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ALIQULOVA NILUFAR
THE ROLE AND IMPORTANCE
OF ISLAMIC SECURITIES IN
INNOVATIVE DEVELOPMENT
IN THE COUNTRIES OF THE
WORLD
Abstract:
This article provides information on the essence of Islamic securities, which
are taking their place as a new financial instrument, their place in the economy, and their
importance in the economy of the world countries. Also, information on the volume of is-
suance of Islamic securities, annual growth trends, and volume is presented. In particular,
the analysis of the actual situation of Islamic securities – sukuk issued in times when the
population was Muslim, but also non-muslim, is given. A scientific conclusion is presented
on the introduction of Islamic securities and the efficiency that can be achieved through it.
Key words:
Islamic finance, Islamic securities, financial market, sukuk, bond, stock.
There are a variety of Islamic religious obligations like zakat (compulsory alms
giving), sadaqa (voluntary alms giving) and waqf/awqaf (charitable endowments)
that could contribute to social finance – these are not Islamic finance instruments
per se but are included in this analysis. Commercial Islamic banking transactions
use instruments such as murabaha (cost-plus financing of a non-interest-bearing
loan), which accounts for a large share of Islamic financing, ijara (leasing), muda-
rabah (capital and labour partnership) and musharaka (profit- and loss-sharing
partnership). Islamic fixed income, known as sukuk, has been increasingly used in
different parts of the world, although not all forms are used for social impact.
Overview of Islamic finance terms:
Instrument
Description
Zakat
Alms-giving in Islam which is obligatory on all Muslims who meet certain wealth
criteria. One of the five pillars of Islam.
Sadaqa
Voluntary alms-giving in Islam.
Waqf /Awqaf
Endowment on the property is made to religious, educational, or charitable causes.
Sukuk
Islamic asset-based financial certificates can be compared to conventional bonds
(which are debt-, equity, or quasi-equity based).
Musharaka
Joint enterprise or partnership where partners share profits and losses.
Murabah
Receivables created are trade receivables from the cost-plus sale, often structured
to deliver similar economic outcomes as a loan.
Mudarabah
Partnership contract where delegated authority is given to an agent to carry out trades
and transactions. Money is provided by one party and expertise/labor from the other.
https://doi.org/10.47689/STARS.university-pp49-55
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The Global Islamic Finance Market was worth US$ 2.2 billion in 2021 and is an-
ticipated to reach the valuation of US$ 3.02 billion by 2027 and is predicted to
register a CAGR of 10.2% during 2022–2027.
Chart 1. Islamic Finance Assets Growth (2014–2025, USD Billion)
The most important indicator in the analysis of the dynamics of the growth of
Islamic finance assets (2014-2025, billion dollars) is the clear evidence that the
assets of Islamic finance continue to grow steadily, taking their place in the finan-
cial market as a new financial instrument. It can be seen that the value of assets in
2014 was worth 1.978 billion USD worldwide. Six years later, by 2020, it was worth
$3.374 billion. In 2020, despite the global pandemic situation, we will see an up-
ward trend in the market value of Islamic finance assets, and it is estimated that by
2025 this figure will reach 4,940 billion US dollars. Of course, in order to achieve
such result, Islamic finance has already taken its place in the financial market of
many countries, not only with the Muslim population but also with the non-Muslim
population, showing its importance with annual efficiency indicators.
Chart 2. Top Countries in Islamic Finance Assets (2020, USD Billion)
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Among leading countries in terms of Islamic finance assets (2020, billion US
dollars), countries with a predominantly Muslim population have a high index. De-
spite the impact of the pandemic that has gripped the world, in 2020, it can be
seen that Islamic financial assets have actively participated in financing and mar-
ket relations. In particular, among the top three, Iran – 838 billion, Saudi Arabia
– 826 billion, and Malaysia, which has not lost its leadership over the years, have
been developing Islamic finance with 620 billion US dollars, proving that Islamic
financial assets are a necessary instrument in the financial market.
As for the new software development of Islam in world finance, Islamic securi-
ties – sukuk, a new instrument in its composition, should be recognized. In different
countries, sukuk has a different appearance according to the demands of society
and the economy, and therefore, its definition and support are produced under dif-
ferent conditions. Some scholars interpret it as a debt financing instrument, securi-
tization of other assets. In addition, you can find his participation in private capital.
Sukuk is becoming a vital instrument used by both sovereign and corporate ac-
tors for resource mobilization (World Bank and Islamic Development Bank Group,
2017). Specifically, sukuk and other forms of Islamic financing could help respond
to the current needs in infrastructure and help finance large-scale programs in
partner countries. It is noteworthy that current financial shortage in many devel-
oping countries in these areas is large.
World experience shows that it is possible to finance actively many large proj-
ects, especially aviation and green economy, through Sukuk. The introduction of
Sukuk allows the effective use of free funds in the hands of the population and the
implementation of projects that have stopped due to financial problems.
ISLAMIC FINANCE STANDS ITS GROUND AMID THE PANDEMIC STORM
The IFDI 2021 indicator score looks at key metrics that shaped the pandemic
year of 2020 for 135 countries. While there were movements in scores and ranking
among countries and different indicators, the overall global IFDI indicator score
improved slightly to 11.0 for 2021 from 10.8 for 2020. If anything, this nudge-up
indicates the continued strength and development of Islamic finance industry de-
spite the unprecedented challenges caused by the pandemic for most of 2020.
Chart 3. Total global sukuk issuance (USD, millions)
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Total global issuance (long term & short term) amounted to USD 188.121 billion
in 2021 which is, yet again, the highest value of yearly Sukuk issuances to date.
As illustrated in Chart 3 below, global Sukuk issuance has shown a single-digit of
around 7.72% percentage or USD 174.641 billion in 2020 to USD 188.121 billion in
2021. The steady issuance volume during 2021 was mainly due to sovereign Sukuk
issuances from Asia, GCC, Africa and, certain other jurisdictions while Malaysia
continues to dominate the Sukuk market though share of countries like Indonesia,
UAE, Saudi Arabia and few others increased with good volume.
According to the information presented on the total global sukuk issuance vol-
ume (million dollars), we can say that the volume of sukuk issuance worldwide has
increased by nearly 3 times over the past 11 years. In 2010, a total of 53.125 million
US dollars worth of global sukuk was issued, and in one year almost twice as much
was issued, corresponding to 93.173 million US dollars. During next two years, a
significant increase in the volume of issuance was observed (2012–2013, 137,599
and 135,557 million US dollars, respectively). By 2014-2015, the growth rate began
to decline sharply. When comparing the period 2015-2021, it can be seen that in 6
years, it has increased in value by 3 times, and it can be seen that the largest vol-
ume was issued compared to the first years (2015–2021, 67,818 and 188,121 million
US dollars, respectively). Even during the global pandemic and in the following
years, we can see the increase in the volume of sukuk issuance as an economic
instrument. This means that the countries of the world are able to strengthen their
position in the financial market, even in the time of testing.
Chart 4. Islamic Banking share in total banking assets by Jurisdiction
During 2020 there were no Non-Local Currency Sukuk issued in a jurisdiction
by a foreign issuer nor was there any Formosa Sukuk issuance. A few milestones
achieved in the international Sukuk market in the year 2021 are as follows:
a) Saudi Aramco, USD 3 billon, Hybrid Sukuk;
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b) Islamic Development Bank – Sustainability Sukuk, 2.5 billion, Hybrid Sukuk;
c) Government of Saudi Arabia, USD 2 billion Hybrid Sukuk;
d) Government of Sultanate of Oman, 1.7 billion, Sukuk Al Ijarah;
e) Government of Malaysia (Sustainability Sukuk) USD 1.3 Billion, Sukuk
Al Wakalah;
f) The Saudi National Bank, USD 1.2 billion, Sukuk Al Mudharabah;
g) Government of Indonesia Sukuk USD 1.2 billion Sukuk Al Wakalah;
h) Ahli United Bank, USD 600 million, Sukuk Al Mudharabah;
i) Kuveyt Turk Katilim Bankasi – Sustainability Sukuk, USD 350 Million, Hybrid
Sukuk.
Notably, the number of jurisdictions where Islamic banking has achieved do-
mestic systemic importance17 remained at 15, the same as in 4Q’20. Collec-
tively, these 15 jurisdictions accounted for a 91.8% share of the global Islam-
ic banking assets and for 82.7% of global – outstanding of at end-4Q’21. The
Islamic banking sector experienced an increase in domestic market share in
29 countries. While both Iran and Sudan maintained 100% domestic market shares,
five jurisdictions monitored recorded declining market shares.
The development of Sukuk improves corporate governance and ensures open-
ness and transparency of companies’ reports. In turn, the development of the cap-
ital market reduces the state’s demand for foreign loans and budget deficit.
Sukuk does not represent a debt obligation. Upon its issuance, the issuer sells
certificates to investors. Then, the issuer uses the proceeds from the certificates
to purchase the asset, and investors receive partial ownership of the asset. The
investors are also entitled to part of the profits generated by the asset.
The unique nature of Sukuk requires a specific issuing process for financial in-
strument.
Pic. 1. Common steps in the emission process
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Aviation is a huge system that accounts for $3.5 trillion in global GDP, creates
about 88 million jobs, and delivers about 60 percent of the world’s tourists to
their destinations. The aviation sector provides economic growth, creates jobs,
and facilitates international trade and tourism. It is a rapid transport network that
ensures the flow of investments and ideas.
Ensuring the continuity of the industry’s activities is carried out with the pro-
vision of financial resources, and the development of new aircraft and infrastruc-
ture. Today, financing through the introduction of sukuk securities is becoming
one of the most preferred mechanisms for the financing of the aviation industry,
especially for the purchase of new aircraft, and the formation of working capital.
Islamic aircraft leasing financing is used by international airlines, including Eti-
had Airlines, Saudi Arabian Airlines, Air Arabia, Emirates, Malaysian Airlines, Turk-
ish Airlines, and many of the world’s largest aircraft leasing companies.
In 2012–2013, the Malaysia Airways holding company issued $785 million worth
of sukuk securities. Purchased six new Airbus A380 and two new Airbus A330
aircraft through the issuance of securities for a total of $1.67 billion. The company
applied to the Malaysian Securities Commission to create a sukuk wakala program
of up to $1.2 billion in 2021.
In 2004, Bahrain issued its first $250 million leased sukuk securities with a 5-year
term to finance the expansion of the airport area. In 2013–2015, Emirates airline
company introduced wakalah and ijaarah sukuk with a ten-year term. Through
the introduction of these sukuk issues, 4 new Airbus A380-800 aircraft were pur-
chased and deployed to generate working capital.
Air Arabia purchased a total of 29 of the 44 Airbus A320s it ordered in 2007
using an Islamic financing sukuk arrangement.
Green sukuk are investments in renewable energy and other environmental as-
sets. Green sukuk’s assets include environmental trends such as the creation of
solar, wind, and biogas energy, and the production of electric cars.
Financing projects aimed at meeting the needs and demands of people by sav-
ing natural resources, ensuring a safe ecology, and creating renewable energy
resources has become a topical issue today.
In recent years, the financing of infrastructures using the opportunities of green
sukuk has become popular in the countries of the world.
During 2017-2020, Indonesia, UAE, Malaysia, and Saudi Arabia issued a $9 bil-
lion green sukuk.
In 2020, during the outbreak of covid-19, green sukuk worth $2.56 billion were
issued globally, and in 2021, $1.57 billion were issued.
The first green sukuk was issued in 2017 by renewable energy group Tadau En-
ergy, raising US$59 million to finance a solar power plant in Malaysia. This year,
along with Malaysia, Indonesia has shown leadership by issuing the world’s first
sovereign green sukuk and the world’s first retail green sukuk.
The Gulf states are working on financing sustainable (decarbonization) proj-
ects, including opportunities for green sukuk. For example, Saudi Arabia plans to
produce 50 percent of its electricity from clean sources by 2030. The UAE aims to
increase the share of clean energy in total energy by 50% by 2050. Bahrain plans
to increase renewable energy to 250 MW by 2025. One can observe many other
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sectors that are currently being financed through sukuk securities, a product of
Islamic finance.
Reference:
1.
Mahmoud Mohieldin. Realizing the Potential of Islamic Finance // World
Bank, Econo
mic Premise, Poverty Reduction and Economic Management
(PREM) Network, March 2012, 77, p1.
2.
Mohammed Imad Ali, Ikramur Rahman Falahi. Islamic banking and finance:
principles and practices // Marifa Academy Private Limited, 2014. P – 161.
3.
Knowledge & research. Pioneering the Green Sukuk: Three Years On. // Oct.
2020.
4.
How Islamic finance contributes to achieving the sustainable development
goal. – p.13. https://www.oecd-ilibrary.org/docserver/ ac1480caen.pdf?expire
s=1668500912&id=id&accname=guest&checksum=A781DC3AB4EAA81BF0C-
7FAA6E3A216FE
Islamic finance development report 2021. – Pp. 23–24. https://static.zawya.
com/pdf/Islamic %20Finance%20Development%20 Reports/2021%20IFDI%20
Report.pdf
