Islamic banking and finance have already become a global commodity within the span of four decades starting from the late 1960s. alhamdulillah, it is currently growing at a double-digit rate. Amongst the most popular and widely used financial instrument by both governments and private corporate entities is the Islamic financial bond called sukuk. In fact, it is popular in both Islamic and non-Islamic countries. According to the definitive financial solutions, as of the first half of 2022, global sukuk issuance reached $100.9 billion dollars. Malaysia, Saudi Arabia and Indonesia remained the largest issuance bases for sukuk, and together made up 75% of sukuk issued.
In 2014, the UK government offered its first sovereign sukuk. The very current by the UK government was in 2021. Nigeria issued its first sukuk in 2013, through the Osun state government. It raised $28 million to construct 28 schools in Osun state. The latest was issued by the Nigerian federal government, was in November 2022 worth N100 billion. The initial offer size of N100 billion was upsized to N130 billion due to the over 165% subscription level.
Now let’s come to the meaning of sukuk. Sukuk is equivalent to a conventional bond without interest or fixed return. Whilst a traditional bond is a loan, sukuk is equity. Whilst conventional bonds is fixed, with sukuk, it is residual. Whilst in conventional bonds maturity is fixed, with sukuk it is perpetual. And lastly, whilst in conventional bonds object of issuance must not be necessarily licit, with sukuk it must be licit to be valid for its purpose. In practice, sukuk is similar to conventional securitization where a Special Purpose Vehicle (SPV) is created to administer the transaction.
The Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) has defined sukuk as “certificate of equal value representing undivided shares in ownership of tangible asset, usufruct and services or in ownership of asset of particular project or special investment activity. However, this is true after receipt of the value of the sukuk, the closing of subscription and the employment of funds received for the purpose for which the sukuk were issued”
Potential benefit of sukuk for governments, private sector, investors and its impact on the capital market.
It has the potential to raise enough funds for the development of infrastructure such as the construction of schools, hospitals, roads, bridges, railway systems etc. it can also be used for macro-economic management by governments. In the private sector, funds are mobilized through sukuk by selling the ownership of right of a project to a group of investors who will be entitled to the cashflow of the project during a specified period. Further it is an ideal tool for liquidity management, a tool for the mobilization of fresh funds, and it generates good income for managers of the sukuk project.
To the investors, it offers shariah-compliant investment for those who would not invest their money in conventional bonds due to adherence to their faith dictates. It also proffers very safe investment to the investors since it has an underlying asset to back their investments. Another big advantage of sukuk to the capital market is that it can be traded in both primary and secondary capital markets. It is a source of developing capital market for the economy. In addition, huge source of funds for banks and individual companies.
Types
Even though there are other types of sukuk, we will concentrate on the fourteen types recognized by the Accounting and Auditing Organization for Islamic Financial Institutions.
Ijarah sukuk; a certificate of ownership in leased assets.
Sukuk Milkiyyah Al-Manafi’a; certificate of ownership of usufruct.
Certificate of equal value issued by the owner.
Certificate of ownership of usufruct of described future assets.
Certificate of ownership of a service of a specified party.
Certificate of ownership of described future services.
Salam sukuk.
Istisna’a sukuk.
Musharakah (participatory) sukuk
Wakalah; investment agency sukuk.
Mudarabah (partnership) sukuk.
Muzara’a; (share cropping) sukuk.
Musaqah; (irrigation) sukuk.
Mugharasa; (agricultural) sukuk.
The important amongst all these certificates of investment with considerable potential are those issued on the basis of musharakah (participatory) investment ie. istisna’a, salam and ijarah.
The infrastructural deficit on Ghana is very glaring, affecting almost all sectors in the country. For example, according to SEND WEST AFRICA Ghana, the educational sector alone has about 5,403 schools in critical condition and about 2,417 schools still under trees. As for Ghana’s railway sector it is kaput. Further, according to the Public Health Ghana, Ghana’s health is in a deficit of limited workforce and facilities, poor hygiene and sanitation and inadequate beds in major hospitals across the country. Lack of adequate road infrastructure from farming communities into the urban centers has caused a lot of food waste in Ghana. According to the Global Food Banking Network, in its article (October 13, 2022), 3.2 million tons of food is either lost or wasted along the supply chain in Ghana, costing about GHC762.32, million, while half the population is moderately to severely food insecure. Other sectors of the economy of Ghana are facing either same rate of infrastructural deficit or worse.
The issuance of sukuk in Ghana can rewrite this distressful story about Ghana’s social infrastructure and rekindle the light of development which we all deserve.
Sukuk has become a permanent financial instrument for mobilizing fresh funds across the globe by both central governments and private corporate bodies. For example, Malaysia, Nigeria, Germany, Saudi Arabia, UK, Indonesia etc. have enjoyed enormous infrastructural development from issuance of sukuk. the viability of sukuk with regards to the mobilization of resources and their effective use for the benefit of investors, fund users and augmenting infrastructural deficits can never be underestimated. And Allah knows best!
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email:yahaya0246873726@gmail.com
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