Conventional Conventional vs.vs.

Islamic Bond @ Sukuk MarketIslamic Bond @ Sukuk Market

Prof. Dr. Mohd. Ma’sum BillahProf. Dr. Mohd. Ma’sum BillahE-mail: E-mail: masum2001@yahoo.commasum2001@yahoo.com

Conventional Bond MarketConventional Bond Market

Primary marketPrimary market

A financial market in which new issues of a security, such A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds.The corporation or government agency borrowing the funds.The investment bank underwrites securities and then sells them investment bank underwrites securities and then sells them to the public.to the public.

Secondary MarketSecondary Market

A financial market in which securities that have been A financial market in which securities that have been previously issued can be resold. It could be an organised previously issued can be resold. It could be an organised market, such as KLSE, or over-the counter (OTC) market in market, such as KLSE, or over-the counter (OTC) market in which dealers at different locations stand ready to buy or which dealers at different locations stand ready to buy or sell securities over the counter to whoever accept their sell securities over the counter to whoever accept their price.price.

Market ParticipantsMarket Participants

DealersDealersDealers link buyers and sellers by buying and selling Dealers link buyers and sellers by buying and selling securitiessecurities

BrokersBrokersAgents of investors who match buyers with sellers of Agents of investors who match buyers with sellers of securitiessecurities

InvestorsInvestorsIncludes individual investors, Includes individual investors, financial institutions, pension financial institutions, pension funds, mutual funds and governments, from around the funds, mutual funds and governments, from around the world.world.

Types of BondsTypes of Bonds

Convertible BondsConvertible Bonds Extendible/Retractable BondsExtendible/Retractable Bonds Foreign Currency BondsForeign Currency Bonds Government BondsGovernment Bonds High Yield or "Junk" BondsHigh Yield or "Junk" Bonds Inflation-Linked BondsInflation-Linked Bonds Zero Coupon or "Strip" BondsZero Coupon or "Strip" Bonds

Valuing BondsValuing Bonds

The value of a bond depends on the size of its coupon payments, the length The value of a bond depends on the size of its coupon payments, the length of time remaining until the bond of time remaining until the bond

matures and the current level of interest rates. matures and the current level of interest rates.

Present ValuePresent Value Yield-to-MaturityYield-to-Maturity DurationDuration Interest RatesInterest Rates

Islamic Bond MarketIslamic Bond Market

Three main steps involved in the bond Three main steps involved in the bond issuanceissuance..

Securitization Securitization Bond IssuanceBond Issuance Trading of dept certificatesTrading of dept certificates

Process of Securitization using Bai’ al-Process of Securitization using Bai’ al-InahInah

Creditor Debtor

(1) Sells an asset to the creditor in cash @RM14mil

(2) Cash payment RM14mil

(3) For future date, the debtor buys back the asset for 15 mil

Issuance of Islamic Dept Certificate Issuance of Islamic Dept Certificate (Shahadah al-Dayn)(Shahadah al-Dayn)

Two types of bonds:Two types of bonds:

Islamic coupon bondIslamic coupon bond Islamic zero coupon bondIslamic zero coupon bond

Trading of Dept Certificate – Trading of Dept Certificate – Discounted Bai’ al-DaynDiscounted Bai’ al-Dayn

For liquidity purposes, bond trading in the For liquidity purposes, bond trading in the secondary market is crucialsecondary market is crucial..

Islamic Bond MarketIslamic Bond Market

Muqarada Bonds an Alternative for Islamic Dept Muqarada Bonds an Alternative for Islamic Dept BondsBonds

Securitization of Securitization of MusharakahMusharakah

MusharakahMusharakah is a mode of financing which is a mode of financing which can be securitized easily.can be securitized easily.

Especially in case of big projects where Especially in case of big projects where huge amounts are requiredhuge amounts are required..

Musharakah certificateMusharakah certificate

Every subscriber can be given a Every subscriber can be given a MusharakahMusharakah certificate, which represents his proportionate certificate, which represents his proportionate ownership in the assets of the ownership in the assets of the Musharakah.Musharakah.

After the project is started, these After the project is started, these MusharakahMusharakah certificates can be treated as negotiable certificates can be treated as negotiable instruments.instruments.

Can be bought and sold in the secondary market.Can be bought and sold in the secondary market.

Difference Between Difference Between Musharakah Certificates Musharakah Certificates and a Conventional Bondand a Conventional Bond

Musharakah CertificatesMusharakah Certificates

Represents the direct Represents the direct ownership of the holder ownership of the holder in the assets of the in the assets of the project. project.

If all the assets of the If all the assets of the joint project are in liquid joint project are in liquid form, the certificate will form, the certificate will represent a certain represent a certain proportion of money proportion of money owned by the project. owned by the project.

Conventional BondConventional Bond

Has nothing to do with Has nothing to do with the actual business the actual business undertaken with the undertaken with the borrowed money.borrowed money.

The bond stands for a The bond stands for a loan repayable to the loan repayable to the holder in any case, and holder in any case, and mostly with interest. mostly with interest.

Growth in MYR Islamic Bond MarketGrowth in MYR Islamic Bond Market

Potential Growth in USD Islamic Potential Growth in USD Islamic Bond MarketBond Market