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.
Noisy architectural players
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.
Noisy architectural players
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
tkhan@qfis.edu.qa
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