Conventional vs. Islamic Bond Sukuk Market

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Conventional vs.Islamic Bond _at_ Sukuk Market

• Prof. Dr. Mohd. Masum Billah
• E-mail masum2001_at_yahoo.com

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Conventional Bond Market

• 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.
• 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.

3
Market Participants

• Dealers
• Dealers link buyers and sellers by buying and
  selling securities
• Brokers
• Agents of investors who match buyers with
  sellers of securities
• Investors
• Includes individual investors, financial
  institutions, pension funds, mutual funds and
  governments, from around the world.

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Types of Bonds

• Convertible Bonds
• Extendible/Retractable Bonds
• Foreign Currency Bonds
• Government Bonds
• High Yield or "Junk" Bonds
• Inflation-Linked Bonds
• Zero Coupon or "Strip" Bonds

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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
• Yield-to-Maturity
• Duration
• Interest Rates

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Islamic Bond Market

• Three main steps involved in the bond issuance.
• Securitization
• Bond Issuance
• Trading of dept certificates

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Process of Securitization using Bai al-Inah
(1) Sells an asset to the creditor in cash
_at_RM14mil
Creditor
Debtor
(2) Cash payment RM14mil
(3) For future date, the debtor buys back the
asset for 15 mil
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Issuance of Islamic Dept Certificate (Shahadah
al-Dayn)

• Two types of bonds
• Islamic coupon bond
• Islamic zero coupon bond

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Trading of Dept Certificate Discounted Bai
al-Dayn

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

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Islamic Bond Market

• Muqarada Bonds an Alternative for Islamic Dept
  Bonds

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Securitization of Musharakah

• Musharakah is a mode of financing which can be
  securitized easily.
• Especially in case of big projects where huge
  amounts are required.

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Musharakah certificate

• Every subscriber can be given a Musharakah
  certificate, which represents his proportionate
  ownership in the assets of the Musharakah.
• After the project is started, these Musharakah
  certificates can be treated as negotiable
  instruments.
• Can be bought and sold in the secondary market.

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Difference Between Musharakah Certificates and a
Conventional Bond

• Musharakah Certificates
• Represents the direct ownership of the holder in
  the assets of the project.
• 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.

• Conventional Bond
• Has nothing to do with the actual business
  undertaken with the borrowed money.
• The bond stands for a loan repayable to the
  holder in any case, and mostly with interest.

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Growth in MYR Islamic Bond Market
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Potential Growth in USD Islamic Bond Market