PRODUCTS OF ISLAMIC CAPITAL MARKET

 SUKUK

                                

    Sukuk, or Sharia-compliant bonds, are Islamic financial certificates. Investors who buy Sukuk or bonds are guaranteed to receive a steady stream of payments until they reach a predetermined maturity date. At that time, investors receive a return on their initial investment, though, in the case of Sukuk, complete payback is not assured. And, similar to bonds, Sukuk is meant to provide less risk than equities and therefore frequently used to diversify portfolios, with rating agencies assessing the creditworthiness of both Sukuk and bond issuers. Nevertheless, Sukuk adheres to Islamic financial principles by not earning money from money, such as interest or usury. This is based on the idea that it is improper for any asset, including money, to gain in value solely as a result of lending. Sharia, on the other hand, does not forbid investors from earning a profit if the provider is ready to participate in the risks of a successful business. An investment returns a profit rather than interest when compared to borrowing. Traditional bonds are always Riba since they pay a fixed interest rate (LIOUDIS, 2022).  

    Sukuk and bond are basically similar in many ways. However, there are still some distinctions that make Sukuk ‘halal’ than a bond. Firstly, the ownership of an asset is compared to a debt obligation where Sukuk is backed by tangible assets, and investors receive a portion of ownership in an asset with genuine value. Despite the fact that a bond may also signify this, the ownership of a bond signifies a debt responsibility. Secondly, the Sharia-compliant assets vs. unrestricted assets – Sharia compliance is required for the assets backing Sukuk. They cannot include investments that receive the majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment and weapons, or tobacco, as well as banks and other organizations engaged in interest-paying operations. Bonds, on the other hand, may be utilized to fund any compliant asset, project, business, or joint venture. Third, Sukuk's face value is determined by the market value of the underlying asset, while the face value of a bond is determined by the creditworthiness of the issuer, including its rating. 

    Moreover, the fourth distinction that can be stated is about the variable vs. fixed value. In this factor, Sukuk can increase in value when their underlying assets improve in value, and vice versa, losses and costs associated with the underlying asset can also affect the value of the Sukuk. The performance of the underlying asset has no bearing on bondholders. Unlike the sale of debt, investors selling Sukuk on the secondary market are selling ownership of the underlying assets. When investors sell bonds on the secondary market, they are actually selling a lending obligation. In addition, the role of the purchaser is another means of differentiation between the two. The purchaser of a bond acts as the lender, while the issuer of the bond is the loan recipient. With Sukuk, the purchaser acquires partial ownership of a tangible asset and subsequently leases it back to the issuer for a predetermined time period. Instead of participating in an implicit loan agreement, the investor simply charges rent for the use of the asset. Therefore, the relationship between an issuer of a bond and its purchaser is fundamentally dissimilar to the relationship between an issuer of Sukuk and its purchaser. 

    For instance, there is a first-of-its type Sukuk Prihatin (Sukuk Prihatin) being issued by Malaysia, and CIMB, Maybank, Public Bank and many others are one of the distribution banks participating in the sale of this innovative and new products. As a response to public demand, Sukuk Prihatin has been launched to assist with the nation's recovery following COVID-19. As part of the Penjana (National Economic Recovery Plan) that was unveiled on June 5, 2020, Sukuk Prihatin aims to empower the Rakyat, promote enterprises, and develop Malaysia's economy in three distinct ways. Some terms and conditions that need to be known are the Islamic principles used in this Sukuk which is Commodity Murabahah (via Tawarruq), the date of maturity where the Sukuk Prihatin will be due on September 22, 2022, two years after it was issued, and the rate of return to investors of 2% per year (fixed throughout the Tenure). 

                                                                            

               

The infographic shows the Bond and Sukuk statistics from the year 2019 to 2022 from the BNM FAST’s website.  

Islamic Real Estate Investment Trust (i-REIT)

   

    Equities are long-term risk investments with substantial capital appreciation potential. Typically, investing in stock allows investors to a portion of the company's profits in the form of dividends. A Real Estate Investment Trust (REIT) is a type of equity that consists of a trust or fund that owns and manages commercial real estates, such as retail centers, hospitals, plantations, industrial real estate, hotels, and office buildings. The management company of a REIT can deduct shareholder distributions from its taxable income. A REIT that is listed on a stock exchange is traded in the same manner as shares. In addition, since they may be traded on the stock market and have lower capital expenditure, they are more liquid than other forms of real estate. Shariah-compliant REITs share the same objectives, management, and organizational structure as conventional REITs. The primary distinction is that Islamic REITs must adhere to Shariah principles. Several developments in the Islamic financial system have inspired a rising interest in comparative studies examining the parallels and contrasts between Islamic and conventional financial instruments. 

    Next, we will examine the REIT and i-REIT characteristics. When profitable, REIT has the conditional income required to distribute at least 90 percent of the fund's net earnings yearly to its unitholders. In addition, REITs offer enhanced investment choices and diversity, as well as high levels of transparency, as REITs are required to disclose quarterly financial statements similar to other listed equities. i-REIT, on the other hand, must only invest in Shariah-permissible activities; but, in certain situations, such as mixed operations, it must adhere to the 20 percent benchmark established by the Shariah Advisory Council (SAC) of SC. Included among the Shariah-prohibited activities were financial services based on riba, gambling, the manufacture of prohibited non-halal products, conventional insurance, Shariah-prohibited entertainment activities, the manufacture or sale of tobacco-based products or related products, stockbroking or share trading in Shariah-incompatible securities, as well as hotels and resorts (Bursa Malaysia Berhad, n.d.). Furthermore, a Shariah committee or Shariah advisor must be appointed to advise the fund manager on Shariah compliance-related problems. 

        Apart from that, REITs and i-REITs have identical tax statuses in Malaysia with respect to stamp duty, real property gains tax, and corporate tax. The regulatory framework is also comparable, with the exception that i-REITs must adhere to Shariah law. The return that unitholders of a REIT will normally get can be in the form of income distribution depending on the distribution policy mentioned in the REIT's deed and capital gains resulting from the price appreciation of the REIT's units. Meanwhile, i-REIT offers a diversified portfolio of real estate and real estate-related assets, allowing investors to diversify their risk profile through participation in a variety of real estate and real estate-related assets. In order to qualify for tax transparency status, an i-REIT is required to distribute at least 90 percent of its total income to unitholders, and i-REITs provide stable returns because they are physically able to generate stable, sustainable income through rental income and capital appreciation, which can be used to continue paying regular dividends.

    Furthermore, every investment carries both large and small risks. The same applies to REIT and i-REIT. Regarding REIT, investors should be aware of the REIT's risk management and corporate structure, particularly the REIT manager (good track record and reputation). Next, the REIT's investment purpose and strategy, as well as the real estate's quality, including mortgages, occupancy rates, and geographic locations. In contrast, the risks associated with returns are not guaranteed for i-REITs, whose entire return is dependent on the success of the real estate market. Therefore, the unit price of an i-REIT may decline if the value of its underlying assets declines. The market aspects where i-REIT is also vulnerable to market demand and supply fluctuations. Consequently, market fluctuations, economic confidence, and changes in interest rates may impact the price of i-REIT (Bursa Malaysia Berhad, n.d.). Last but not least, investors will not have direct control over investment decisions made by the management business, such as whether to buy or sell certain real estate or how it will be handled. 

        In Malaysia, for example, Al-Aqar Healthcare REIT operates as an Islamic real estate investment trust (i-REIT). In June 2006, Al-Aqar Healthcare REIT, also known as Al-Aqar KPJ REIT, was launched in Malaysia as the first Islamic REIT in the world. The original investment of Al-Aqar KPJ REIT was USD 138 million in six hospitals (A Complete Guide on Islamic REIT: A Liquid Investments Accessible to Retail Investors, 2021). Al-Aqar Healthcare REIT (Al-Aqar or the Fund) was listed on Bursa Malaysia Securities Berhad's Main Market on August 10, 2006. Al-Aqar primary contract used is ijarah (leasing), and it focuses mostly on the renting of hospitals. It is the first healthcare-focused REIT in Malaysia, with a property portfolio comprised mostly of hospitals and healthcare facilities.