Islamic Bonds: Sukuk and the World of Finance Stocks and bonds are among some of the most common ways of investing and raising capital in the financial markets today. Investors in the international arena are presented with a myriad of choices in terms of bond types. One of these is a relatively recent bond market that has emerged from the Islamic community, known as "Sukuk." This term is used to describe Islamic bonds. This type of bond distinguishes itself from its Western counterpart by its adherence to Shari'ah principles, one of which is the prohibition on charging or paying interest (Islamic Development Bank, 2010). This is accomplished by granting the investor a share of the investment asset, with its cash flows and risk. The growth and success of the Sukuk market has been remarkable, in that it caters to an investor market that seeks to diversify its holdings beyond the traditional.

Thus, foreign and domestic investors who buy Sukuk must have structures approved by Shari'ah boards consisting of scholars in Islam. Issuers general include sovereigns and corporations in the Middle East and Southeast Asia, attracting many investors from some 56 IDB member countries and more than 100 non-member countries. In this way, Sukuk acts as a type of bridge between issuers and investors, where money raised can then be allocated to infrastructure initiatives in a transparent and efficient way.

In 2010, Sukuk has proven its resilience in difficult economic times, and particularly during the global economic downturn. Sukuk issuance increased, for example, from U.S.$14.9 billion to U.S.$23.3 billion between 2008 and 2009. Issuance has been particularly strong in Asia during this time. In 2010, the growth rate of the Sukuk bond global market was 10-15% (Islamic Development Bank, 2010).

Within the Shari'ah requirement, Sukuk can include various structures. Most commonly, Sukuk takes the form of partial ownership of an asset, also referred to Sukuk al-jiarah. Sukuk could also mean a partially owned debt, known as Sukuk murabaha. A partially own project is known...

A partially own investment is referred to as Sukuk al-jstithmar (Financial Times, 2011).
From 2010 onwards, Sukuk has made rapid strides not only in Asian markets, but also internationally, as shown in its prowess in terms of foreign currency. According to Rana (2014), Pakistan has raised $1 billion from international debt markets in 2014 with its second-largest transaction in less than a year. This was done by issuing five-year dollar-denominated Sukuk bonds. The capital raised in this way would go a long way towards Islamabad's foreign currency reserves in terms of satisfying the International Monetary Fund (IMF).

The profit rate of the transaction was 6.57%, half a percent lower than the five-year Euro bond sold in April 2014. While the Eurobond carried no collateral, Sukuk has an inherent collateral requirement. Hence, the government pledged the Islamabad-Lahore Motorway and succeeded in maintaining an interest rate that was lower than the Euro bond transaction when reaching $2 billion. This places Sukuk on par and in competition with the Euro bond in the international market. Furthermore, the 6.75% interest rate for the $1 billion Sukuk bond is 5.17% higher than the five-year U.S. treasury rate used as a bench mark (Rana, 2014).

This is a trend following the global economic downturn, also fueled by further fears of slowing economic progress (Rana, 2014). This trend is evident in the projected target rate of $500 million for the bond, whereas great investor interest resulted in $2.3 billion, almost five times higher than the projection.

On the strength of this success, Pakistan has further hopes of raising $1.2 billion from the sale of its remaining stakes in the HBL, amounting to 42.5%. In 2014, Pakistan was also asked to increase its foreign currency reserves to $13 billion by June 2015 from its $8.5 billion level in 2014.

Sukuk has been issued by various entities, including Hong Kong, the DIFC, and recently Britain has become the first…