Sukuk is an Arabic term for ‘financial certificates’, which is commonly referred to (albeit mistakenly) as “Islamic Bonds”. Sukuk, however, differs from bonds in concept and structure.
Since the traditional interest-paying structure of bond financing is not permissible in Shariah, sukuk offers an alternative. To put it in context, let’s say the issuer of a sukuk is a company/statutory body intending to raise capital for a bridge construction project. It offers sukuk certificates to the investors for purchasing at a fixed price (BDT 1 lac each) for a specific period (10 years). Capital raised from the sukuk is then invested in the project through a sale-lease structure. Subsequently, the issuer starts to distribute profits generated from the project to the sukuk-holders on a regular basis. At maturity (after 10 years), the issuer buys back the sukuk at face-value (BDT 5 lac) from the investors. The investors get their money back with certain returns.
In effect, sukuk-holders temporarily attain beneficial ownership over the asset whereas the bondholders only have debt obligations by the issuer without any underlying asset. Furthermore, the return of investment in sukuk comes as ‘profits’ (bonds generate ‘interests’).
The meager presence of sukuk in Bangladesh till date is reflected by the limited application of short-term Government Islamic Bonds and perpetual Islami Bank Mudaraba Bonds. As an effective financing option, the full potential of sukuk is yet to be unlocked.
Among other compelling arguments (e.g. market potential in Bangladesh, the 4th largest Muslim majority country in the world with a successful Islamic banking industry), formal recognition of sukuk (legally and financially) is imperative for its’ proven track-record in infrastructure projects financing.
To fulfill the realistic aspiration of becoming an upper-middle-income country by 2031, studies by the World Bank suggests that Bangladesh need an investment of about $300 Billion for infrastructural development. Numerous infrastructure development projects around the world, specially in Malaysia, the Gulf and in Africa has been successfully financed through sukuk. Accommodating sukuk as a source of project finance might turn out as a game-changer.
However, this mechanism has some challenges in Bangladesh. Despite having a thriving industry, Bangladesh is yet to formulate a comprehensive legal and regulatory framework for Islamic finance (except for a regulation for the banking sector). In absence of comprehensive guideline for specialised sectors like sukuk, the steppingstone could be the modification of some key laws e.g. the Companies Act, the Income-Tax Ordinance, the Registration Act, the Bankruptcy Act, the Trust Act, and the Securities laws and regulations.
To incentivise the investment in debt securities (e.g. bonds), NBR provides tax benefits to the individual investors but not to the corporates e.g. banks, insurances, and financial institutions. Moreover, facilitating special tax treatment for sukuk transactions is imperative in line of the global best practice, since the Shariah obligations of sukuk often entail complex structures that trigger taxes in different layers.
Bangladesh is reported to have the second-highest number of Shariah scholars on finance (Malaysia being the first), and the Islamic banks currently rely on a self-governed Shariah Board for compliance issues. With formal institutionalisation and legal mandate, disputes on the Shariah standards of sukuk transactions can be averted. Interestingly, the leading case on sukuk till date (2004 EWCA Civ 19) was initiated when a renowned Bangladeshi company (Beximco Pharma) defaulted on an international sukuk with a Bahraini bank and raised the issue of Shariah standard as a defense.
The remarkable growth of the Islamic banking industry in Bangladesh without a comprehensive legal and regulatory facilitation is a curious case. This also indicates a huge opportunity for a well-planned execution of sophisticated financial products like sukuk in the local market, which will boost infrastructural development.
The writer is LLM candidate, Queen Mary University of London.