Critical analysis of sukuk innovation in islamic banking and finanace : case study of Cagamas Berhad`s Sukuk Al-Amanah Li Al-Istithmar (ALIm)

Abstract

The sukuk market is developing rapidly as investors are turning into viable alternative to the traditional debt market in meeting their funding requirements. The thriving sukuk market has resulted in the evolution of sukuk structures beyond the simple structures such as the zero-coupon, non-tradable sukuk and pure Ijarah sukuk. Recent sukuk structures are more complex, specifically tailor-made in the form of structured investments products linked to specific underlying assets such as securities, index, currency, commodity or a combination of any of these, based on the risk and return profile of the investors. For instance, the US$400 million hybrid sukuk offered by the Islamic Development Bank (IDB) in 2003 was based on the combination of Ijarah, Murabahah and Istisna’ contracts. Notwithstanding the complexity of the sukuk structure, there are great pulling factors towards the acceptance of sukuk. This study aims to identify the objectives and challenges lies in developing and innovating complex sukuk structures, with specific reference to Malaysia’s Cagamas’ Sukuk al-Amanah Li al-Istithmar (ALIm). The study aims to surface the real objective to what has been an innovation of the sukuk market. It also highlights the challenges towards the new existence of sukuk structure. Clear idea on the basis for the product structure would benefit the stakeholders in understanding and appreciating the reasons behind the complex product structure. By focusing on the case of the sukuk ALIm, the study concentrates on the documentations relating to the sukuk ALIm structure initiation including the product structure diagram and relevant agreements. In addition, semi-structured interview is conducted to seek the opinion on the roles of sukuk innovation and the needs to innovate new sukuk structure. The study finds that despite the main objective of profit maximization, there are evidences that the other objectives of the sukuk ALIm innovation derived from the needs, market pioneering motives and wider market penetration. Further, the replication of conventional bond raises the issues of the complex sukuk structure.