Cover
Title Page
Foreword
Acknowledgements
About the Editors
CHAPTER 1: Overview of the Islamic Capital Market
1. HISTORY OF THE ICM
2. GEOGRAPHIC SPREAD
3. KEY PRINCIPLES FOR SHARI'AH-COMPLIANT FINANCIAL INSTRUMENTS
4. SHARI'AH-COMPLIANT INSTRUMENTS
5. SHARI'AH-COMPLIANT INVESTORS
6. SHARI'AH-COMPLIANT EQUITY INDICES
7. SHARI'AH-COMPLIANT COLLECTIVE INVESTMENT SCHEMES
8. TAKAFUL (ISLAMIC INSURANCE) INSTITUTIONS
9. SUKUK
10. BANKS: CAPITAL AND REGULATORY ISSUES
11. MARKET LIQUIDITY: THE OUTLOOK FOR MARKETABLE ASSETS
12. CONCLUSION
13. NOTES
CHAPTER 2: Islamic Capital Markets and Islamic Equities
1. SHARI'AH COMPLIANCE CRITERIA FOR EQUITIES
2. SECURITIES, FUNDS AND MARKETS: ISLAMIC EQUITIES
3. REGULATORY ASPECTS: ICM AND BASEL III REQUIREMENTS
4. CONCLUSION
5. NOTES
CHAPTER 3: Sukuk – Unlocking the Potential for Economic Development
1. GENERAL CHARACTERISTICS OF SUKUK
2. ASSET-BACKED VS. ASSET-BASED
3. VOLUME OF SUKUK ISSUED
4. ORIGINATORS OF SUKUK
5. COMMONLY USED CONTRACTUAL BASES AND STRUCTURES FROM ALL SUKUK ISSUED
6. ‘QUASI FIXED-INCOME’ SUKUK VS. EQUITY-BASED SUKUK
7. ASSET-BACKED AND ASSET-BASED SUKUK
8. RATINGS OF SUKUK
9. ISSUANCE OF SUKUK AND SECONDARY MARKETS
10. CONCLUSION
11. BIBLIOGRAPHY
12. NOTE
CHAPTER 4: Islamic Collective Investment Schemes
1. SHARI'AH-COMPLIANT EQUITY FUNDS
2. SHARI'AH-COMPLIANT FUNDS – REGULATORY ISSUES
3. SHARI'AH-COMPLIANT AND CONVENTIONAL RETURNS
4. COMMODITIES FUNDS
5. ISLAMIC REAL ESTATE INVESTMENT TRUSTS (iREITs)
6. TAKAFUL (ISLAMIC INSURANCE) INSTITUTIONS
7. PROFIT-SHARING INVESTMENT ACCOUNTS
8. CONCLUSION
9. BIBLIOGRAPHY
10. NOTES
CHAPTER 5: Legal and Regulatory Considerations Pertaining to Islamic Capital Markets
1. SECURITIES LAWS AND REGULATORY REGIMES
2. SECURITISATIONS (INCLUDING SUKUK)
3. SYSTEMIC ASPECTS OF LEGAL REGIMES
4. CONCLUSION
5. BIBLIOGRAPHY
6. NOTES
CHAPTER 6: Regulatory Aspects of the Islamic Capital Market and Basel III Requirements
1. ELIGIBLE CAPITAL AND CAPITAL INSTRUMENTS
2. SHARI’AH-COMPLIANT INSTRUMENTS AND BASEL III CAPITAL COMPONENTS
3. LIQUIDITY RISK MANAGEMENT AND HIGH QUALITY LIQUID ASSETS (HQLA)
4. NOTES
CHAPTER 7: Shari'ah Foundations of Islamic Equity Investment Criteria and Purification of Investments
1. THE ISLAMIC EQUITY INVESTMENT CRITERIA
2. TOTAL ASSETS OR MARKET VALUE
3. FALLING OUT OF THE CRITERIA
4. COMPONENTS OF THE PROGRAMME
5. THE LIMITED APPLICABILITY OF THE SCREENS
6. PURIFICATION
7. THE ISSUES
8. METHODS OF PURIFICATION
9. CONCLUSION
10. NOTES
CHAPTER 8: Collateralisation in Islamic Capital Markets
1. THE DEVELOPMENT OF SHARI'AH-COMPLIANT COLLATERALISATION ARRANGEMENTS RELATED TO THE NEED FOR, AND CURRENT DEARTH OF, HQLA TO MEET THE CHANGED REGULATORY ENVIRONMENT FOR ISLAMIC BANKS
2. THE KEY STAKEHOLDERS IN THE DEVELOPMENT OF THE COLLATERALISATION ELEMENT OF ICM AND THEIR NOTABLE DEVELOPMENTS IN REGULARISING COLLATERALISATION IN ICM ACROSS THE ‘VALUE CHAIN’
3. THE ‘ISLAMIC REPO’ AND THE NEED FOR, AND CURRENT DEARTH OF, HQLA TO MEET THE CHANGED REGULATORY ENVIRONMENT FOR ISLAMIC BANKS
4. DEVELOPING MARKET PRACTICE AND IDENTIFYING AND MITIGATING RISK IN COLLATERALS, GUARANTEES AND COLLATERAL MANAGEMENT
5. RISKS SPECIFICALLY ASSOCIATED WITH ISLAMIC COLLATERALISATION IN ICM
6. CONCLUSION
7. NOTES
CHAPTER 9: Eligible Capital and Capital Instruments
1. FLAWS IN THE BASEL II REGIME
2. THE DEFINITION OF CAPITAL
3. QUANTITY OF CAPITAL
4. CAPITAL WEIGHTS
5. LEVERAGE RATIO
6. BASEL III CAPITAL AND ISLAMIC BANKS – FURTHER CONSIDERATIONS
7. CONCLUSION
8. NOTE
CHAPTER 10: Regulatory Aspects of the Islamic Capital Market and Basel III Requirements – Shari'ah-Compliant Bank Capital Instruments
1. BANK CAPITAL REQUIREMENTS: BASEL II VS. BASEL III
2. BASEL III-COMPLIANT COMMON EQUITY TIER 1 (CET1) INSTRUMENTS
3. BASEL III-COMPLIANT ADDITIONAL TIER 1 CAPITAL (AT1) INSTRUMENTS
4. BASEL III-COMPLIANT TIER 2 CAPITAL (T2) INSTRUMENTS
5. CONCLUSION
6. NOTES
CHAPTER 11: Liquidity Risk Management and High Quality Liquid Assets
1. LIQUIDITY RISK CHALLENGES – FUNDING LIQUIDITY AND MARKET LIQUIDITY
2. HIGH QUALITY LIQUID ASSETS (HQLA)
3. SHARI'AH-COMPLIANT HQLA: THE IILM SUKUK
4. CONCLUSION
CHAPTER 12: Malaysia's Islamic Capital Markets – A Case Study
1. THE BEGINNINGS OF AN ISLAMIC CAPITAL MARKET
2. COMPONENTS OF MALAYSIA'S ISLAMIC CAPITAL MARKET
3. MALAYSIAN SUKUK AND SUKUK MARKETS
4. CONCLUSION
5. BIBLIOGRAPHY
6. NOTE
CHAPTER 13: Bahrain's Islamic Capital Markets – A Case Study
1. THE RATIONALE FOR CAPITAL MARKET DEVELOPMENT
2. THE PATH TO A SOUND MARKET
3. THE ECONOMIC OUTLOOK
4. THE EMERGENCE OF THE MODERN FINANCIAL MARKET
5. INTRODUCTION OF AN ISLAMIC FINANCE INDEX
6. CONCLUSION
7. CASE STUDY: MUMTALAKAT USD600 MILLION SUKUK
8. MUMTALAKAT SUKUK: THE MURABAHA PROGRAMME
9. NOTES
CHAPTER 14: Sukuk Issued as Regulatory Capital Instruments for Basel III Compliance – A Case Study
1. REGULATORY CAPITAL IN BASEL III AND IFSB-15
2. SUKUK AS CAPITAL INSTRUMENTS IN BASEL III
3. AL HILAL BANK TIER 1 SUKUK LIMITED
4. MAYBANK ISLAMIC'S RM1.5 BILLION SUBORDINATED SUKUK MURABAHA ISSUANCE
5. CONCLUSION
CHAPTER 15: Concluding Remarks
APPENDIX A: Nominate Contracts Employed as a Basis for Shari'ah-Compliant Financial Transactions
1. WAKALA
2. MUDARABA
3. MUSHARAKA
4. MURABAHA
5. SALAM
6. IJARAH
7. ISTISNA'A
8. MUSATAHA
9. USUFRUCT
10. WA'AD
11. ARBOUN
APPENDIX B: A Note on Market Index Providers
Index
End User License Agreement

List of Tables

Chapter 1
1. TABLE 1.1 Breakdown of Islamic finance segments by region (USD billion, 2015 YTD)
2. TABLE 1.2 Shari'ah banking assets
3. TABLE 1.3 Selected hallmark global sukuk issuances in 2014 (USD 500 Million or >)
4. TABLE 1.4 Selected hallmark global sukuk issuances in 2015 (USD 500 Million or >)
5. TABLE 1.5 The effect of Basel III Changes on Islamic and conventional banks
6. TABLE 1.6 Percentage change in bond prices when interest rates change
Chapter 2
1. TABLE 2.1 Islamic economic regions
2. TABLE 2.2 Shari'ah screening comparison: Malaysia versus Dow Jones
3. TABLE 2.3 Core principles of Islamic finance
4. TABLE 2.4 Top five global Islamic equity indices (and equivalent conventional benchmarks) and 1, 3, 5 and 7 year performances as at end June 2017.)
Chapter 3
1. TABLE 3.1 The differences between sukuk and conventional bonds
2. TABLE 3.2 Differences between asset-backed and asset-based sukuk
3. TABLE 3.3 Differences between rating sukuk and rating conventional bonds
4. TABLE 3.4 Top ten countries by outstanding amounts in 2014
Chapter 9
1. TABLE 9.1 G-SIFI banks
Chapter 10
1. TABLE 10.1 ADIB Tier 1 mudaraba sukuk – transaction overview
2. TABLE 10.2 ADIB Tier 1 mudaraba sukuk – summary of commercial terms
3. TABLE 10.3 DIB Tier 1 mudaraba sukuk – transaction overview
4. TABLE 10.4 DIB Tier 1 mudaraba sukuk – summary of commercial terms
5. TABLE 10.5 HLISB Tier 2 capital sukuk – transaction overview
6. TABLE 10.6 HLISB Tier 2 capital sukuk – summary of commercial terms
7. TABLE 10.7 Summary of commercial terms
Chapter 12
1. TABLE 12.1 Islamic mutual funds
2. TABLE 12.2 Special incentives for the ICM
Chapter 13
1. TABLE 13.1 Financial development indicators in Bahrain and other economies (2012)
2. TABLE 13.2 Bahrain economic outlook
3. TABLE 13.3 Bahrain All-Share Index (Feb 2011 – June 2015)
4. TABLE 13.4 The BFX product portfolio
5. TABLE 13.5 The BFX conventional market products
6. TABLE 13.6 List of corporate sukuk issued, 2005–2012
7. TABLE 13.7 Transaction Summary – Terms and Lead Managers
8. TABLE 13.8 Transaction Summary of Bahrain Mumtalakat – Terms and Lead Managers
Chapter 14
1. TABLE 14.1 Key Criteria of AT1 and Tier 2 instruments
2. TABLE 14.2 Key requirements set by IFSB
3. TABLE 14.3 Key features of the UAE sukuk issuance

List of Illustrations

Chapter 1
1. FIGURE 1.1 Country-wise breakdown of sukuk outstanding, as of 31 December 2015
2. FIGURE 1.2 Global sukuk issuances currency break-up – all tenors (January 2001 – December 2015, USD Millions)
3. FIGURE 1.3 Total global sukuk issuances (January 2001 – December 2015, USD Millions)
4. FIGURE 1.4 Total global sukuk outstanding as of 31 December 2015
5. FIGURE 1.5 Structural break-up of international sukuk issuances – all tenors (January 2001 – December 2014, USD Millions)
6. FIGURE 1.6 Ijarah structure
7. FIGURE 1.7 Implied volatility in US interest rates
8. FIGURE 1.8 Variation of asset price responses across countries following May-June 2013 monetary policy shocks (z-scores)
9. FIGURE 1.9 Global stock of debt outstanding to end Q2 2014
10. FIGURE 1.10 Cumulative flow into mutual funds and ETFs
11. FIGURE 1.11 United States Fed funds rate 1971–2017
Chapter 2
1. FIGURE 2.1 Evolution of Islamic capital market products
2. FIGURE 2.2 Basic elements of a capital market, conventional or Islamic
Chapter 3
1. FIGURE 3.1 Global aggregate sukuk historical trend (1996–2014)
2. FIGURE 3.2 Sukuk breakdown as of 2014
3. FIGURE 3.3 Top ten sovereign issuers, December 2014
4. FIGURE 3.4 Quasi-sovereign issuers, December 2014
5. FIGURE 3.5 Top ten financial services issuers by country, December 2014
6. FIGURE 3.6 Top ten corporate issuers by country
7. FIGURE 3.7 Top ten global issuers by sector as of 2004
8. FIGURE 3.8 Top sukuk structures as of December 2004
9. FIGURE 3.9 Asset-backed structure
10. FIGURE 3.10 Asset-based structure
11. FIGURE 3.11 S&P sukuk rating
12. FIGURE 3.12 Top five sukuk rating agencies
13. FIGURE 3.13 IDB vs. ADB price spread
14. FIGURE 3.14 Average percentage of liquid assets available for investing by type of bank
15. FIGURE 3.15 Average percentage of liquid assets available for investing by region
16. FIGURE 3.16 Sukuk demand and supply levels (2014–2020)
17. FIGURE 3.17 Five-Year US treasury vs. international sukuk bid yield
Chapter 9
1. FIGURE 9.1 Basel III – Bank Capital Buffers
2. FIGURE 9.2 Value at risk under normal and ‘fat tailed’ distributions
Chapter 10
1. FIGURE 10.1 Basel II/2.5 vs. Basel III capital requirement comparison
2. FIGURE 10.2 ADIB Tier 1 mudaraba sukuk structure
3. FIGURE 10.3 ADIB Tier 1 mudaraba sukuk – distribution statistics
4. FIGURE 10.4 HLISB Tier 2 capital sukuk – inception
5. FIGURE 10.5 HLISB Tier 2 capital sukuk – ongoing and maturity
6. FIGURE 10.6 MIB Tier 2 Murabaha Sukuk – inception
7. FIGURE 10.7 MIB Tier 2 Murabaha Sukuk -– ongoing and maturity
Chapter 11
1. FIGURE 11.1 IILM sukuk volume traded (%) per issuance
2. FIGURE 11.2 The IILM programme structure
3. FIGURE 11.3 Regulatory treatment for the IILM sukuk
4. FIGURE 11.4 IILM sukuk auction subscription levels
Chapter 12
1. FIGURE 12.1 Volume of Interbank transactions and trading performance of key IIMM instruments
2. FIGURE 12.2 A commodity murabaha transaction on Bursa Suq Al-Sila
3. FIGURE 12.3 Hedging rate risk with an IPRS
4. FIGURE 12.4 Sukuk issuance, Malaysia vs. Rest of the world
5. FIGURE 12.5 Sukuk issuance by country – 2014
6. FIGURE 12.6 The evolution in sukuk issuance
Chapter 13
1. FIGURE 13.1 IMF financial development index 2015
2. FIGURE 13.2 Islamic finance development indicator for the top 15 countries in the world
3. FIGURE 13.3 Bahrain Bourse innovative products
4. FIGURE 13.4 Market capitalisation on the Bahrain Bourse
5. FIGURE 13.5 Mutual fund providers, (USD '000)
6. FIGURE 13.6 Sukuk al ijarah – New product for an existing market
7. FIGURE 13.7 Four key elements for building a sound and efficient Islamic capital market
8. FIGURE 13.8 The structure type – sukuk al-murabaha
Chapter 14
1. FIGURE 14.1 An example of a Basel III-compliant sukuk mudaraba structure
2. FIGURE 14.2 The Al Hilal Bank's sukuk structure and cash flows
3. FIGURE 14.3 Maybank Islamic's subordinated sukuk murabaha structure

This edition first published 2018

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Library of Congress Cataloging‐in‐Publication Data

Names: Archer, Simon, editor. | Abdel Karim, Rifaat Ahmed, editor.

Title: Islamic capital markets and products : managing capital and liquidity requirements under Basel III / [edited] by Simon Archer, Rifaat Ahmed Abdel Karim.

Subjects: LCSH: Finance—Islamic countries. | Finance—Religious aspects—Islam. | Capital market—Islamic countries. | Financial institutions—Islamic countries. | Financial institutions—Religious aspects—Islam.

Classification: LCC HG3368.A6 (ebook) | LCC HG3368.A6 I854 2017 (print) | DDC 332/.0415091767—dc23

LC record available at https://lccn.loc.gov/2017026729

Cover Design: Wiley

Cover Image: © Anna Poguliaeva/Shutterstock

Foreword

Professor Simon Archer and Professor Datuk Rifaat Ahmed Abdel Karim are very well known in the field of Islamic finance, to which they have made great contributions over the years. In this new book, they lead a team of expert contributors who write on the subject of Islamic Capital Markets and Products, with a particular emphasis on that important aspect of it which concerns managing capital and liquidity requirements under Basel III. They are uniquely qualified to do this, Prof. Rifaat having been CEO of the International Islamic Liquidity Management Corporation (the IILM), which is headquartered in Malaysia, between 2012 and 2016, and Prof. Archer having consulted for the major bodies in Islamic finance over a range topics.

These are technical requirements under Basel III that benefit from clear expositions by a number of practising professionals, but the book valuably traverses a wider terrain. In particular, there are numerous case studies particularly on sukuk issues which bring together practical information on particular issues. Although the focus is on sukuk, there are contributions on Islamic equities, collective investment schemes, and collateralisation, the latter being an important prerequisite of liquidity. The focus is also on Malaysia, the authors pointing to the consistent support from the authorities as explaining why, for example, Malaysia continues to dominate the global sukuk market, though other important players are not neglected, there being a chapter on Bahrain and much material from elsewhere in the Islamic world.

Amidst the detail there are wider remarks, for example as to the roots of sukuk in the Middle Ages as papers denoting obligations arising from commercial transactions, and a contribution by a leading scholar which emphasises the role of the Shari'ah in Islamic finance as a live body of jurisprudence that can be understood in the light of contemporary circumstances.

The authors' primary concern in this work, however, is with liquidity, and the management of risk, recognising the challenges which Islamic finance faces in this respect, challenges which in one form or another are faced by all financial institutions. The value of the work lies in the solutions that are to be found in its pages. Prof. Rifaat and Prof. Archer are to be congratulated for bringing together a group of authors who share their commitment to the continuing growth of Islamic Capital Markets, in which they themselves are such leading participants. Everyone who works in this growing field will be glad to have this book on their shelves.

Sir William Blair
Judge in Charge of the Commercial Court
Royal Courts of Justice in London
September 2017

About the Editors

Professor Simon Archer is a Visiting Professor at the ICMA Centre, Henley Business School, University of Reading, UK. He qualified as a Chartered Accountant with Arthur Andersen in London and then moved to Price Waterhouse in Paris, where he became Partner in charge of Management Consultancy Services. Since the beginning of his academic career, Professor Archer has undertaken numerous consultancy assignments, including acting as consultant to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Financial Services Board (IFSB) and the International Islamic Liquidity Corporation (IILM). He is the author or co-author of a considerable number of academic papers on Islamic finance and a co-editor of and contributor to several books on the subject, including three published by Wiley. In 2010, he received an award from the Central Bank of Bahrain and Kuwait Finance House for his ‘outstanding contribution to the Islamic financial services industry’.

Professor Rifaat Ahmed Abdel Karim has an international reputation as a leader and authority in the Islamic financial services industry (IFSI) at both the professional and academic levels.

Professor Rifaat was the CEO of the International Islamic Liquidity Management Corporation during the period October 2012–December 2016. He has served as the inaugural Secretary-General at both the AAOIFI and the IFSB. Professor Rifaat is an Adjunct Research Professor at INCEIF, Malaysia, and Visiting Professor at the ICMA Centre, Henley Business School, University of Reading, UK. He is the author or co-author of a considerable number of academic papers on Islamic finance and a co-editor of and contributor to several books on the subject, including three published by Wiley.

Professor Rifaat's contribution to the IFSI has been recognised by the many prestigious international awards that he has received during his career over three decades, which has been dedicated to high achievement in professional activities, as well as in research and academic work. These awards notably include the (inaugural) 2004 Euromoney Outstanding Contribution in the Development of Islamic Finance, the 2010 Islamic Development Bank Prize in Islamic Banking and Finance and the Malaysian Royal Award in Islamic Finance 2016.

In 2010, the King of Malaysia awarded Professor Rifaat the Royal Malaysian Honorary Award of Darjah Kebesaran Panglima Jasa Negara (PJN), which carries the title ‘Datuk’.