Abstract
It's a reality that the world economy is rapidly growing and developing. International foreign markets are in trouble about offsetting the funds that meet the finance demand with every passing day. In this case, the need of finding new sources is triggered off. In Islamic countries, in which interest is forbidden, bringing the idle funds to the economy is to be seen to offset these needs partially. Thanks to this, the investors, who reject to invest in financial markets due to their faith, have an alternative. In this chapter, Sukuk, the development in Islamic finance markets, an item of borrowing out of assets, is observed. In this regard, this study explains the structures, types and the actions of the sukuk hence one can conclude that Sukuk can be valued as an alternative investment item for Turkish markets.
TopAlternative Financing And The Definition Of Sukuk
Using the alternatives proposed by conventional banking transactions is not possible under Shari’a principles. However, this situation makes it difficult to control the mechanism of money in economic activities of Muslim countries and undermines the country's development (Wedderburn-Day, 2010, s. 326). Therefore, the development of Islamic finance models and growth on the implementation requirements necessitated the planning of the need to ensure the conditions of the Shari’a by the authorities of the subject environment. The potential size of the industry is estimated to be around $4 trillion. Islamic financial products are approximately $1 trillion of investment value, and are expected to double in 5 years (Küşat, 2014).
Sukuk which is structured on the basis of Islam has a very important place in Islamic finance market. According to Sheri’a principles, the use of conventional banking applications, swap and loan derivative tools are forbidden and sukuk, as present alternatives compliant with Sheri’a principles, is gaining more importance for the developing economies (Tariq, Managing Financial Risks of Sukuk Structures, 2014). First, in practice, even though it was used in the frame of Islamic countries and the Middle East, the domain is expanded in a very short time. European and American companies are also included among the Sukuk investors (H.Abdel-Khaleq & Richardson, 2007).
Figure 1.
Islamic finance services industry
Sukuk is the plural form of the word “sak” in Arabic. “Sak” literally means a written document or official report. In Arabic, the term of deed is used for bonds and bills while “sak”s are used for sukuk, which means Islamic notes. It is defined as a financial certificate in many of the studies conducted so far, and is the Islamic equivalent of the bill of exchange. Besides, it is also described as an Islamic investment certificate, and also accepted as the most compliant asset to the Islamic principles for it has no interest (Güngören, 2011, s. 95) (Wilson, Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk – Overview of the sukuk market, 2004, s. 1)
Sukuk is defined as “an ayn (good), benefit, service, a specific project and / or investment on the existence of equal value representing the shares of financial documents” (Durmuş, 2010, s. 143).
In the simplest way, sukuk represents having an entity and the right to gain benefit from it. The right mentioned in sukuk is not only cash but also right of property (Wilson, Innovation in the Structuring of Islamic Sukuk Securities, 2008, s. 1) and thus makes sukuk different from traditional bond. While traditional bonds are securities which have interest, sukuks are investment certificates which derives from the right of possession in the basket of entity (Tariq & Humayon, Risk of Sukuk Structures: Implications for Resource Mobilization, 2007, s. 203-204). A sukuk is evaluated by comparing traditional bonds and securities because it gives the investor a share of the income/profit from the financed entity instead of interest. The securities are the certificates depending on debt and sukuks are the certificates depending on entity. (Güngören, 2011, s. 96) (Yılmaz, 2014, s. 82-84).
Key Terms in this Chapter
Asset Leasing Company: A capital market institution founded in order to issue rent certificates.
Ijara Sukuk: The term ijara refers to rent. Financially, the term refers to a contract issued when purchasing an asset in order to achieve a regular rent. In this aspect, an Islamic bank purchases an estate, machinery or an equipment in order to rent the asset for a specific period of time.
Islamic Finance: The act of doing every financial activity and transaction within the Islamic rules and regulations.
Sukuk: Sukuk commonly refers to the Islamic equivalent of bond, which provides partial ownership of a property, benefit, service, project or a tangible asset, thus it is not solely a monetary right but an ownership right.
Dividend: The amount of monetary benefit of a principal gathered from a commercial or industrial activity at the maturity date.
Interest-Free Financing: Due to the fact that interest is forbidden in Islam, interest-free financing is the method of financing used along with Islamic regulations different than the conventional banking transactions. The system, which accepts the sharing of labour and risk according to the distribution of profit and loss, is rather known as interest-free financing.
Mudabara Sukuk: The term refers to a contract where one party puts forward labour whereas other party provides capital. The profit obtained at the end of the business is distributed in the ratio designated in the contract whereas the loss is only afforded by the bearer of capital. The sukuk issued through mudaraba sukuk also carries the features of mudaraba. Mudaraba can be traded in secondary markets but it does not guarantee income. The investors do not have the right to recourse in the event of a project being unsuccessful.
Musharaka Sukuk: The word musharaka derives from the Arabic word “ serik ”, which means partnership, meaning both labour and capital partnership. The sharing of the loss is made according to the capital participation ratio whereas the profit is distributed according to the ratios agreed in the beginning of the project.