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Sukuk are just another capital markets instrument (and that is a good thing)

Tradeable securities include Sukuk. They trade on significant stock exchanges worldwide and settle via the biggest global securities clearing systems. In other words, they are capital market instruments, much like stocks and bonds. Naturally, they are designed to follow particular Islamic tenets. The fact that they are made to be suitable for Islamic investors does not, however, alter their essential characteristics. Even if a Tesla has been created to cater to a specific demographic, it is still an automobile.


Sukuk is securities, but most of the world's largest financial hubs, from New York to Tokyo, aren't considered standard capital market components.


Being viewed as exotic can occasionally be advantageous for business. For instance, if a Moroccan restaurant were to operate in Wichita, Kansas, the "exotic" moniker may draw in local foodies. Exotic, however, is rarely a good trait in the financial markets. This reputation frequently comes with a price, as investors tend to steer clear of products that are regarded as exotic or demand a premium over simpler ones.


capital markets instrument

The characterization of sukuk as an exotic and distant relative within the family of products on the capital market is justified for several reasons. The two most frequent are that sukuk are (1) exceedingly complex products and (2) only available to emerging market (EM) investors.


While it is true that the legal documentation for sukuk can be lengthy, the argument against their complexity only holds weight if conventional bonds are considered simpler in comparison. In reality, bond documents themselves are intricate in nature. If a group of poets with no finance background were subjected to reading both a bond indenture and an underlying contract for a sukuk from start to finish, they might conclude that bonds are the more complex instruments.


The perception of sukuk being unusually complex largely stems from the use of Arabic terminology such as ijara and mudarabah. However, if the capital markets can accommodate terms like force majeure, pari passu, and defeasance, they can certainly adapt to a few Arabic words. Furthermore, the contractual principles represented by these words, such as leases and participations, are familiar to financial professionals.


The utilization of Arabic words also contributes to the belief that sukuk are primarily associated with emerging markets (EM). From the viewpoint of trading desks in major financial centers like New York, London, or Tokyo, a product incorporating Shariah principles and employing Arabic terms may appear inherently EM-oriented. While it is true that many EM issuers utilize sukuk for funding, and EM-based investors often purchase them, these facts alone should not categorize the instrument itself as exclusively EM. Stocks, for example, have more listed companies on the National Stock Exchange of India and the Shanghai Stock Exchange compared to New York or London, yet they are not considered EM products.


Moreover, the majority of internationally placed sukuk are not solely confined to traditional EM instruments. Most issuances come from sovereigns, supranational entities, state-owned enterprises, and large multinational corporations with credit ratings toward the higher end of the investment grade spectrum. Notably, several Western issuers such as the United Kingdom, Luxembourg, and the International Financing Facility for Immunization (an international organization organized as a UK charity) have also issued sukuk.


In essence, the perception of sukuk often diverges from reality. Many financial market participants dismiss them as overly complex EM instruments, overlooking the fact that they are fundamentally securities. Similar to how a climate change denier views a snowstorm, they focus on superficial aspects of the product, such as the use of Arabic terms, and fail to recognize the underlying reality that sukuk can be a valuable instrument in capital markets.

For international investors, disregarding sukuk comes at a cost, as the product offers diversifying credits and compelling credit stories.


The Islamic Development Bank, for instance, is a supranational institution committed to promoting sustainable social and economic growth in its member countries, issuing billions of dollars' worth of triple-A rated sukuk annually. Any high-grade, fixed income investor with an interest in sustainability should consider these sukuk as valuable diversifying assets for their portfolios.


In summary, sukuk, like stocks and bonds, are simply a type of tradable security. They are not tied to a specific nationality nor exclusively designed for a particular type of institution. Recognizing the fundamental nature of sukuk as a useful and diversifying instrument would benefit the international capital markets as a whole.


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