector and Sukuk as a viable
financing tool.
• Value & Egypt of sukuk bonds issuances by GCC 2010-2023
In 2023, the total value of sukuk bond issuances in the Gulf Cooperation Council and Egypt
reached an all-time high of 36 billion U.S. dollars. Since 2010, the sukuk bond issuance market in
the region has generally increased each subsequent year. However, major dips in fiscal year 2015,
and 2022 were seen dropping by roughly six and 14 billion USD over the previous year,
respectively.
4.7 Challenges and Opportunities for Growth:
While Egypt has made significant strides in developing its Sukuk market, some key challenges
remain:
• Market Depth: Compared to established Islamic finance hubs, Egypt's Sukuk market has a
limited range and volume of offerings. This restricts investor options and hinders market
growth.
• Standardization: Establishing standardized Sukuk structures and legal frameworks is crucial.
Consistency reduces complexities for issuers and investors, fostering market transparency and
attracting new participants.
• Investor Awareness: Raising public awareness about Sukuk and their benefits is essential.
Educational initiatives and promotional campaigns can help demystify Sukuk and showcase
their advantages compared to traditional financial instruments. This can encourage greater
participation from domestic retail investors.
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4.8 The Road Ahead: Building a Robust Islamic Capital Market
By addressing the existing challenges and embracing innovation, Egypt can solidify its position as
a leader in the Islamic finance sector:
• Collaboration between Public and Private Sectors:
Collaboration between the government, regulatory bodies, and financial institutions is crucial
for fostering market growth. This can involve joint initiatives to promote Sukuk and streamline
issuance processes.
• Developing Expertise within the Legal and Financial Ecosystem:
Building a pool of legal and financial professionals with expertise in Sharia-compliant finance
is essential. This equips institutions to design and manage Sukuk offerings effectively.
4.9 Looking Ahead: Overcoming Challenges and Embracing Opportunities
Despite the recent progress, Egypt's Sukuk market still faces some challenges:
• Standardization: Establishing standardized Sukuk structures and legal frameworks can enhance
investor confidence and market liquidity. Clear and consistent guidelines can help mitigate
risks and attract a wider range of investor
• Investor Awareness: Raising awareness about Sukuk among potential investors, both domestic
and international, is crucial for market growth. Educational initiatives and promotional
campaigns can help demystify Sukuk and showcase their advantages.
• Product Innovation: Developing innovative Sukuk structures catering to diverse investor needs
can further expand the reach of Islamic capital markets. Sukuk with varying risk-return profiles
and tailored features can attract a broader investor base.
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5- Reference
• For a more comprehensive overview of the development of Islamic banking, see Pastré,
Olivier and Gecheva, Krassimira. 2008. “La finance islamique à la croisée des chemins,”
Revue d'économie financière 92, pp. 197-213 (especially pp. 199-205).
• It seems likely that the Nasserist regime, which had dealt harshly with attempts by the
Muslim Brotherhood to bring about an Islamist order in Egypt, did not look kindly on an
experiment that smacked of Islamism. For a noteworthy attempt at piecing together the
history of this early example of Islamic banking, see Orhan, Zeyneb Hafsa. 2018.
• “Mit Ghamr Savings Bank: A Role Model or an Irreplicable Utopia?,” The Journal of
Humanity and Society 8/2, pp. 85-102. 11 See “About Us,” Tabung Haji, in
[Link]
• Usmani, M. T. (2002). Introduction to Islamic Finance. Idaratul Ma'arif, Karachi.
• Iqbal, M., & Mirakhor, A. (Eds.). (2011). An Introduction to Islamic Finance: Theory and
Practice. John Wiley & Sons.
• Warde, I. (2000). Islamic finance in the global economy. Edinburgh University Press.
• Khan, M. F., & Bhatti, M. I. (2008). Risk management: An analysis of issues in Islamic
financial industry. Managerial Finance, 34(10), 680-694.
• El-Gamal, M. A. (2006). Islamic finance: Law, economics, and practice. Cambridge
University Press.
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