Islamic Banking and Finance

1.0 INTRODUCTION

1.1 Background Study

The Islamic banking and finance sector is a fast growing industry, where it expanding and getting stronger each and every year. According to Tahmoures (2013), there are over 300 Islamic banks and financial organizations successfully running their business from Dubai, Los Angeles, London, Karachi, Jakarta, Cairo, Riyadh and many other cities in the world. The Financial Times estimates the value of the industry in overall are exceeding $1 trillion (Christophe, Rima, Laurent, Financial Times Special Report, 2010). Most of the expansion has been contributed by the issuance of sukuk.

According to Nazri (2012) in his presentation of Islamic Banking Operations and Regulatory Framework Workshop in Sri Lanka, sukuk is defines as certificates that represent the holder’s proportionate ownership in an undivided part of the underlying asset, where the holder assumes all rights and obligations to such assets. Commonly, sukuk is known as ‘Islamic bonds’, but the correct translation of the Arabic word of Sukukis, ‘islamic Investment Certificates’ (Tahmoures, 2013). The term ‘Islamic bond’ is being pointed out as the only difference between sukuk and conventional bond is that the regulation consistent with Islamic principle of financial trading apply to sukuk (Arif and Meysam, 2012).

Conventional bond is a debt obligation issued by corporation or government in order to obtain financial resources (Zhamal, 2010). The issuer is obligated to pay back the bondholder a principal amount plus periodic interest payments or coupons, upon maturity. This conventional bonds are prohibited by Shariah due to the interest bearing loan transaction (Nazri, 2012). Unlike conventional bonds, sukuk are issued accordance to Shariah principle (Fadma and Rachid, 2013).

Despite of the differences between sukuk and conventional bond, Balkish, Azwan and Rabiatul (2012) stated that, both financial instruments have fixed term maturity, bear profit (coupon) and tradable at normal yield price. However, sukuk must be related and attached to specific asset, service, or project for a certain time period.

1.2 Problem Statement

According to Dodik (n.d), there is only 20 total of results from Proquest searching of sukuk. Today, the increasing popularity of Islamic finance and banking product around the world, especially the issuance of sukuk, a great number of research has been attempted to investigate difference, application, and performance as related to sukuk. In the past research made by Fadma and Rachid (2013), they only evaluate the performance of sukuk portfolio in compared to conventional bond portfolio, in the context of Malaysian market. In their study, they are trying to find either the correlation between return of the portfolio of sukuk and bonds exist.