Sukuk Securities: New Ways of Debt Contracting

CHAPTER 15 Challenges and Future Developments

Since their introduction in the early 1990s, sukuk securities have emerged from being a small-scale niche industry to becoming a relatively sizable force around the world as both private issues and in publicly traded markets. In 2013, the outstanding value was variously estimated to be US$1,200 billion. Sukuk securities have unique features that fit the market practitioner’s targeted fund needs and hence help the industry to become an important niche player in the huge lending-based investment markets.

However, in order to sustain the high growth, some critical developments are essential. This chapter discusses some of the major challenges of the global sukuk markets that, if not addressed as the markets are growing larger, will become potential obstacles and limit future growth. An important challenge to sukuk trading centers is from London as it enters the market this year (2014). Given London financial market’s long history of nurturing new products such as insurance, investment banking, and Islamic banking, the entry of London to the sukuk market is by far the most important development to date. These challenges are discussed in this chapter.

VALUATION

Practitioners use existing conventional bond valuation models for pricing sukuk securities. Such estimates are used by investors to make decisions. However, these models are not entirely suitable for the valuation of sukuk, as was shown in Chapter 13. First, sukuk and bond ...