By: Dr. Mohamed Shakeel Salyani (PhD) IMG-20200917-WA0009

We always end up wondering, where do we save our money so that we can maximize our returns and make them grow. This has been a challenge for many of us which has triggered the very bright minds to find different ways of maximizing our hard earned income. Some of those returns have been considered haram, since it enterprises the medium of exchange.

According to Investopedia Investment is the act of putting money to work i.e. to start/expand a business, project or the purchase of an asset, with the goal of earning income or capital appreciation. Investment is oriented toward future returns, and thus entails some degree of risk. There are various risk based investments which generate profit namely: Stocks, Bonds, Mutual funds, Money market funds, Exchange-traded funds, and retirement benefit funds, hedging funds to name a few. Options and futures within the money market and mortgage backed securities are some of the investments which have been labeled as high risk with high return.

How it is done

So with the attractive option of maximizing the little money we have how do we grow it to achieve the financial freedom we are looking for. The steps to be followed in Kenya:

a.) Decide how you want to invest, in stocks or related opportunities. b.) Open an investing CDS account. c.) Know the difference between stocks and stock mutual funds and other options (Do some little googling). d.) Set a budget for your investment. e.) Focus on the long-term. f.) Manage your stock portfolio or use the services of a broker to manage your investment and advise.

Who should do it

Warren buffet, at 11 years old, made his first investment, buying three shares of Cities Service Preferred at $38 per share where he waited for the price to increase to $40. Though he regrets thinking he could have bought those shares earlier. Hence principally there is no right time or age to invest. Though a number of rulings emphasize on the investment to be in a shariah compliant institution and not an organization which is not conducting halal business or exorbitantly indebted with Riba based financing.

What is halal investment

So the confusion comes, what is halal and what is haram? The confusion can be cleared with one simple answer, the investment to be on the basis of : a.) equity and not a lending basis. b.) trade and not on speculation or gambling basis. c.) currency trades to be done on a spot basis and not future transactions.

What is a Sukkuk

The Arabic definition of Sukkuk is translated as a certificate. Which identifies a basic right to the type of investment an individual has done with a specific firm or individual.

Why Sukkuk

Investment Sukkuk are certificates of equal value issued in the name of the owner or bearer in order to establish the claim of the certificate owner over the financial rights and

obligations represented by the certificate. They represent a common share in the ownership of the assets made available for investment, whether these are nonmonetary assets, usufructs (authority to use), services or a mixture of all these plus intangible rights, debts and monetary assets.

These Sukkuk do not represent a debt owed to the issuer by the certificate holder. Investment Sukkuk are issued on the basis of a Shariah-nominated contract in accordance with the rules of Shariah that govern their issuance and trading. The trading of Investment Sukkuk is subject to the terms that govern trading of the rights they represent.

The owners of these certificates share the return as stated in the subscription prospectus and bear the losses in proportion to the certificates owned (held) by them.

Types of Sukkuk

There are different types of Sukkuk applied in the international markets namely: Salam certificates (Salam Sukkuk), Istisna’a certificates (Istisna’a Sukkuk), Murabahah certificates (Murabahah Sukkuk), Musharakah certificates (Musharakah Sukkuk), Mudarabah Sukkuk, Investment agency Sukkuk, Sharecropping certificates -Muzara’ah Sukkuk, Irrigation certificates -Musaqat Sukkuk, Agricultural certificates -Mugharasah Sukkuk

Benefits of Sukkuk

There are varying perspectives on values inherent in the utilization of Sukkuk by corporate as well as public institutions. Some of the benefits have been highlighted as follows:

The use of Sukkuk represents a way of raising financial resources for large companies including multinational corporations, multinational development institutions and government agencies that require enormous resources that is difficult to be met by individual investors singly.

Sukkuk is utilized, as there are openings in the secondary market for trading in the Sukkuk where investors can sell their current holdings in full or in part, for cash including earnings where it is a profitable one. A major fault line usually associated with conventional financing is its unfair means of allocating returns from business efforts. This anomaly is effectively corrected by the use of Sukkuk, which carries a more equitable method of distributing wealth as all investors are carried along in fair manner and based on actual profits made.

Islamic Banks and other financial institutions sometimes have difficulty in managing their liquidity situations as they are limited by sharia constraints. With Sukkuk issuance by corporate entities, an avenue is created for them.

Other benefits of utilizing Sukkuk financing for the originators are seen in respect of reduced cost of funds occasioned by higher ratings, access to capital markets, bringing alternative and diversified funding sources, possibilities of reduction of risks, and possible tax relief on capital.

Challenges of Sukkuk

Of course some challenges trail the issuance and utilization of Sukkuk in corporate entities. The first challenge is related to viability of an economy that involves the private sector in the production of public infrastructure and public goods. Thus where there are fault lines in the overall activities in the economic landscape, such as high interest rates and inflation rates, such permeates to issuance and performance of Sukkuk. Another challenge for full utilization of benefits associated with Sukkuk is the concern about the

capacity of the public sector to establish a sound legal framework that would attract the private sector participation. In the private sector investors’ perspective, the existence of a clear and consistent legal framework is a precondition for participation.

Assets that are tradable in the secondary market for Sukkuk are limited in number. This is as a result of the fact that those assets are sharia compliant and thus fresh issuers have limited supply of underlying assets and have to wait for maturity of the underlying assets before such new issuances can be made. This is unlike conventional bond issuances which do not have underlying assets as basis for issuance. Again, there is the challenge of standardization of Sukkuk in its documentation and structures, and also standardization in Shariah principles.

The World standing on Sukkuk today

The research findings for the year 2019 saw the market close with a record Sukkuk primary market issuance amounting to USD 145.70 billion resulting in an increase of around 18.32% in Sukkuk issuances as compared to 2018.

Why should it be done in kenya

Many third world countries like Pakistan, Burkina Faso have implemented Sukkuk within personal capacity or within the government capacity, generating funds from within their own economy instead of borrowing interest based debt from different countries. This has helped the funds be directed to the rightful purposes since it’s a monitored and accountable investment where the citizens/ investors have a keen eye on what is happening. This has eliminated corruption and mismanagement of funds to derive the rightfully deserved earnings for the investors. The impact of ploughing the returns back within the economy is vital to boost growth.

The Sukkuk platform shall bring in confidence with the international financing bodies as its shall be well structured and purpose oriented instead of a blanket borrowing from the citizens of a country. A series of research have been done to show a direct impact on an economy with a case study of Malaysia narrating that, Sukkuk have a positive impact on the economy. According to this it is desirable to use Sukkuk emissions as a factor in increasing incomes in developing countries and is considered that it is a sufficient opportunity to stimulate the economies of countries that have not implemented the Sukkuk or have little use of this financial instrument. The studies also indicate a large impact on the stock market of the country to create wealth and bring tangible returns for all related stakeholders..(Abrorov 2020)

Dr. Mohamed Shakeel Salyani (PhD)

msalyani@arafconsultants.com