Islamic Finance’s #Sukuk innovation needs to go further

As opposed to earlier structures, today’s sukuk come with a variety of features. There are two broad thrusts in the innovation that has taken place. First, the use of embedded options for better risk management and second, innovation seeking to overcome limitations like the need for physical underlying asset. For example, a call option which provides the right to purchase an underlying asset at a predetermined price is typically embedded to minimize the risk to the obligor. An embedded put option on the other hand favors the sukuk-holder. The put enables the holder to sell the underlying asset to the obligor at a predetermined price. A number of Islamic banks have issued perpetual sukuk with embedded call options for the purpose of meeting their Basel III capital adequacy requirements. Also, sovereign wealth funds like Malaysia’s Khazanah have issued “Exchangeable Sukuk” which allow the holders to either convert the sukuk to the underlying asset, or redeem the sukuk at face value. While sukuk design has come a long way, they need to move toward an even more enhanced risk-sharing.