Conventional

vs.
Islamic Bond @ Sukuk Market
Prof. Dr. Mohd. Masum Billah
E-mail: masum2001@yahoo.com

Conventional Bond Market

Primary market
A financial market in which new issues of a security, such
as a bond or a stock, are sold to initial buyers by the
corporation or government agency borrowing the funds.The
investment bank underwrites securities and then sells them
to the public.

Secondary Market
A financial market in which securities that have been
previously issued can be resold. It could be an organised
market, such as KLSE, or over-the counter (OTC) market in
which dealers at different locations stand ready to buy or
sell securities over the counter to whoever accept their
price.

Market Participants

Dealers
Dealers link buyers and sellers by buying and selling
securities

Brokers
Agents of investors who match buyers with sellers of
securities

Investors
Includes individual investors, financial institutions, pension
funds, mutual funds and governments, from around the
world.

Types of Bonds

Convertible Bonds
Extendible/Retractable Bonds
Foreign Currency Bonds
Government Bonds
High Yield or "Junk" Bonds
Inflation-Linked Bonds
Zero Coupon or "Strip" Bonds

Valuing Bonds
The value of a bond depends on the size of its coupon payments, the length
of time remaining until the bond
matures and the current level of interest rates.

Present Value
Yield-to-Maturity
Duration
Interest Rates

Islamic Bond Market

Three main steps involved in the bond
issuance.

Securitization
Bond Issuance
Trading of dept certificates

Process of Securitization using Bai alInah

(1) Sells an asset to the creditor in cash @RM14mil

Creditor

(2) Cash payment RM14mil

Debtor

(3) For future date, the debtor buys back the

asset for 15 mil

Issuance of Islamic Dept Certificate

(Shahadah al-Dayn)
Two types of bonds:
Islamic

coupon bond
Islamic zero coupon bond

Trading of Dept Certificate

Discounted Bai al-Dayn
For liquidity purposes, bond trading in the
secondary market is crucial.

Islamic Bond Market

Muqarada Bonds an Alternative for Islamic Dept

Bonds

Securitization of Musharakah
Musharakah

is a mode of financing which

can be securitized easily.

Especially

in case of big projects where

huge amounts are required.

Musharakah certificate

Every subscriber can be given a Musharakah

certificate, which represents his proportionate
ownership in the assets of the Musharakah.
After the project is started, these Musharakah
certificates can be treated as negotiable
instruments.
Can be bought and sold in the secondary market.

Difference Between Musharakah Certificates

and a Conventional Bond

Musharakah Certificates

Represents the direct

ownership of the holder
in the assets of the
project.
If all the assets of the
joint project are in liquid
form, the certificate will
represent a certain
proportion of money
owned by the project.

Conventional Bond

Has nothing to do with

the actual business
undertaken with the
borrowed money.
The bond stands for a
loan repayable to the
holder in any case, and
mostly with interest.

Growth in MYR Islamic Bond Market

Potential Growth in USD Islamic

Bond Market