Issuanc of sukuk and bonds in Malasiay Essay Example | Topics and Well Written Essays - 2750 words

Issuanc of sukuk and bonds in Malasiay - Essay Example The following discourse delves into Sukuk issuance with specific focus being on the Malaysian economy. According to Ayub (2009), Sukuk may be defined as certificates of equal value that represent an undivided interest in the ownership of an asset or investment. It should be noted that Sukuk have the benefit of being backed by assets hence they offer better protection to the investors as compared to the conventional bonds. Investors who require fixed investment return with low risk find Sukuk to be an ideal choice (Kuran, 2004). One of the forms of Sukuk is known as the Ijarah Sukuk. This kind of Sukuk is based on letting of property rights for a given property on an agreed price. Sovereign issuers have an inclination towards issuing Ijarah Sukuk on a sale and leaseback agreement for a given piece of real estate. The other type of Sukuk is known as Mudharabah Sukuk. This is essentially an agreement between the investors and managers of capital. These are investment Sukuk that represen t ownership of units with an equal value in equity. The holders of such Sukuks own shares and are entitled to the returns based upon the percentage of ownership. The key characteristic of Mudhabarah Sukuk is that the holder of the shares is not given a guarantee by the issuer on the capital and fixed profit but rather, the profit is based on a percentage of the given capital (Muhammad, 2009). Musyarakah Sukuk involves the contribution of capital by two parties to incorporate a common motivation. The issuer contributes a given amount of money to obtain a subscription of a given number of shares whilst the originator may contribute either capital or in kind. The profit is shared in a certain ratio and the losses are shared according to capital contribution. Sukuks known as Istisna’s are used to finance the purchase of a project item. The holder of the Sukuk offers finance for a given project and in turn obtains a title to the asset. The title can be returned to the developer at an agreed repayment methodology. It should be noted that Istisna’s Sukuk cannot be traded in the secondary market. Government bonds are issued by the government in order to finance the projects that they require. One of the key characteristic of government bonds is that they have a set maturity date. This implies that the issuer guarantees to give back the principal amount invested the bond after a certain period regardless of how the investment performs. Government bonds also have interest payments. The interest payment can be on a fixed rate whereby a fixed interest is paid periodically for the life of the bond or floating interest whereby the interest rate is determined periodically. The principal investment repayment is also a key characteristic of government bonds. According to Sharma (2007), â€Å"it is an obligation of the issuer to repay the principal amount in lump sum upon the maturity of the bond.†`p. 234. Some bonds also have a call feature whereby the iss uer has the liberty to return the bond before its maturity date and be paid a percentage of its principal amount. Once the callable bond is paid, the government stops paying interest on the bond. Government bonds are subject to a given minimum investment and have credit ratings. Bonds are income investment because the issuer pays a certain rate of interest for a given period of time until the bond