Question

Identify one (1) Sukuk issues by any company/ government. Explain in detail, include:

a)Sukuk Profile

b)Purpose of the Sukuk

c)Contract involve

d)Performance of the Sukuk

Conduct a descriptive analysis on Shariah Stock Malaysia from November 2010 until May 2020.

a)General/ Overall Performance by year

b)Analysis by sectors over years

Answer 1

You can invest in various ways that are in accordance with Islamic principles. One of them is to use investment instruments in the form of sukuk. However, it is a shame that knowledge related to sukuk among ordinary Indonesians is still quite minimal, even though Indonesia is a country with a major Muslim population.

Sukuk is taken from an Arabic word, the plural word of shak, which has the meaning of a legal instrument or certificate. Sukuk are similar to bonds. However, in practice, sukuk are run with sharia principles, in contrast to bonds that are accompanied by elements that are prohibited in sharia principles, namely the use of interest.

You can also find the definition of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) reveals that sukuk is a certificate of ownership that has the same value on an asset, service, benefit right, ownership of a project, or certain investment activities.

Meanwhile, the National Sharia Board of MUI revealed that Furthermore, the issuer must pay income to sukuk holders through the principle of profit-sharing margin and payment of funds when the bonds are due. Furthermore, the issuer must pay income to sukuk holders through the principle of profit-sharing margin and payment of funds when the bonds are due.

In general, there are six characteristics of sukuk distinguishing them from other investment instruments, namely:

Sukuk is proof of ownership of an asset that has a form or has a beneficial title.

Use sharia principles that are free from the elements of gharar, usury, and maysir.

There is a division of income in the form of margins, profit sharing, or compensation in accordance with the type of contract used.

Sukuk issuance is done through special purpose vehicle (SPV).

There is an underlying asset.

Utilization of results based on sharia principles.

History of Sukuk as an instrument of modern Islamic investment

Sukuk are often referred to as modern Islamic investment instruments. However, who would have thought that the use of Islamic investment instruments could also be traced in the history of Islam in ancient times? In fact, historians reveal that the use of sukuk can be traced to the 12th century.

The concept of shak can be found in the trade carried by the Jews with Muslim merchants. Evidence of shak use can be found in Cairo's genetic documents. Shak used by these ancient traders has similarities to the concept of check in the modern era.

New modern sukuk were known to appear in 1988 at the implementation of the Council of the Islamic Fiqh Academy which took place in Jeddah, Saudi Arabia. The decision of the conference contains sukuk issued with mudarabah contract. Ownership of sukuk is also used as proof of capital ownership.

Since then, the use of sukuk as a sharia instrument has continued to develop. In 1990, Shell MDS became the first company to issue sukuk in Malaysia. Meanwhile, the first sukuk in Indonesia only appeared in 2002, issued by PT Indosat Tbk.

Furthermore, the Indonesian Government also issued a National Sharia Securities Act (SBSN) in 2008. This law became the basis for the government to issue state sukuk which was later used as a source of funding for infrastructure projects. At present, state sukuk issuance is carried out regularly, both for domestic and international markets.

2. Screening process is design to identify the elements that violate the rules and guidelines of Shariah
law, which rooted from al-Quran, and the teaching of Prophet Muhammad. Shariah law prohibits
elements such as usury (riba or interest), gambling (maysir) and uncertainty (gharar). These elements are
present in many conventional financial activities. For a Muslim, this means getting involved indirectly in
prohibited practices, which is considered as grave sin.
Alhabshi (2008) said that the stocks have to be either Shariah compliant or non-compliant. However,
the present situation does allow prohibited elements in the screening process. Khatkhatay and Nisar (2007) support Alhabshi’s opinion by saying that "fully Shariah-compliant equities are extremely rare".
The reason for this is that, most of the countries do have conventional finance institution; therefore,
exposed to riba-related activities when dealing with these institution. As mentioned by Obaidullah
(2009), "there must be no interest income by intention", so the companies must be responsible to ensure
they are not involved in non-permissible element. Donia and Marzban (2008b) also stated that “it is
almost impossible to find companies which are not dealing with conventional banks and either earn or
pay interest.”
To overcome this problem, Shariah scholars have agreed on certain acceptable level to which
companies can involve in such practices and outline the steps to purify the sinful earnings. However, it is
not an easy task to do. Screening for Shariah compliant is a tedious process (Popotte, 2010; Sefiani, 2009;
Donia and Marzban, 2008a; Siddiqi, 2006; Islamic Finance Asia, 2008) and far from easy (Sengupta,
2012). This paper will discuss the criteria, processes as well as the tediousness involved in the screening
for Shariah compliant and proposed the possible solution to be undertaken to assist in the Shariah
screening process.
This paper is structured as follows: Section 2 will discuss some background on Shariah screening.
Section 3 deals with the role of Shariah scholars. Screening criteria details is provided in Section 4. The
screening process is discussed further in Section 5. Section 6 will outline the proposed business screening
state model and finally some general conclusions and recommendations are drawn in the last section.
2. Shariah Screening Background
Together with the establishment of Islamic banking, Shariah-based products have been introduced.
Some says that it is merely a replication of a conventional product. However, this is far from true. The
people involved in the banking sector have done a thorough research before they come out with such
product that may look like the conventional one. The main thing is that, it is Shariah-compliant. Islamic
banking and finance have shown a good sign of progress with variety of Shariah-compliant product and
services to the prospective customers and client.
The product offered by Islamic financial institution will go through several steps of screening before it
can be certified as Shariah-compliant by its Shariah advisory board. This committee will ensure that the
product offered is within the Shariah boundaries. Established products like murabaha, musyaraka and
ijarah has gained its own audience for the past years. The banking sector is competing with each other to
offer variety of product. The modern business world requires more extensive product with the new comer
such as e-commerce, online banking and the like.
Shariah screening is conducted to eliminate stocks believed to be unacceptable for investments, which
involve in prohibited element including liquor, gambling and riba. In its early days of Islamic finance, the
screening process was not practiced mainly because the investment activities were either fully compliant
or there were no issues of Shariah compliant since it only involves Muslims. However, now we have joint
ventures or partnership (shirkah) in the Islamic commercial space that took place between Muslim
partners and their non-Muslim partners in various business activities. Before they can proceed with such
joint ventures, the Muslim partners need to ensure that the conduct or partnerships are compatible to
Shariah principles (Bakar, 2010).
The rise of awareness among Muslim investors on favorable circumstances in foreign stock markets
has been the major concern of the development of the screening methodology. High involvement with
interest-based conventional banking has moved away Muslim investors from the stock market. A few
scholars seeing this as a big loss to the Muslims since the stock market promise a good income.
Therefore, in 1987, Muslim scholars have gathered and came up with criteria that allow Muslim to gain
halal income through stock investment in the stock market. Muhammad Taqi Usmani of Pakistan headed
the team with Prof. Saleh Tug of Turkey and Sheikh Mohammad Al-Tayyeb Al-Najar of Egypt. They
have presented the Shariah screening criteria on how the Muslim investors can involve in buying shares of the companies that fulfill the criteria.