4What makes Islamic finance different? The Five Pillars of Islamic FinanceProhibition of interestProhibition of speculationProhibition of the financing of illicit sectors (pork, weapons, alcohol,…)Profit & Loss sharing principleAsset backed principleHowever:Islamic finance is not restricted to Muslims (the “natural” clients) as some of its principles may attract non-Muslim clients.
5What is SukukThe plural of the Arabic word Sak, literally translated as title deedFinancial certificates structured to comply with Shariah prohibition on the charging or paying interest(Riba) that grants an undivided interest or share in an underlying asset along with the profit, cash flow and risk commensurate with such ownership.Technically, Sukuk refers to securities, notes, papers or certificates, with features of liquidity and tradability (except for salam and murabahah sukuk)
6Accounting And Auditing Organization For Islamic Financial Institutions (AAOIFI) AAOIFI Definition“Investment sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufructs and services (in the ownership of) the assets of particular projects or special investment activity”
7How do Sukuk Differ from Bond The fundamental of Islamic Finance requiresAll contract arrangement must beTransparent clear to all partiesNo any unfair punitive clausesWith proper alignment of interestTransaction must not involve excessive risk speculative due to uncertaintyInvestments should have a social and ethical benefits to the societyNo involvement of unethical business activesWhich implies that ……
8How do Sukuk Differ from Bond Sukuk constitute partial ownership inReceivables (sukuk al Murabaha)A lease (sukuk Al Ijara)A project (Sukuk Al Istisna)A business or partnership (Sukuk Al mudaraba / Musharaka)Investment (sukuk)So Sukuk represents ownership of a real asset not like conventional bonds own debt.
9Comparing SUKUK to BONDS 1. Holder owns assets1. Holder owns cash flow only2. Use a variety of contracts to create financial obligations between issuer and investors; e.g. Sale, lease, equity partnership, joint-venture etc.2. Simply use a loan contract to create indebtedness3. Return linked to profit elements in-built in the sale, lease or partnership3. Return linked to interest charged out of the loan contract4. Instrument may be equity or debt depending on underlying contract4. It is a Debt instrument5. Tradability of the sukuk depends on the nature of the underlying asset5. No restriction on the tradability6. Investment in Shari`ah-compliant activities6. Proceeds are invested in any business without restrictions
10How do Sukuk Differ from Bond sukuk transform bilateral risk-reward sharing between borrowers and lenders into market-based refinancing of shari’ah-compliant lending or trust- based investment in existing or future assets.sukuk do not pay interest, but generate returns through commoditization of capital gains from actual transactions (i.e., asset transfer), such as:leasing : ijaracost-plus sale : murabahahprofit-sharing/”sweat capital”/trust: musharakah or mudarabahshari’ah-compliant assets, usufructs or servicesinvestors own the underlying asset(s) via SPV that funds unsecured payments to investors from direct investment in real, religiously-sanctioned economic activity
12Development of Sukuk Market Increasing appeal in non-core markets (UK, Turkey, Maghreb HK. UK and others)Sukuk issuance soared over the last decades in response to growing demand for alternative investmentsOutstanding sukuk globally exceeded US$1.8 trillion at end of 2013Total issuance in 2014 equivalent to roughly a quarter o f conventional securitization in EM but only two percent of conventional (local and foreign) bond issuance
13TOTAL GLOBAL SUKUK ISSUANCES (JAN 2001 – DEC 2014, USD MILLIONS) Significant slowdown of Sukuk issuance in because of market conditions.Apparent recovery in the recent pastReportedly healthy pipeline2014 Global Sukuk Market bounces back from low with almost $116.4 billion sukuk issued in the first nine months
14Sukuk Insurance by Structure (2014) Murabaha and Ijarah structure are still the preferred choiceBy structure, Murabahah and Ijarah remain popular choices among issuers in 2014 with 58% and 15% respective shares for each structure in total sukuk issuances
15Sukuk Insurance by Region Malaysia has taken the lead but GCC is still contributing significantly.
16Sovereign Sukuk Issuance (2004-2014) Malaysia3514941388Brunei60903113Indonesia2189065Qatar1965517Bahrain12545226Pakistan7669UAE685511Sudan286826Gambai194401Hong Komng10001South Africa500UK3402Luxembourg272Yemen250Senagal200Singapore1935Germanay123Nigeria71issuance still concentrated in parts of Asia and countries of the GCCSovereign issuances dominated the global Sukuk marketGovernment and related entities are driving the growth of the market compared with FI and corporates in the past.This trend should help the construction of a yield curve against which issuers can benchmark themselves.
26Why Russia Needs to Develop Islamic Finance and Sukuk Islamic finance has become increasingly important in the global financial market, registering exponential growth over the past few years.Compared with a size of only US$700 billion in 2008, the global Islamic financial industry has expanded remarkably to an estimated US$1.8 trillion by the end of 2013, representing an annual average growth rate of 21%.According to market estimates, there is a huge potential for further growth, with Islamic financial assets expected to reach US$6.5 trillion by 2020
27Why Russia Need to Develop Islamic Finance and Sukuk Sukuk market is the major growth area for Islamic financeTen years ago, new sukuk issuance was only a modest US$5 billion. In just ten years' time, annual sukuk issuance has already surpassed US$100 billion, amounting to US$117 billion in 2013 which was more than 20 times higher than the figure in 2003The current account surpluses in the Gulf Cooperation Council (GCC) countries are estimated to be more than US$300 billionwhile assets under management by sovereign wealth funds in those countries amounted to as much as US$2 trillionIslamic investors in the Middle East and other Islamic countries generally have a preference for investing in Shariah-compliant assets.
28Why Russia Need to Develop Islamic Finance and Sukuk sukuk are becoming a mainstream asset class in the global financial system.Financial innovation and tax reform in major international financial centers have made sukuk largely comparable to conventional bonds.Apart from Islamic investors, sukuk are increasingly appealing to conventional investors as a way to diversify their investment portfolios.
29What Russian Needs to do build a conducive platform for sukuk issuancesukuk are no different from conventional bonds in terms of economic substance, enabling issuers to raise funds while giving investors interest-like return.However, the more complicated structure of sukuk, which involves the setting up of a special purpose vehicle and multiple transfers of underlying assets, had led to additional tax liability for sukuk issuers.Tax law amendments need to overcome this obstacle by removing the additional profits tax and stamp duty charges incurred in issuing sukuk as compared with conventional bonds.Therefore , level the playing field between sukuk and conventional bonds with tax framework changes .
30What Russian Needs to do To play a lead-off role for by Issuing Sovereign SukukTo demonstrate to the global financial markets that the legal, regulatory and taxation frameworks in Russian can well accommodate sukuk issuance.To Encourage and attract more investors.Government sukuk could play a catalytic role, paving the way for local and international fund-raisers, no matter from the public or private sector, to follow suit.Make Kazan as a gateway of IFC to Russia’s access to global financial marketsMatching the needs of fund raisers and investment demand of investors among Russia, the Middle East, and other parts of the world interested in Islamic financial products
31The way forward …...There are at least two ways to kick-off sukuk insurance1) Gradual approach:A though legal and tax framework adjustment to cattle the Sukuk insurance but takes long time2) Fast trackOff shore insuranceLocation of SPVWithholding tax (20%) – Non residents in Luxembourg and NetherlandsVAT tax (18%) – Non-resident leasing out asset such as aircraft to Russian do not need pat VATProperty Tax (2.5) – Basically are exempted if the asset is immovable asset.
34Contact Islamic development bank group Dr. Turkhan Ali Abdul Manap Senior EconomistResearch DivisionIslamic Research & Training InstituteP. O. Box 9201, Jeddah 21413Kingdom of Saudi Arabiawebsite:Tel:Fax:Islamic research & training institute(A member of)Islamic development bank group