Introduction
As it is known, at the present stage, in the world economy, the issue of diversification of investment financial instruments is particularly relevant. One of the markets offering alternative financing schemes is the Islamic finance market, where increasingly more countries are initiating the issuance of Sukuk ‑ the equivalent of Islamic bonds. Given the limited financial and investment resources, it seems obvious to consider Islamic financing mechanisms and instruments as an effective alternative to Western capital. It is important to emphasize that, given the specificity of their activities based on the principles of the Islamic religion, Islamic financial institutions have shown better stability and resistance to the financial crisis. In this regard, such financial products as Sukuk are no less attractive for the investment community than their classic counterparts.
Literature Review
At the present stage in world practice, Sukuk provides an opportunity to attract debt financing, occupying an intermediate position between the company’s own and borrowed resources. According to the definition of AAOIFI (Organization of Accounting and Auditing of Islamic Financial Institutions), Sukuk is certificates of equal value, certifying the indivisible share of ownership intangible assets, the right to use them and receive income, the services rendered, the assets of a specific project, or a special investment project (Safari, Ariff, & Mohamad, 2014).
Western financiers compare Sukuk and traditional bonds, establishing the term “Islamic bonds” in the global financial community (Godlewski, Turk-Ariss, & Weill, 2013). However, there is a difference between these instruments in that the bond is debt, while Sukuk is the share in the allocated tangible assets. In general, it should be noted that a significant mistake of some researchers is the assessment of Islamic economic doctrine from the standpoint of classical political economy is not taking into account the specifics and characteristics of Islamic economic science. As a result of this, a misunderstanding of some basic principles and mechanisms of the Islamic economy arises. Obviously, without taking into account the characteristics of the Islamic economic model, several conclusions contained in scientific studies and training materials on various economic problems require at least refinement.
Nevertheless, in several publications, it is noted that a Sukuk or property certificate, unlike bonds, is not a debt obligation of the issuer to an investor, but a representation of a share in an asset (project) with a right of ownership (it is applicable as an asset securitization tool) (Al-area, Zainol, & bin Abdul Rahim, 2018). At the same time, Sukuk, in contrast to stocks and bonds, is targeted, providing non-guaranteed income from the profit that can be obtained from the use of assets (services) or a financed project. The main condition for issuing Sukuk is the security with real assets (tangible or intangible) (Smaoui & Khawaja, 2016). It is interesting to note that the risks associated with the ownership of the underlying asset, when issuing Sukuk, are related to the holders of this instrument, and not to the issuer.
A review of the literature allows systematizing the current main conclusions regarding the nature of Sukuk and its prospects in the global financial market. These conclusions can be summarized as follows (Echchabi, Aziz, & Idriss, 2016): 1) The Islamic financial system and Sukuk, in particular, are not identical to the interest-free financial system; 2) Alternative Sukuk is expressed not in the fact that it is intended to replace the instruments of the “capitalist” financial market or the socialist system as the “third way,” but in that it supplements them by offering its version of building a financial system that is not based on the use of loan interest; 3) The goals and objectives of applying Sukuk within the Islamic financial system are universal, and the Islamic financial system itself is addressed not only to Muslims. However, the lack of studies aimed at evaluating Sukuk’s influence not only on a regional scale but also on the world financial market should be noted.
Data Collection
The methodological basis of the research is a secondary study, using the dialectical method of cognition. In the research process, general scientific methods were used (analysis and synthesis, classification, systematic approach, deduction, induction, grouping, and comparison methods). The study is based on concepts and ideas about the mechanisms of a market economy, its regulatory functions, and principles, the nature of capital, etc.
The study applied the methods of the grounded theory of Corbin and Strauss. In the grounded theory approach, a methodology is proposed for generating theories from an empirical “field” (an inductive approach in which a theoretically ‘loaded’ interpretation is derived from the data). In this approach, the researcher from the data “deploys” the theory of the phenomenon selected for study (Birks, 2015). To do this, he must present the phenomenon in dynamics, identify the changes taking place in it, describe their nature, and explain the reasons, consistently summarizing the data and forming theoretical and practical conceptualizations on their basis.
The main goal of the study is to carry out a comprehensive analysis of the trends and prospects for the implementation of the principles and methods of applying Sukuk in the modern system of world economic relations, identifying the place and role of Sukuk in the economic and financial systems of Muslim and non-Muslim countries, as well as studying the potential of this tool in addressing relevant tasks of economic development.
Data Analysis
With the deepening debt crisis in the Eurozone and financial turmoil in the US, investors are increasingly trying to move away from a speculative and profit-based financial system. Under the new global order of economy and caution, the fundamental principles of Islamic finance risk sharing, as well as the prohibition of interest, have helped to enhance their image as a “safe haven” (Smaoui & Khawaja, 2016). Significant infrastructure development, planned both in Southeast Asia and the Middle East, means that sovereign or semi-state issuers will depend, among other sources of project financing, on Sharia-compliant documents that are individualized to meet different needs. Indeed, project finance needs in the Middle East are estimated at $120 billion over the next decade and $150 billion for Southeast Asia over the next five years.
The Islamic debt capital market will play an important role in these long-term projects. Developers in both the government and private sectors can use conventional bank financing, but the liquidity pool is shrinking day by day in light of tightened credit lines and strengthened regulatory requirements. There is a large pool of liquidity for Islamic finance, which makes project financing with Sukuk a viable alternative.
The main “boom driver” of the Sukuk market is ambitious infrastructure projects implemented both in Asia and the Middle East. Another reason is lower yield than in the traditional bond market, which is associated not only with the fact that Sukuk is a less risky instrument than a regular bond. Sukuk bonds are seen as an attractive medium-term investment mechanism (Ahmad, 2016). Borrowers through the use of not traditional, but Islamic methods of financing get the opportunity to expand their investor base and sources of financing. Moreover, in recent years, Sukuk bonds have increasingly been resorted to as an alternative to syndicated lending.
Experts also argue that the increased interest of European countries in the development of public-private partnerships contributes to the development of the Sukuk market on the world stage (COMCEC, 2018). Islamic finance and Sukuk in particular, aimed more at satisfying social needs, of course, can be safely used in the framework of the Project Bonds Development Initiative by 2020 in Europe and for funding public-private partnerships. In several publications, it is noted that, at the current stage, Islamic financial instruments ideally fit into the new global “integrated” way of life, which should replace the current capitalist model (Safari, Ariff, & Mohamad, 2014). The features of this structure combine market self-realization, entrepreneurship, long-term state planning, and resource allocation based on public interests.
It can be argued that the Islamic securities market is currently demonstrating a steady growth potential. In particular, the director-general of the Malaysian branch of the Islamic Bank Al Rajhi, Datuk Azrulnizam, notes that now Sukuk has become an important tool to attract long-term financing of infrastructure projects, especially in the face of a difficult liquidity situation (Datuk Azrulnizam as cited in Muharam, Anwar, & Robiyanto, 2019). The introduction of new Basel III regulatory standards for the short-term liquidity ratio limits the ability of traditional banks in terms of long-term lending, and countries that have not previously entered the Sukuk market should have increased interest in such an instrument. In this regard, Sukuk has the potential for application in European countries, actively engaged in the search for new sources of financing. The fact that Al Rajhi Bank is planning to provide advisory and technical support in terms of structuring the instruments to the states most interested in developing the Sukuk and Islamic capital markets is also contributing to the spread of the Sukuk market.
For several consecutive years, in the Sukuk market, there has been an excess of demand oversupply. The volume of accumulated liquidity exceeds the volume of the local market by many times, “pushing” the yield of securities down in both the primary and secondary markets. In particular, the huge demand for Sukuk for $358 million by the state-owned company Khazanah (Malaysia) led to the formation of negative profitability (Muhmad, 2018). At the same time, Islamic bonds are well suited for long-term financing of infrastructure and can help spread innovation in the financial market. Moreover, the creation of local and regional institutional investment structures allows pension and insurance funds to invest in Sukuk, which leads to the creation of a more liquid debt securities market.
Findings and Conclusions
The past few years have shown clearly that the model of the short-term capital market for liabilities and long-term assets creates risks during periods of market dispositions. As a result, increasingly more attention is being paid to matching assets and liabilities. Moreover, the Gulf countries have accumulated significant liquidity over the past few years, as investors seek to distance themselves from the dependence on dollar instruments, and rising oil prices have further increased their liquidity.
The reason why Sukuk continues to grow in double digits in most markets, despite the financial crisis, is mainly consumer effort rather than regulatory enterprise. From an industry perspective, there are emerging markets that are not currently open to Islamic finance but have potentials, such as Egypt and India. How and when they become available is a question, and if they have a corresponding demand for Islamic products and services, then banks and Islamic companies will also be interested in expanding the retail network in these countries.
In addition to developing new lines of business, key Islamic financial players also seek to expand their areas of influence. In particular, Standard Chartered Saadiq, the Islamic finance department of Standard, hopes to expand in Africa to make the content accessible to its Middle Eastern and Asian clients (Ahmad, 2016). In Africa, the Muslim population is very large, and a significant proportion does not use the services of banks at all.
The widespread use of Sukuk has the potential to have a significant positive impact on the economic development of the countries where this financial instrument is traded. In particular, this means diversification of investment flows, the attraction of long-term external investments for the implementation of industrial development plans, the need to tap into the country’s economy the financial resources of the population that are not used due to a lack of confidence in traditional financial instruments or a lack of Islamic financing.
However, there are several obstacles. In particular, the absence of a secondary market or its extremely low liquidity is characteristic of the Sukuk market (Ulusoy & Ela, 2018). Moreover, Islamic jurisprudence is, to some extent, uncertain and quite heterogeneous. As a result, decisions recognized in one jurisdiction may not be recognized in another. The proof is the fact that some types of Sukuk used in Malaysia are recognized as not complying with Sharia standards in the United Arab Emirates. Moreover, the Shariah council may invalidate the issue if it considers that the Sukuk does not meet Sharia requirements, which significantly increases investor uncertainty. There is no single standardized approach to determining the structure of Sukuk. All attempts to standardize, as a result, tighten the conditions for issuing Sukuk and significantly limit the composition of assets that could potentially become the basis for Sukuk.
The problems associated with issuing Sukuk are the time and costs spent by investors in attracting lawyers and compilers of related documentation, as well as the legality and preparation of assets associated with the transaction. Compared to ordinary securities, the cost of fulfilling Sharia requirements can influence the decision of investors to choose traditional issues instead of Sukuk. From our point of view, these problems should be seen as a call for more standardization for the issuance of Islamic bonds.
Based on the foregoing, it can be concluded that Islamic finance, including Sukuk financing, in the modern world economy, is likely to be further developed and may occupy an increasing share of the financial market not only in countries whose population professes Islam. The existing difficulties are mainly related to the lack of a legislative base and to a lack of understanding of the essence and content of Islamic financial instruments, which are usually associated with purely religious aspects. Thus, it is necessary to intensify efforts to study and practical use of investment financing instruments new to the West. Islamic finance, in particular through Sukuk, can to some extent constitute a viable alternative to classical forms of project financing, including through public-private partnerships.
References
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