Islamic bonds in developing countries


Some thoughts of Professor M. Kabir Hasan

Sukuk or Islamic bonds are a new investment product in Bangladesh for a variety of investors. A financial instrument controlled by Islamic Sharia law is known as a sukuk. It differs from a traditional investment in that it does not earn interest (ie “Riba” in Arabic) and instead offers income in the form of shared profit.

Islamic financing represents around 25 percent of the total market. If Islamic bonds are effectively implemented and used, it will benefit the government and the economy in two ways: (a) when the private sector refuses to invest in infrastructure development, the government can generate funds and use to improve infrastructure development; (b) to cover the annual budget deficit, the government usually borrows from the banking system. As a result, the government puts pressure on the financial system. In such a situation, the government can reduce the funding gap by borrowing directly from citizens through Islamic bonds.

The private sector can also borrow from citizens to invest in their businesses, including various Sharia-compliant businesses. In light of this, the decision to introduce the Islamic obligation is very positive. Professor Kabir Hasan, a prominent, internationally renowned professor of Islamic finance at the University of New Orleans, has long advocated for the proposal. Here are the highlights of the recent conversation with Professor Kabair Hasan. [the talk was facilitated by Dr. Tonmoy Choudhury, Lecturer at Edith Cowan University]

CHALLENGES IN INTRODUCING ISLAMIC OBLIGATION: The first challenge is the inadequate understanding and lack of technical know-how on Islamic obligation. The lack of understanding arises not only from the perceptual or conceptual context, but also from the operational paradigm.

The problem is that any Sharia-based banking product is usually developed using conventional banking products. Due to the current behavior of the market, simply following the conventional system can be characterized as an imitation industry. For example, Islamic banking products are formulated following products from other banking systems. These are of course Islamic banking products. But in most cases, the structures under which these products are developed do not lead to the attainment of the larger objectives of Islamic Sharia law.

Professor Kabir fears that the way Islamic bonds are introduced will increase the likelihood of mistakes. According to former Islamic judge and scholar Muhammad TaqiUsmani, 85% of all Islamic obligations in the world do not comply with Sharia law.

Professor Kabir ignores, and cannot remotely estimate, the structural competence and extent of authority of the Bangladesh Bank and the Bangladesh Securities Commission (BSEC) for the types of Islamic bonds introduced in Bangladesh. , and these take place in the appropriate manner.

However, he believes the country needs the right people in the right positions. He expects them to fulfill their responsibilities and respond appropriately.

IMPLEMENTATION OF ISLAMIC BONDS AND OTHER COUNTRY STRATEGY: The first dilemma is that the people involved in the Islamic bond market and engaged in the development of Islamic bonds are mostly lawyers by profession. They would essentially ensure that the letter of the law is followed and that this implies a term of interest, an anomaly or whether the basic principles are followed or not. But they do not consider the end result or determine whether it is a project finance product or a debt product.

In most cases, it is not only lawyers but also those who work in credit rating institutions who are also inclined to rate it from the point of view of the conventional bond system.

As a result, they change the fundamental structure of Islamic bond instruments. As a result, it ceases to be an Islamic link in the real sense of the word and essentially becomes another conventional link.

The first challenge is whether Islamic bonds are asset-backed or asset-based. Asset-based is when the originator is the guarantor of solvency. What is the purpose of Islamic bonds? The goal is to refinance. Indeed, the intention is to mortgage and monetize the existing asset. This will increase credit in the economy.

Supporters of Islamic bonds say there should be a direct asset-based mortgage. We call it an asset-based Islamic bond. Of course, it depends on the government’s risk appetite. But an Islamic bond is asset-backed, and that’s what makes it Sharia-compliant.

Suppose there is construction work on the highway in progress. The future of this asset can be guaranteed by issuing Islamic bonds. This will create opportunities to procure new materials. So what do people who buy these Islamic bonds get in return? The toll levied on the highway can be used to reimburse. Professor Kabir thinks people understand this and are doing it right.

We have seen four different mechanisms. The Islamic bond is a bond holder, a light asset, an Islamic transaction must be a contract of sale and the presence of collateral.

Another fundamental tenet of Islamic Sharia is that “you cannot rent money for money”. As a result, the asset-based model, which is heavily dominated by real assets, does not provide a complete picture of financial resources. It is generally accepted that the asset should be denominated in real assets up to 51 percent real and the remaining 49 percent in murabaha, or debt assets. Many Sharia scholars allow this. But it is not Islamic. It must be heavily denominated by a real asset to become an Islamic product. If we are to move forward properly, we need to formulate the structure of Islamic Asset Backed Bonds.

There are some complex factors and issues involved. But, unfortunately, muftis (Islamic scholars) lack proper training in commercial jurisprudence. Having an Islamic background does not automatically imply that they are specialists in Islamic financial jurisprudence, and therefore their capacities need to be strengthened.

Mohammad Mushfiqul Haque Mukit is a journalist and independent researcher.

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