Conventional vs. Islamic Bond @ Sukuk Market Prof. Dr. Mohd. Ma’sum Billah E-mail: masum 2001@yahoo. com
Conventional Bond Market l Primary market A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds. The investment bank underwrites securities and then sells them to the public. l Secondary Market A financial market in which securities that have been previously issued can be resold. It could be an organised market, such as KLSE, or over-the counter (OTC) market in which dealers at different locations stand ready to buy or sell securities over the counter to whoever accept their price.
Market Participants l Dealers link buyers and sellers by buying and selling securities l Brokers Agents of investors who match buyers with sellers of securities l Investors Includes individual investors, financial institutions, pension funds, mutual funds and governments, from around the world.
Types of Bonds l l l l Convertible Bonds Extendible/Retractable Bonds Foreign Currency Bonds Government Bonds High Yield or "Junk" Bonds Inflation-Linked Bonds Zero Coupon or "Strip" Bonds
Valuing Bonds The value of a bond depends on the size of its coupon payments, the length of time remaining until the bond matures and the current level of interest rates. Present Value l Yield-to-Maturity l Duration l Interest Rates l
Islamic Bond Market Three main steps involved in the bond issuance. Securitization l Bond Issuance l Trading of dept certificates l
Process of Securitization using Bai’ al-Inah (1) Sells an asset to the creditor in cash @RM 14 mil Creditor (2) Cash payment RM 14 mil (3) For future date, the debtor buys back the asset for 15 mil Debtor
Issuance of Islamic Dept Certificate (Shahadah al-Dayn) Two types of bonds: Islamic coupon bond l Islamic zero coupon bond l
Trading of Dept Certificate – Discounted Bai’ al-Dayn For liquidity purposes, bond trading in the secondary market is crucial.
Islamic Bond Market Muqarada Bonds an Alternative for Islamic Dept Bonds
Securitization of Musharakah l Musharakah is a mode of financing which can be l Especially in case of big projects where huge amounts are required. securitized easily.
Musharakah certificate Every subscriber can be given a Musharakah certificate, which represents his proportionate ownership in the assets of the Musharakah. l After the project is started, these Musharakah certificates can be treated as negotiable instruments. l Can be bought and sold in the secondary market. l
Difference Between Musharakah Certificates and a Conventional Bond Musharakah Certificates Represents the direct ownership of the holder in the assets of the project. l If all the assets of the joint project are in liquid form, the certificate will represent a certain proportion of money owned by the project. l Conventional Bond Has nothing to do with the actual business undertaken with the borrowed money. l The bond stands for a loan repayable to the holder in any case, and mostly with interest. l
Growth in MYR Islamic Bond Market
Potential Growth in USD Islamic Bond Market
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