Risk In Investment Sukuk Example For Free

In sukuk, credit risk means that the probability of an asset or loan becomes unchangeable due to a failure or delays in payment and if the correlation involves in engages by written agreement then the counterparty risk is the probability that the counterparty rebound on the situation of the delegate. Other than that, the outcome can be tough with a fall in the value of a bank’s assets and credit and counterparty risks essential in Islamic finance. They are one and lone due to the essence of Islamic financial instruments that somehow to be transformed to the basis of the Sukuk asset collective.

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Meanwhile, it has a different in conventional financial institutions and Islamic banks no need to access to the derivative instruments and other credit risk management mechanisms due to Sharia thoughts. Major Sukuk issuances have mostly bear on assets based on Ijarah, Istisna, Salam and Murabaha contracts. Other than that, there is several credit risk considerations joined with these modes of finance. Firstly, Salam contracts are bare to the risk that goods will not be endow on time or will not fulfil to the deal allotment and besides that Istisna contracts entail in performance risk. The client of the bank may fail on the conditions of the contract and the subcontractor may fail to make the vital services. In addition, there is also a coupon payment risk that connected to Sukuk and in case the obligor fault to clear all the payments of the demand coupons on time given. However, the asset reclamation risk might be arising as the underlying assets and might not be amply redeemed when the originator has to buy back from the certificate holder. Besides, there are also specific risks connected to the SPV such as the belief of making a payment risk entailed with the SPV where the maker need to repay back the certificate holders through a clearinghouse. Apart from that, the Sukuk coordinate are bared to a liquidity risk. Presently, sukuk coordinate do not have good structured and adequately aqueous derivative market and many of the credentials cultivate to be held until maturity. In addition, the hidden assets of the Sukuk credentials are also refer to a risk of shortfall which is a crucial risk in the case of accoutrements and massive degrees arrangement and yet there is a potentiality to lessen the risks of asset losses by using purvey for assurance to redeem back in the mould of Takaful. Types of Investment Sukuk Description of Investment Sukuk Shariah rulings and requirements Salam certificates These are documents of equal value issued for the sake of mobilizing Salam capital and the items to be delivered on Salam basis are owned by the certificate holders. Issuer: Sells Salam commodity Subscribers are: Buyers of that commodity. Mobilized Funds: The purchase price of the commodity, which the Salam capital. Certificate Holders: Entitled to the Salam commodity and the selling price or the price of selling the on parallel Salam basis if any. Istisnaa certificates These are documents that carry same cost and are addressed with the attempt of mobilising the funds required for producing a certain item and the items to be produced on Istisnaa basis are basically possess by the certificate keeper. Issuer: The manufacturer or supplier. Subscribers are: The buyers of the item to be produced Mobilized Funds: are the cost of the item Certificate Holders: Entitled to the item or the selling price of the manufactured item. Murabahah certificates These are documents of same amounts are addressed for the aim of financing the Murabahah commodity and the authorization holders will become the proprietors right of the Murabahah commodity. Issuer sells: Murabahah commodity Subscribers are: buyers of that commodity Mobilized Funds: the buying cost of the commodity Certificate Holders: Basically stand alone by the Murabahah commodity or the price of selling it.

3.9.3

Shari’ah Compliance Risk

There are a lot of disadvantages of Shari’ah compliance risk in sukuk. Shari’ah compliance risk means to the failure of asset cost as prove of the issuers’ break of its fiduciary responsibilities with honors to obedience with Shari’ah and there might be a number of such instances of deliberate or acquitted breaches. Besides, the closure clauses or syaria jurist of the Sukuk announcement describe issues that will officially make the Sukuk exploit invalid and annulled due to Sharia non-compliance. For example, if the Sukuk is based on a hybrid of Ijara and Istisna’ assets, Ijara must always more than Istisna’ in the pool, otherwise the Sukuk deed will disperse and thus approximately speaking, Sharia compliance risk must be defined as a rate of return inevitable in comparison to the market rates, as a result of complying with the Sharia. Hence, the issue of competitiveness and survival in capital markets as a Sharia complaint the asset class. For example, in the case of occurrence of a Wakil or the warrantor and the agent need to be unconnected entities to disprove any battle of interest and moral hazards. However, Islamic finance is an economic model imitates the essence of a faith that is a way of life for Muslims. Therefore, the pressure to keep alive the nature of Islamic financing in a Shari’ah compliant way remains powerful and the Sukuk structures must not only imitate this but also preserve competitiveness. Often it is the case that a fine balance is affect between Shari’ah conformity and project viability considerations to the degree or extent that jurists and Shari’ah consultants play a constantly vital impression in the classify of the Sukuk thought. For your information, there are a number of discrepancies regarding the applicability of Islamic financial instruments against the different schools of thought as well as the legal regimes in which the Sukuk are issued such a theoretical ambiguity would pose further operational risks that the Islamic bank might be run post nominal of Shari’ah jurisdictions. For example, the theoretical applicability of the Murabaha contract varies between different schools of thought and various jurists such as the Organization of the Islamic Conference (OIC) Fiqh Academy concur that the Murabaha contract is binding on only the seller of the contract and not on the buyer but other jurists hold the prospect that both the parties to a contract have an equal obligation to the terms of the contract. However, it is notable that financial engineering has made it possible for Shari’ah positions to join together. For example, a few years ago, floating rate Ijara was not broadly conceivable to be Shari’ah compliant as, according to the Shari’ah principles, the originator can only guarantee rents (returns) on the fixed return underlying assets. As mentioned above, fixed rate Sukuk face serious matters of market risks nowadays and to match the market requirements of Sukuk to be floating rate, the Shari’ah requirements of rents must be in the fixed rate and the Ijara Sukuk are based on a Master Ijara Agreement with numerous subordinate Ijara agreements. Besides, in the subordinate Ijara contracts, the rents are revised semi-annually in accordance with the market benchmark. This is to ensure the rent is fixed for 6 months and floating at the same time. Major Ijara Sukuk likes Gutherie, Malaysia, Qatar, Saxony-Anhalt and so on are based on this marriage. Other than that, the investors might still have some matters in interest rate risk to a certain extent and they would be unprotected in the event that the floating rate rises to a level higher than the fixed rate of the underlying assets. Since the originator can only guarantee the fixed return on the underlying asset pools, the issue of floating rate returns still maintain disputatious, particularly in pooled hybrid Sukuk. So, the only major issuer to offer fixed rate distributions is the IDB which continues to face the underlying rate of return risk. Another example relates to the liquidity facility. Liquidity facility is something likes a letter of credit, standby bond purchase agreement or other arrangement used to render liquidity to purchase securities or accommodates funds to the agent or its issuer to buy the securities that have been tendered to the issuer or its agent but which cannot be immediately or directly remarketed to new investors until such time as they can be remarketed and the provider of the liquidity facility is typically a bank. Besides, stipulations for a liquidity facility to abate lags between payments to investors and returns on the underlying asset pools have been analyzed by the prospectuses of the sukuk. Some liquidity facilities have been formed to permit the trustee to make some advantages to the facility for any liquidity deficit ensuing from default in the Sukuk asset pools and the imbursement of the liquidity services have been provisional upon surplus funds after the distribution of coupon payments to the Sukuk holders. However, it has been suggested by Shari’ah scholars that the sole purpose of such a liquidity facility should be to easily out delays between investor payments and returns on the underlying asset pools and the importance of such a liquidity facility can most efficiently be accumulated where the arrangement has floating rate payments because of the fixed rate returns would give the non-existence of interest rate differentials. A third example of the shari’ah compliance risk is that the functions and the relationships of special purpose vehicles (SPVs) and other third party agents. In the occurrence of a wakil or agent of the guarantor, wakil have to be separate entities to countermand any conflicts of interest and moral hazards. There also had been proposals to appeal to two SPVs in several instances instead of one. In this case, the first SPV would have to manage the financial obligations of purchasing and reselling the underlying Sukuk assets to the second SPV that would be a trust with the purpose of issuing the certificates. However, Shari’ah considerations prefer a single streamlined SPV that would perform in both functions of financing the transaction of Sukuk assets and servicing the trust certificates for the investors such an SPV should have foregoing experience in financial markets and they also should to remain independent of the originator. In the nutshells, what can I say here is the association of Shari’ah supervisors with Sukuk issues will guarantee investor confidence? The answer definitely will be yes. However, the convenience with which the Shari’ah compliance requirements can be married with the conditions of market competitiveness will remain a great challenge for the Sukuk issues.

3.9.4

Operational Risk

Operational risk is a form of risk that summarizes the risks of a company or firm undertakes when its try to operate within in their area or industry and operational risk is where the risk that is definitely not inbuilt in budgeting, systematic or market wide risk and whereas it is the risk that remaining after crucial financing and systematic risk and it also includes risks resulting from breakdowns in internal procedures, people and systems. However, there are several other risks definite to the process of the Sukuks and these risks mirror those continuances in conventional bond markets and are operational in the sense that they are inherent to the structure of the issuances rather than the underlying Islamic principles. Operational risk is divided into six risks which are default risk, coupon payment risk, asset redemption risk, spv specific risk, investor specific risk and lastly risk related to the asset as following: Firstly is the default risk which every prospectus has provisions for the termination of the certificate in the event of a default by the obligor and in case if the obligor fails to pay the rentals on the Ijarah agreements that form the coupon payments, the certificate holder can exercise the right to abolish the agreements of the contact and force the obligor to purchase back all the assets .Furthermore, certificate holder also can exercise the right to take legal action and force the obligor into debt rescheduling proceedings in the event that the obligor fails to compensate the principal amount of the certificate holder . Secondly is the coupon payment risk which the obligor might be fault to make a payment on the required coupons on the due date given and any delayed coupons will be subject to a specified payment amount that will be accumulated with the special purpose vehicles (SPV). However, these accumulated funds are suggested by Shari’ah councils to be donated for charitable purposes. Thirdly is the asset redemption risk where the originator has to purchase back the underlying assets from the certificate holder. Furthermore, the principal amount paid may not be same to the Sukuk issue amount and as a result, there is the risk that the assets may not be fully redeemed. Next, the special purpose vehicle (spv) is generally designated to be a standalone institute that is bankruptcy or black list remote from the originator. However, there may be a view of resolution risk involved with the SPV in that the originator will have to network the payments through a clearinghouse and then the certificate holders will be compensate through the clearinghouse immediately. Another risk is the investor specific risk where the certificate holder is contributed to some of the risks that are applicable to Sukuk structures and these are primarily with respect of liquidity issues. Besides, the Sukuk structures, they are welcoming in dealing with liquidity management issues in Islamic finance where the Islamic finance is revealed to a liquidity risk. Currently, there are related to liquidity risk because mainly its does not exist a good structured and sufficiently liquid secondary market. In addition,as we know the certificates are listed on several local markets but this alone does not signify their liquidity and the Sukuk certificates are medium to long term in maturity and their continued success will definitely depends on their ability to develop into highly liquid means of fund investment with adequate risk management mechanisms. However, as is the currently the case, all of the certificates be liable to remain until last of their maturity. Last but not least, Risk related to asset is the concealed assets of the Sukuk certificates where this risk is are similar to other risks as well and mainly there is the risk of loss of the assets and these are minimal with regards to Ijarah assets of land parcels. However, in case of equipment and massive scale formation typifying some of the underlying IDB assets the risk of loss may not be so insignificant. Nevertheless, Islamic finance has Shari’ah providing acquiescent for insurance compensations in the structure of Takaful and these arrangements might have to be utilized to diminish the risks of asset losses and as it is related to the asset risk as well is the need to maintain the structures of the assets. Besides, proper maintenance will certify capable returns to the certificate holder and according to Shari’ah principles, the SPV will usually be required to bear the responsibilities on ensuring asset structure maintenance.

3.9.5

Institutional Rigidity

Sukuk as we know is originate from developing countries and the financial infrastructure in some of these countries such as Bahrain and Malaysia are well developed but generally this infrastructure is delicate in most emerging economies. In our country Malaysia, sukuk are already used by Muslim and also non Muslim. It is not something new in this era. In addition, Sukuk require unique Shari’ah compliant structures and this creates a state, which can be termed as one of institutional rigidity and which cannot be removed in the short run, habitually it will raised the risks of Sukuks.

The features of this state that having the matters are likes:

Lack of hedging and financial engineering processes. For your information, hedging is making an investment to lower the risk of opposing price movements or drive in an asset. However, normally a hedge made up of taking an offsetting situation in allied to the security likes a futures contract. Non-existence of interbank money markets. Lack of best practice uniform controlling standards and commands. Weaknesses in litigation and legal framework support, particularly, in the treatment of default Non-uniform accounting, auditing and income and shortfall of recognition systems Non-strong investment assessment, promotion and monitoring infrastructure Ineffective external credit assessment systems Undeveloped state of financial markets Weak inter-segmental support and lost in connections. For example, without life insurance coverage the credit risk of a client is sure to be high. This is one of the important risk factors faced by Islamic banks due to non-existence of comprehensive Islamic insurance coverage.

3.10

Calculation Mechanism

Sukuk profit is coming from…..

As Shari’ah think about money to be a assessment appliance for cost and not stand for an asset in itself but it also need to stand in need of that one may not be accomplished to take income from money by itself. For your information, this self assurance of capital from money is known as Riba, and is obviously not allowed and now we already know that a lot of people misused their powers and keep doing these illegal activities but in sukuk we really take serious of this matter. However, some note that it is the money lending interpretation that is the more relevant for example when interest is applied in an unequal manner that can make or force individuals into debt traps and also a revolution of hardship and this already not special to Shari’ah as many non Islamic countries have extortion laws. In making a profit in sukuk, there also have the presumption for Islamic financial institutions and securitisations that the selling of claim or receivables without the hidden asset for par is not allowable. However, we need to take noted that some of the extant in Sukuk and somehow some of the Shari’ah boards arise to approve that as long as receivables are in a small part of the all embracing income flows and their existence is acceptable even though there is some alteration in the meaning of little. For the second point that have been raised by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is that they offensive the trading of receivables or claims as such in both of the Sukuk securitisations was seen to the due date so the physical assets such as land and properties are going to bring about the cash flows and also have been rendered to the investors as well as the payments or receivables due on those assets. If Tamweel or Sorouh PJSC is going alter to impoverish so the legal ownership of the properties and land might basically in with the investors. In addition, Institutions likes AAOIFI and the Islamic Financial Services Board has an important part to caper in working together the different parties in an organised fashion to argue the affair and attain an agreement that will eventually lead to adequate standardisation to achieve the common long term goals of Islamic finance. Besides, in the censured Gulf Sukuk structures, there is naturally a rent or lease management income derived from the asset. However, under the Ijarah rent type affinity so the company obviously will agrees to make a payment on the given time to the Sukuk holder’s salary for applying of the asset and these will form the periodic fixed income flow that imitate the coupon in a conventional bond. However, in other structures likes Mudarabah and Musharaka, there might be several capitals that flow from the assets that are going to pass through to the Sukuk holders to make a payment for the profit. However, if there is an extra income officially it is taken as an encouragement fee or if there is a deficit, the maker has basically has an obligation to make a payment to the changes of the differences. The third AAOIFI principle come into view that they will stand to this practice and hinders the payments or loans if there is a loss in the expected earnings. Thus, same with the purchase responsibility and what we were talk over below, the investors again will depends on the corporate or bank to pay back their profit but not based on the underlying assets.

How do we can calculate the profit rate from Sukuk?

Do you think that sukuk will be a model to the conventional bond market?

In our analyses, the answer definitely will be yes. Many people keep questioning how a Shari’ah compliant, non interest aspect the appliance might be recognizing in opposition to London Interbank Offered Rate (LIBOR). For us, to use an analogy, for example if I have a building and lease it out to renters at a rate based on market forces, market forces might be stand for by a formula which may comprise all the cost of borrowing. Nowadays, we live a life in a worldwide economy where the amount of tale on loan influences even what we pay for our day to day provisions. However, there is therefore did not effect in referencing revenue to LIBOR as long as the asset that is appropriate is a Shari’ah compliant asset and it has been prove when the enormous most of qualified scholars hold up this observation or view. Another thing that we are forbidden to do is to give or lend money with the purpose to take money in the future at a profit or in the form of interest. Nowadays, most of them like to lend money with a high interest but in Islamic law that is not the one trade that may advantage civilization as you are going to make a capital out of capital, as follows honestly speaking, the rich become better and richer while the poor turns to be worse and poorer. In addition here, there constantly has to be an hidden buying and selling behind it in which case you may absolve a blemish up or revenue rate and in Islamic law also advises us that we cannot trade money. Generally, capital is absolutely a medium of exchange and not a goods itself that might be traded.

Pricing of Sukuks with Embedded Options

How we are going to pricing sukuk with embedded option? Embedded option means a bond can be valued similar to the valuation of selection on equities by implementing binomial trees. In conventional bond issuance the value of the underlying assets will base on the level of interest rates whereas in Islamic contracts interest rates are substituted with the rate of return on the underlying assets. We can analyses the valuation of embedded options using altering scenarios in a tree diagram.

Assume that futures one-year rates of return develop are as follows:

YEAR 0 1 2 3

8.10

7.50 7.00 7.25 Rates 6.50 6.50 6.00 6.25 5.60

5.10

The represented tree can be utilized to value zero coupon certificates of various maturities. For example, the value of a 1-year zero coupon bonds at time 0 is

B (0, 1) = 1/1.065 = 93.89 % of par value

The value of a 2-year certificate at time 0 can be determined using the same discount mechanism. The value of a 1-year zero coupons at time 0 can be calculated as: If r= 7.00 1/1.07 = 93.45% of par value If r= 6.00 1/1.06 = 94.34% of par value As a result, an investor who owns a 2-year zero coupons knows that the investment will be worth either 93.45% of par value of 94.34% of par value in one year. If the probabilities of the two scenarios altered for risk are known then the investor can value the two year zero coupon bonds accordingly. Assuming 60 percent for r=7.00 and 40 percent for r=6 we can infer the value of 2-year zero coupon bond to be:

B (0, 2) = 1/1.065 x [(0.6) x 93.45 + (0.4) x 94.34] = 88.0807 % of par value

The estimate of callable bonds will appeal an adjusted technique as the callable bond is basically a portfolio of a non-callable bond and an American call option written with the non-callable bond as the underlying and a raid the price that is given by the call price. Accordingly, at each bulge of the tree the value of the bond can be given as follows: P = 1 + C at maturity P = max [CP, (1+C)/(1+r) ] one year prior to maturity P = max [{CP, 0.5 x (Pu + Pd) + C} (1 + r)] more than one year to maturity CP = price of the option C = coupon r = rate of return Pu = value of the certificate in one year if return goes up Pd = value of the certificate in one year if return goes down

4.0

Conclusion

The overall finding of this research included in this study is clearly understood thorough the conclusion of this report that Sukuk, as mentioned earlier, has become a very important instrument worldwide over the past decade and it has been accepted not only by the Muslim investors but also by the many non-Muslim investors across the world. Its characteristics have allowed it to give a competitive advantage over other influential in the Islamic Capital Market. There are other advantage of Sukuk for the economies and financial markets in terms of discipline and more financial stability. Hence, the purpose of this work research did not extend beyond examining and analyzing issues which are very important to the future development and enhancement of the Sukuk industry. It is expected that Sukuk will encourage many Muslims world-wide to participate in financial markets and hence will be instrumental in expanding these markets, particularly in the evolving countries. In this research we analyzed a number of issues related to the evolution, underlying principles, structures, risks and competitiveness of Sukuk as Shari’ah compliant substitutes to traditional fixed income financial assets. Other than that, the evolution of the sukuk market in our country, Malaysia might be result in extensive and wide-ranging measures which include the creation of an effective issuance manner and it will increasing the price discovery manner and agreement system, enacting a method bear, developing the investor base, advertising liquidity in the secondary market, and protecting the lawful, arrangement and Syariah composition. The foundations for the allowable development of Islamic finance in general and the Islamic bond market in particular are now in place and it is hoped that current incentives and measures under the MIFC initiative as well as other internal and external factors, will encourage local and international financial market players to become MIFC service providers. By doing so, and by making Malaysia as their regional hub, these players might definitely boost their market attain and blow up their buyer satisfaction bases within this region. The observation of our research in sukuk is made on the basis of the following points like firstly, the essential employment and objective of the Sukuk issuance is to outfit way of bargain in the capital and money market sector to all society Muslim investors as well as non Muslims. However, for the Muslim investor they will make them harmony of mind, security reliance are high and focus attention on this thing. However, until mid 2008 the international Sukuk market was driven mainly by corporate issues or qausi-sovereign mostly without implicit government guarantee while sovereign Sukuk were few which had resulted into imbalance and hurdle for issues such as creation of bench mark yield curve. Since then, due to the financial crisis, the international Sukuk issuance trend has shifted towards Sovereign or few multilateral agencies issuances mainly due to better quality & safe heaven reasons. Furthermore, there has been limited investors’ appetite for corporate risk. As regard to the issuances of Sukuk at the domestic level, the analysis shows that Malaysia is ahead. However, with consider to the growth in both international and domestic Sukuk issuances, the conclusion reached based on this study is that, until 2007 there has been high growth in both international and domestic Sukuk issuances, but the growth pattern was twist by the credit crunch. Nevertheless, in first half of 2009 the growth trend again showed sign of recovery and the market may have witnessed a stead reversal in Sukuk issuance if it was not hit by few troubled Sukuk issues. Tenor wise international Sukuk is mostly confined to 5 year tenor and there are just a couple of long term Sukuk which again high light the need for having balance between short, medium and long term tenors more for secondary market development purposes. At international level the Ijarah Sukuk is the most broadly used followed by Musharakah. During mid 2008 to mid 2009 the market witnessed the issuance of Sukuk dominated by Ijarah organize where issuance by Government of Indonesia of its retail and sovereign Sukuk are good examples. However, exchangeable or convertible and Hybrid Sukuk structures have also emerged as one of the potential growth drivers due to their innovation possible and also equity market link. Finally, the market situation and AAOIFI Shari’ah panel finding had affected the Musharakah and Mudarabah Sukuk issuance. However, we are of the view that the evaluation and the development of Sukuk is counted on to carry on which necessitate more and continue effort and improvement in many of its aspects. Admitting the challenges facing Islamic securitizations and bonds, there are likes to be a tough desire to overcome with explanations that will global up these product locality and numerous of chief investment banks and law firms are digging hard to find Shariah-compliant matters. However, to the liable investor appetency in the Gulf region and in the Far East for Halal investment chances and they require of many Islamic financial institutions to securities their hidden financings, we have faith in that overcome might be swiftly advanced that issue these arouse and these markets will establish abundant ground for all contributors. The recent trend shows that the Islamic Capital Market has grown and has drawn increasing interest from among the market players. This has motivate the need for creating appropriate measures in recognizing and measuring transactions relating to the issuance and investment of Islamic bonds to ensure compliance with Shari’ah Law. Hence, in response towards this need, AAOIFI has issued a new standard, FAS 17 which covers Islamic investments including Sukuk. Based to the standard, Islamic bonds should be categorized into three categories according to investment intentions, rather than two categories in accordance to the period of holding as is the practice in the traditional accounting. The classification of Islamic bonds is made to promote public maslahah or interest as underlies in the determination of zakat. Further, the standard states that the recognition for investment in Sukuk and shares shall be made on the acquisition date. In terms of its measurement, Islamic bonds should be measured at historical cost rather than fair market value. The standard also specifies the necessary requirements for Sukuk disclosures. The goal of these termination requirements is to ensure that adequate disclosure is made by the issuer of Sukuk for the purpose of assessing whether or not it complies with Shari’ah Law. In the effort to position Malaysia as a premier international Islamic financial centre, the Malaysian government has to encourage the private sector to be more effectively. The market for Sukuk authentication continues to grow and an important facet of this growth is the increased number of sovereign issuances typified by those issued by Malaysia, Bahrain and Qatar and, interestingly, Saxony-Anhalt in Germany. These certificates are appealing to global investors without having too much bearing on the underlying Islamicity of the certificates. Accordingly, Islamic secondary markets receive a boost because such sovereign issuances and the subsequent attraction of global investments encourage increased corporate confidence in their private issuances. Nevertheless, Ijarah Sukuks continue to hold as the most popular manifestation of Sukuk certificates. This is largely in part to their unambiguous Shari’ah conformity and familiar leasing formulae. However, leasing contracts on underlying real estate properties cannot single-handedly support the growing diversity of Sukuk investors. With increased global investors there will be a myriad of investment needs and thus other avenues of Sukuk issuances should be implemented to satisfy these demands. Istisnaa, Mudarabah and Musharakah certificates are established as part of the AAOIFI standard and can be garnered to offer a plethora of Sukuk structures. The recent Sukuk issuance by the Islamic Development Bank serves as an excellent case study in this regard with their Shari’ah compliant diversity of investments. With the rapid emergence of Sukuk markets, risk management considerations have also come to the vanguard of the industry. Novel financial instruments bring with them original financial risks. An analogous situation represented itself in conventional financial markets in the early 80s with the emergence of interest rate derivatives to hedge against the financial risks of bonds. With the globalization of financial markets and increased convergence of Islamic finance and conventional markets, indirect interest rate effects as well as other financial risks will necessitate the development of Islamic financial risk management techniques. Derivatives are inherently against Shari’ah considerations because of the uncertainty associated with them that amounts to Gharar. However, we have discussed the possibility of extending the functions of embedded options to fit the needs of Sukuk certificates and Shari’ah considerations. This facility also provides a debt structure framework that helps to regulate the functions of traditional instruments in turn benefit from the convexity gains of these instrument. Firstly, there are no markets for liquid interest rate derivatives and secondly, interest rates are fluctuations lead to significant gain in credit risk and lower the bonds price. Accordingly to these statement, investors in emerging markets is suffering from the negative effects of volatilities but cannot benefit from the positive side and such benefits have been garnered in conventional emerging markets such as in brazil where the interest rate volatilities is the 90s warranted a protective cushion against these fluctuations in the form of putt able and callable bonds these debt structures can be transferred to the sukuk issuances in accordance to outstanding shariah concerns. However, in conventional markets, investors have also garnered the positive effects of swaps between different interest rates, exchange rates and between floating and fixed rates. Again, the feasibility of swaps in Islamic markets has been in contention as they are deemed to contravene Shari’ah considerations. However, the emergence of Sukuk certificates as mechanisms of liquidity management presents a novel asset-backed securities structure that can set the foundation for supporting risk-management derivative instruments. Our discussion centred on the viability of a swap between floating rate Sukuk (FRS) and fixed rate zero coupon embedded Sukuk (ZCES). Needless to say, the limit is not here. According to the standard, Islamic bonds should be classified into three categories according to investment intentions, rather than two categories in accordance to the period of holding as is the practice in the traditional accounting. The classification of Islamic bonds is made to promote public maslahah or interest as underlies in the determination of zakat. Further, the standard states that the recognition for investment in Sukuk and shares shall be made on the acquisition date. In terms of its measurement, Islamic bonds should be measured at historical cost rather than fair market value. The standard also specifies the necessary requirements for Sukuk disclosures. The goal of these disclosure requirements is to ensure that adequate disclosure is made by the issuer of Sukuk for the purpose of assessing whether or not it complies with Shari’ah Law. In the effort to position Malaysia as a premier international Islamic financial centre, the Malaysian government has to encourage the private sector to be more innovative in developing products and services that are in line with Shari’ah. It is also imperative that the accounting practices adopted in the recording and reporting of Islamic bonds fully conforms to Shari’ah requirements and principles. Islamic scholars must continue to work with the financial professionals so that the knowledge gap between them can be reduced. In the future, empirical research should be carried out to compare the accounting treatment adopted and the reporting practices of organizations issuing Sukuk in Malaysia. It will also be beneficial to investigate the main differences between the practices adapted to account for Sukuk and the conventional bonds under the traditional accounting system. The sukuk market delivers a lot of advantages to both issuers and investors. Issuers can advantage from the bulky rose in liquidity in the Islamic world and also may beat on these new sources of funds. Mainstream bonds has been 10 to 20 basis points higher than the rising financing from the Islamic bond market in the current environment. Numbers of multilateral that arise in agencies are issuing sukuks to fund the projects of development. In addition, both corporate divisions and government agencies have taken into consideration that the sukuk market will be an striking source of funding. From the investor point of view, there are the advantages of diversification. In a sukuk issue in 2005, 48% of the issuance was bid by conventional-based investors. Excess liquidity in the global financial system has increased the demand for sukuk. That is also why sukuks are appealingly priced for issuers. The other advantage of investing for sukuk instrument is, firstly sukuk are valued aggressively in channel with conventional bond issues. Secondly, sukuk generally have better risk profile. Next, sukuk are contractible and fill the need for Shariah compatible tradable instruments. Lastly, short term Islamic financial market can benefit from Sukuk. In the nutshell, Sukuks provide an important research agenda for the future. Our research only clearly covers some of the important points. There is more work to be done and these topics can be expanded upon in further studies.

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