Economy, Business And Markets

SEO Says Islamic Bonds Safer

SEO Says Islamic Bonds Safer SEO Says Islamic Bonds Safer

Sukuk or Islamic bonds is a safer alternative to debt securities, an official in Securities and Exchange Organization was quoted Thursday by IRNA as saying.

“Companies that finance projects by selling debt securities are indebted only to bond holders and in the process form a typical debt cycle in the absence of a strong base as guarantee. Lenders are, therefore, always at risk if the issuer fails to repay”, Ali Saeedi, SEO deputy head for supervision of financial institutions said.

“On the contrary, Sukuk and other Islamic bonds enjoy real physical assets which make them a safer and less risky alternative. There always are Special Purpose Vehicles as subsidiary corporations that are designed to secure obligations even if the borrower goes bankrupt.”

He considered Islamic bonds as “essential” instruments for the capital market and financing process and said “Encouraging the issuance of sukuks is a SEO priority. However, since 2011, obstacles imposed on the capital market from outside have slowed down the process.”

Fundamental changes are needed to institutionalize sukuk issuance. For instance, the condition of guarantee should be removed or credit rating should be used as a measure to mitigate the risk of sukuk with fixed income, he said.

Regarding progress in implementing reforms, Saeedi said “An optional amount can be decided as guarantee; sukuk can now be issued at inflation-adjusted rates or can be converted to corporate shares.” However, credit rating institutions are yet to be set up because generally they are justifiable in large and populous countries and the process is different from other financial institutions.

Sukuks are tradable bonds with equal value that are designed within the framework of Sharia-compliant financial contracts. The holders of sukuk are co-owners of a particular property or a collection of assets.

Efforts to design sukuk started in 2007 when a special committee was set up for this purpose which was later developed into Financial Instrument Development Act in 2008.

The first Ijarah sukuks were issued in the capital market in January 2011 to finance Mahan Airlines valued at 300 billion rials ($10 million at the official exchange rate) with a five-year maturity.