Standardization and Authenticity in the Global Sukuk Market

Abstract

While the sukuk market was not spared by the recent global financial crisis, its track record in preceding years has been quite unique. Indeed, between 2001 and 2007, the growth rates experienced in the Islamic Finance industry and the sukuk industry in particular have been impressive. From 2005 to 2007, the growth in issuance value was 204%. As an Islamic alternative to the conventional bond, sukuk provide a unique tool of financing for Islamic as well as non-Islamic entities. With high growth rates in the recent past and a solid potential for further growth, the sukuk industry has many challenges to overcome. Lack of standardization, higher costs and structuring complexities are some of the key issues addressed in this paper. This paper proposes a model for standardization in the sukuk market that also addresses authenticity issues in sukuk structures. More specifically, it addresses the common practice of using orphan SPVs as third parties to facilitate shari’a compliance. Indeed, the standardization model presented here is based on the creation of an authentic third party that acts as an Islamic clearing agent of sort, and fulfills the role of an independent central Islamic trustee that could be used by many issuers.

Keywords: Islamic Finance, Islamic Bonds, Sukuk Market, Standardization

JEL Classification: G15, G29, N25