ISLAMIC BONDS (SUKUK) CASE STUDY
US $400 million Islamic Development Bank Sukuk: Hybrid Sukuk
Case Abstract
An Islamic bond (Sukuk) has economic characteristics similar to those of a conventional bond, but is structured so as to be compliant with Shari'a law and can be sold to Islamic investors who are prohibited by Shari'a law from investing in conventional debt securities.
The IDB is a multilateral development financing institution founded in December 1973 by the first conference of the Finance Ministers of the Organization of the Islamic Conference (OIC). It officially began operations in 1975 with the purpose of fostering the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of the Shari'a. Mobilization of resources has remained one of the greatest challenges facing the IDB. The emergence of Sukuk has provided the IDB a novel dimension through which to face this challenge and in August, 2003 the bank issued US $400 million worth of trust certificates due in 2008.
IDB Hybrid Sukuk: Case Study questions
Following the recent string of successful Sukuk issues, and the fact that they are a relatively new concept in corporate finance, your employer, an Investment Bank, has selected your group to make presentations to the Board regarding the key issues involved.
1. Outline the role of the IDB.
2. Describe the exact nature of the IDB Sukuk.
3. What Islamic modes of finance underpin the IDB Sukuk?
4. Describe how these modes of finance work and the exact relationship they have with the IDB Sukuk.
5. What Sharia Board requirements were put in place?
6. Are issues of corporate governance relevant to this issue?
7. What was innovative about this issue?
8. How was the issue rated and by whom?
9. What risks for investors are associated with investing in Sukuk?
10. was the issue a success?
11. What lessons can be learnt for the issue of future Sukuk? How do the critical factors for IDB Sukuk compare with those for the other Sukuk issued?