Shubber, K. (2008), "Editorial", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1 No. 2. https://doi.org/10.1108/imefm.2008.35201baa.001Download as .RIS
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Copyright © 2008, Emerald Group Publishing Limited
Article Type: Editorial From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 1, Issue 2
Shifting sands of Islamic finance
The recent debate over Islamic bonds (sukuks) illustrates - at one stroke - the changing landscape of Sharia-compliant finance, as well as the awesome responsibility shouldered by leaders in this field, who continually need to co-ordinate and standardise concepts and practices.
Sukuks have witnessed phenomenal growth since the onset of the new millennium, as they had been perceived to be acceptable and legitimate from an Islamic perspective. While in each of 2001 and 2002, total issuance of sukuks did not surpass the $1bn mark, the figure exceeded $47bn in 2007, representing an increase of 73 per cent over the corresponding amount in 2006. Indeed, when we look at the compound rate of growth over the 2001/2007 span, this comes out at a staggering 90 per cent per annum!
In essence, these instruments would work thus: a new corporate entity (X) is set up, whereby the ownership of certain types of fixed assets (such as land, buildings and equipment) is transferred from the holding group (Y) to it.
X would then issue bonds to the total value of its assets, and these would be sold to institutional and private investors. Y would continue to make use of X’s assets, thereby paying compensation to X in the form of periodic rental.
This rental income received by X would provide the earnings necessary for the payment of dividends to the sukuk-holders. In addition, the sukuk-holders would receive the redemption value of the paper at the maturity date.
Clearly, therefore, wherever the return to sukuk-holders is constant from year to year, the impression will be created that this is a fixed amount similar to the coupon payment on government and corporate bonds. Thus, a main requirement here is to make this return sensitive to market conditions, so that it is made sufficiently variable and flexible.
Another possible adjustment is to make the paper irredeemable. In this case, the paper would acquire more equity-like features, making it less susceptible to criticism by Sharia scholars. The introduction of a “perpetual” element of this kind also relieves the issuing corporation (X in this example) from having to pay up the maturity value, thereby assisting the firm’s liquidity position.
Drive for legitimacy
It is a glaring fact that Muslims everywhere are coming round to the requirement that they need to invest, trade, and transact business in accordance with their Sharia. Also, while they wish to live an amicable life on this earth, they must not forget the hereafter. In this respect, most Muslims have little choice but to fall back on judgements meted out by their scholars, due to the complexities of modern business and finance. At the same time, Muslim scholars have a duty to pore over all types of modern instruments, practices, and businesses in order to honour their grave obligations in deciding on what is halal (allowable) and what is not.
All this necessitates several things. The need for dialogue and frank exchanges is certainly one important element, thus calling for more and more conferences, seminars, and media output. Intertwined with this, is the academic plank, represented by pertinent books, research projects, and training/educational courses.
Herein comes out plainly the role of this journal. We continue to welcome academic papers relating to recent academic work in all areas of Islamic finance, as well as issues concerning management in the Middle East (including North Africa). In addition, we endeavour to review new books published, and cover major developments and events in these fields. Moreover, the journal welcomes any worthwhile comments from readers on the contents of various items published, including editorials such as this one.