Conventional vs. Islamic Bond @ Sukuk Market

1. Conventional vs.Islamic Bond @ Sukuk Market Prof. Dr. Mohd. Ma’sum Billah E-mail: masum2001@yahoo.com

2. 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.

4. 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

5. 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

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

7. Process of Securitization using Bai’ al-Inah (1) Sells an asset to the creditor in cash @RM14mil Creditor Debtor (2) Cash payment RM14mil (3) For future date, the debtor buys back the asset for 15 mil

8. Issuance of Islamic Dept Certificate (Shahadah al-Dayn) Two types of bonds: • Islamic coupon bond • Islamic zero coupon bond

9. Trading of Dept Certificate – Discounted Bai’ al-Dayn For liquidity purposes, bond trading in the secondary market is crucial.

10. Islamic Bond Market Muqarada Bonds an Alternative for Islamic Dept Bonds

11. 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.

12. 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.

13. 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. Difference Between Musharakah Certificates and a Conventional Bond

14. Growth in MYR Islamic Bond Market

15. Potential Growth in USD Islamic Bond Market