Table-8 Summary of Risk Characteristics of Sukuk Description of Sukuk structure Istisna‘, Murabaha...
1
Table-8 Summary of Risk Characteristics of Sukuk Description of Sukuk structure Istisna‘, Murabaha debt certificates – non-tradable Credit Risk FX risk Price risk Unique basis of credit risks exist, see, Khan and Ahmed (2001) Other risks Types of Sukuk Zero coupon Sukuk Fixed Rate Ijara Sukuk Floating Rate Ijara Sukuk Default on rent payment, fixed rate makes credit risk more serious Default on rent payment, floating rate makes default risk lesser serious – see previous case Rate of return (Interest rate risk) Very high due to fixed rate, remains for the entire maturity of the issue Very high due to fixed rate, remains for the entire maturity of the issue Exists only within the time of the floating period normally 6 months Fixed rate Hybrid/ Pooled Sukuk Musharakah Term Finance Sukuk (MTFS) Securitized Ijara, certificate holder owns part of asset or usufructs and earns fixed rent – tradable Securitized Ijara, certificate holder owns part of asset or usufructs and earns floating rent indexed to market benchmark such as LIBOR – tradable Securitized pool of assets; debts must not be more than 49%, floating rate possibility exists – tradable Medium term redeemable musharakah certificate based on diminishing musharakah – tradable as well as redeemable Credit risk of debt part of pool, default on rents, fixed rate makes credit risk serious Musharakah has high default risk (see Khan and Ahmed 2001), however, MTFS could be based on the strength of the entire balance sheet Salam has unique credit risk (see Khan and Ahmed 2001) If all other conditions are similar, FX risk will be the same for all cases of Sukuk. However, those Sukuk which are liquid or which are relatively short term in nature will be less exposed. The composition of assets in the pool will also contribute to the FX risk in different ways. Hence this can be very useful tool to overcome the FX risk by diversifying the pool in different currencies. Salam Sukuk Securitized salam, fixed- rate and non-tradable Very high due to fixed rate, remains for the entire maturity of the issue Similar to the case of the floating rate. This is however, unique in the sense that the rate is not indexed with a benchmark like LIBOR, hence least exposed to this risk Very high due to fixed rate Price risk relates to the prices of the underlying commodities and assets in relation to the market prices. Ijara Sukuk are most exposed to this as the values of the underlying assets may depreciate faster as compared to market prices. Maintenance of the assets will play an important part in this process. Liquidity of the Sukuk will also play an important part in the risk. Salam is also exposed to serious price risks. However, through parallel contracts these risks can be overcome Liquidity riskis serious as far as the non-tradable Sukuk are concerned. Business riskof the issuer is an important risk underlying Sukuk as compared to traditional fixed incomes. Shari’ahcompliance risk is another one unique in case of Sukuk. Infrastructure rigidities, i.e.,non- existence of efficient institutional support increases the risk of Sukuk as compared to traditional fixed incomes, see Sundararajan, & Luca (2002) Source: Ali Arsalan (2004) 55
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Transcript of Table-8 Summary of Risk Characteristics of Sukuk Description of Sukuk structure Istisna‘, Murabaha...
Tab
le-8
Su
mm
ary
of R
isk
Ch
arac
teri
stic
s of
Su
kuk
Des
crip
tion
of S
ukuk
stru
ctur
eIs
tisna
‘, M
urab
aha
debt
cert
ific
ates
– n
on-t
rada
ble
Cre
dit R
isk
FX
ris
kP
rice
ris
k
Uni
que
basi
s of
cre
dit
risk
s ex
ist,
see,
Kha
nan
d A
hmed
(20
01)
Oth
er r
isks
Typ
es o
fSu
kuk
Zero
cou
pon
Suku
k
Fix
ed R
ate
Ijar
a Su
kuk
Flo
atin
gR
ate
Ijar
aSu
kuk
Def
ault
on r
ent
paym
ent,
fixe
d ra
tem
akes
cre
dit r
isk
mor
ese
riou
sD
efau
lt on
ren
tpa
ymen
t, fl
oatin
g ra
tem
akes
def
ault
risk
less
erse
riou
s –
see
prev
ious
case
Rat
e of
ret
urn
(Int
eres
t rat
e ri
sk)
Ver
y hi
gh d
ue to
fixe
d ra
te, r
emai
nsfo
r th
e en
tire
mat
urity
of
the
issu
e
Ver
y hi
gh d
ue to
fixe
d ra
te, r
emai
nsfo
r th
e en
tire
mat
urity
of
the
issu
eE
xist
s on
ly w
ithin
the
time
of th
e fl
oatin
gpe
riod
nor
mal
ly 6
mon
ths
Fix
ed r
ate
Hyb
rid/
Poo
led
Suku
k
Mus
hara
kah
Term
Fin
ance
Suku
k(M
TFS)
Secu
ritiz
ed I
jara
, cer
tific
ate
hold
er o
wns
par
t of
asse
t or
usuf
ruct
s an
d ea
rns
fixe
dre
nt –
tra
dabl
eSe
curi
tized
Ija
ra, c
ertif
icat
eho
lder
ow
ns p
art o
f as
set o
rus
ufru
cts
and
earn
s fl
oatin
gre
nt in
dexe
d to
mar
ket
benc
hmar
k su
ch a
s L
IBO
R–
trad
able
Secu
ritiz
ed p
ool o
f as
sets
;de
bts
mus
t not
be
mor
e th
an49
%, f
loat
ing
rate
poss
ibili
ty e
xist
s –
trad
able
Med
ium
term
red
eem
able
mus
hara
kah
cert
ific
ate
base
d on
dim
inis
hing
mus
hara
kah
– tr
adab
le a
s
wel
l as
rede
emab
le
Cre
dit r
isk
of d
ebt p
art
of p
ool,
defa
ult o
n re
nts,
fixe
d ra
te m
akes
cre
dit
risk
ser
ious
Mus
hara
kah
has
high
defa
ult r
isk
(see
Kha
nan
d A
hmed
200
1),
how
ever
, MT
FS c
ould
be b
ased
on
the
stre
ngth
of th
e en
tire
bala
nce
shee
t
Sala
m h
as u
niqu
e cr
edit
risk
(se
e K
han
and
Ahm
ed 2
001)
If a
ll ot
her
cond
ition
s ar
esi
mila
r, F
X r
isk
will
be th
e sa
me
for
all
case
s of
Suk
uk.
How
ever
, tho
seSu
kuk
whi
ch a
reliq
uid
or w
hich
are
rela
tivel
y sh
ort t
erm
in n
atur
e w
ill b
e le
ssex
pose
d. T
heco
mpo
sitio
n of
asse
ts in
the
pool
will
als
o co
ntri
bute
to th
e FX
ris
k in
diff
eren
t way
s.H
ence
this
can
be
very
use
ful t
ool t
oov
erco
me
the
FXri
sk b
y di
vers
ifyi
ngth
e po
ol in
dif
fere
ntcu
rren
cies
.
Sala
m S
ukuk
Secu
ritiz
ed s
alam
, fix
ed-
rate
and
non
-tra
dabl
e
Ver
y hi
gh d
ue to
fixe
d ra
te, r
emai
nsfo
r th
e en
tire
mat
urity
of
the
issu
eSi
mila
r to
the
case
of
the
floa
ting
rate
. Thi
sis
how
ever
, uni
que
inth
e se
nse
that
the
rate
is n
ot in
dexe
d w
ith a
benc
hmar
k lik
eL
IBO
R, h
ence
leas
tex
pose
d to
this
ris
k
Ver
y hi
gh d
ue to
fixe
d ra
te
Pric
e ri
sk r
elat
es to
the
pric
es o
f th
eun
derl
ying
com
mod
ities
and
asse
ts in
rel
atio
n to
the
mar
ket p
rice
s.Ij
ara
Suku
k ar
e m
ost
expo
sed
to th
is a
sth
e va
lues
of
the
unde
rlyi
ng a
sset
sm
ay d
epre
ciat
efa
ster
as
com
pare
d to
mar
ket p
rice
s.M
aint
enan
ce o
f th
eas
sets
will
pla
y an
impo
rtan
t par
t in
this
proc
ess.
Liq
uidi
ty o
fth
e Su
kuk
will
als
opl
ay a
n im
port
ant
part
in th
e ri
sk.
Sala
m is
als
oex
pose
d to
ser
ious
pric
e ri
sks.
How
ever
, thr
ough
para
llel c
ontr
acts
thes
e ri
sks
can
beov
erco
me
Liq
uidi
ty r
iski
sse
riou
s as
far
as
the
non-
trad
able
Suk
ukar
e co
ncer
ned.
Bus
ines
s ri
skof
the
issu
er is
an
impo
rtan
t ris
kun
derl
ying
Suk
uk a
sco
mpa
red
totr
aditi
onal
fix
edin
com
es.
Shar
i’ah
com
plia
nce
risk
is a
noth
er o
neun
ique
in c
ase
ofSu
kuk.
Infr
astr
uctu
reri
gidi
ties
, i.e
.,non
-ex
iste
nce
of e
ffic
ient
inst
itutio
nal s
uppo
rtin
crea
ses
the
risk
of
Suku
k as
com
pare
dto
trad
ition
al f
ixed
inco
mes
, see
Sund
arar
ajan
, &Lu
ca (
2002
)
Sour
ce: A
li A
rsal
an (
2004
)
55
