The Development Mechanism And Trading Of Sukuk Bonds Finance Essay

The Development Mechanism And Trading Of Sukuk Bonds Finance Essay A Sukuk bond is an Arabic word for financial investment certificates, or sometimes can be refer as Islamic bonds. It is the famous element in the Islamic Finance among the Muslim and non-Muslim. Other than that, sukuk also refer to trust certificates and participation securities. Moreover, it is one of the fastest growing tools in the Islamic capital market that triggered the desire of research and writings of many researchers and scholars, as a result of which is the existence of many academic writings and publications [1]. It has become one of the most dynamic tools for capital mobilization in both the Islamic and conventional capital markets (2007, Umar). For your information, base on their Islamic law, it is not allowed fixed income and interest bearing bond. After that, Islamic Finance comes out the sukuk bonds to fulfill its investment principles, which is charging or paying the interest. Besides that, it is similar to the financial bonds in the conventional bank, which are proof of ownership title to the investor and utilized by financial institution to raising the fund. For both conventional bonds and sukuk bonds are structured to generate revenue on the physical assets. However, the differentiation between both bonds is sukuk bonds can be consider as modern application of Islamic financial. Malaysias fully experience and concrete fundamentals in Islamic finance developed over 30 years, tied with its strength in the domestic sukuk market, offers strong exciting value propositions to government agencies, multinational corporations and multilateral development banks or financial institutions across the world to originate sukuk out of Malaysia.  Malaysia leads the global sukuk market, represented by 61% of total sukuk outstanding at the end 2008.2 Development of Sukuk Bonds What is Sukuk? Sukuk is an Islamic financial certificate bond but it refuted to conventional bonds, which is debt based instrument and Sukuk is asset based instrument. Sukuk securities adopt the Islamic laws referred to as Shariah and it own principles, Islamic religious law, which no all interest can make and its forbid the charging or payment of interest such as fixed income, interest bearing bonds are not permissible in Islam . Sukuk instruments are like a middleman or a bridge to issuers, primarily sovereigns and corporations in other foreign countries such as in the Middle East and Southeast Asia, with a large pool for investor to finding diversify their holdings beyond traditional asset classes. In Sukuk market, fund raised can classified in two way which is an efficient and transparent way in over 100 non-member countries in the world. Diagram 1: Different between conventional financial and Islamic financial Selected Historical Highlights Key Highlights in Malaysias Islamic Capital Market: 1990: Issuance of first Islamic Corporate bond by Shell MDS Sdn Bhd 1993: Launch of first Islamic Equity unit trust fund by Arab-Malaysian Unit Trust Bhd 1994: First full fledged Islamic stockbroking company, BIMB Securities, was established 1999: Launch of the KLSE Syariah Index 2000: Launch of the first Islamic bond fund by RHB Unit Trust Management 2001: Issuance of the worlds first Global Sukuk by Kumpulan Guthrie Source: Bloomberg (based on Sukuk issued out of new and existing programmes for the YTD ) Global vs Malaysia Sukuk Issuances 2005- 1H20112002: Issuance of the worlds first Global Sovereign Sukuk Figure :Global vs Malaysia Sukuk Issuances 2005- 1H2011 In 2005 to first half of 2011, global Sukuk market and Malaysia Sukuk market was faced few economic growth and crisis, therefore it was effect issued Sukuk bond. Based on the data, Malaysia Sukuk market doesnt showed significant growth compared with global Sukuk market between 2005 to first half of 2011. However Malaysia Sukuk market looks more stable than global market. In 2008, global Sukuk faced financial meltdown, it is global financial crisis and the Dubai debt woes, therefore it dropped from US$31 billion to US$14.2 billion, dropped around 54%. Besides that, Malaysia Sukuk market also dropped, but the dropped amount lower than global market, around 41%.Apart from that, in 2009 Malaysia Sukuk market of the total Sukuk issuance growth around 31%, it was showed those investor have confidence to Malaysia Sukuk market. http://biz.thestar.com.my/archives/2009/9/9/business/p8-sukukcht.JPG Figure 2:Sukuk issuance by country in 2009 In 2009, Malaysia is the largest country issuer Sukuk bond compare with Indonesia, Sausi Arabia and Bahrain.Malaysia almost having around 45% of issuer Sukuk bond. The second largest is Saudi Arabia, they has around 22% for issuer Sukuk bond. Figure 3 Malaysia: Outstanding Sukuk vs. Bonds In this several years, Sukuk continues growth but compare with normal bond, amount of outstanding Sukuk still lower than bond. In 2011, Sukuk still not famous for the investor or issuer therefore the number was just had small amount for the outstanding Sukuk. Besides that, between 2001 and 2007 the amount of outstanding Sukuk was growth significantly. In 2007, outstanding Sukuk was catching up the normal bond and after year 2007 outstanding Sukuk still having a positive growth in the market. This three chart showed that investor have confidence with Malaysia Sukuk market because it has its potential. In 1990s, Malaysia already had a powerful and transparent Islamic structure. Other than that, Malaysia also do more effort to promoted to foreign investor show that Malaysia is an international Islamic financial hub and had recognized by worldwide and continues lead at the front of the development of Sukuk bond. The strength of Sukuk is lies in its own unique framework. Sukuk can carry distinct value position to issuers and investors. The Sukuk growths rapidly because had few factors. 1. Structure growth sophistication. Sukuk have a good superiority which is it had the flexibility of Sukuk structure to lead its growth continuously and it also can meet the requirement and preferences of investor and issuers by tailored suitable Sukuk to them. Now a day, Malaysia have more than a types of Sukuk in the market such as profit and loss sharing (Musyarakah), cost plus financing (Murabahah), deferred payment (Al-Bai Bithaman Ajil), leasing (Al-Ijarah), agent(Al-Wakalah) and so on to wider range of investors. Figure 4: Type of Sukuk apporeved in Malaysia In 2011, Malaysia has few types of Sukuk approved in Malaysia Sukuk market and types of Sukuk in Malaysia market can classified to Contracts of participation and exchange. Contracts of participation are such as Mudharabah Sukuk and Musyarakah Sukuk. Contracts of exchanges are such as Murabahah and Ijarah. The largest number of investor invest is Musyarakah, the number is around 63% in Sukuk market. The second largest is Ijarah, its around 15% in Sukuk market. 2. Clarity on the regulatory treatment. Excellent regulatory treatment in Sukuk structure has provided regulatory certainty to Islamic financial institutions with regard to their investments.The adherence of the Capital Adequacy Standard was accomplish and issued by the Islamic Financial Services Board (IFSB) 3. Strategic centralize to develop overall Islamic financial system. Every investor or issuers have it own demand or requirement therefore Sukuk can base on each investor or issuers to choice suitable own Sukuk to themselves. For example, in takaful operators the investors can choice medium or long-term liabilities of takaful funds. 2.1 Introduction to Mechanism of Sukuk Bond Sukuk bond is one of the Islamic financial products which grow rapidly nowadays. It is generally known as Shariah compliant  [1]  bond as it is structured according to the Islamic principles. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has defined sukuk as the certificates of equal value that represent an undivided share in the ownership of the underlying asset, usufruct, services or investments in particular projects or special investment activities. (Institutions, 2008) Besides, sukuk bond also can be described as an asset-based investment because the investor which is the sukuk holder owns the undivided interest in the underlying asset even if bad situation occurs. Sukuk bond is not a debt certificate, hence, the claim of sukuk bond is not just a claim to cash flow but it also represents the ownership claim on a pool of underlying assets. However, under the various types of sukuk which structured based on different Islamic principles, the investor has different rights and obligations. When the sukuk is represent the ownership of the underlying asset such as Ijarah sukuk, the investor can claims not only on the underlying asset. But, at the same time, it can be claimed against the cash flow and revenues generated from the sale of the asset. Besides, for the sukuk which issued as the sale of asset-based through the contract of exchange such as the Murabahah and Istina sukuk, the investor has the rights to claim against the cash flow from the contract of exchange but not on the physical asset. This is due to the transfer of ownership which is now to the obligator. On the other hand, for the type of sukuk which provide funds for projects such as Musyarakah sukuk and Mudharabah sukuk, the investor has the rights on the undivided interest in the specific investments. The difference in both of this sukuk is just that the musyarakah sukuk holder shares both the profit and loss however the mudharabah sukuk holder share only the profit while loss will not be sharing. (Bank Negara Malaysia and Securities Commission Malaysia, 2009) Therere many types of sukuk bond which is structured based on various approved Islamic concepts and principles. Among the 14 types of sukuk which are identified by AAOIFI, the most common sukuk included Ijarah sukuk (leasing of specific assets) and the Musyarakah sukuk (profit loss-sharing scheme). Therere also other types of sukuk which included Murabahah sukuk (cost-plus sale), Istina sukuk (project finance), Mudharabah sukuk (profit-sharing), Salam sukuk, Hybrid sukuk and so forth. In the end of October 2011, Musyarakah sukuk leads the biggest proportion among the various types of sukuk bond which is 59%. It then was following by Ijarah sukuk (13%), Murabahah sukuk (10%), Mudharabah sukuk (9%) and Wakalah sukuk (9%). (Team, 2012) 2.2 Similarities and Differences between Sukuk Bond and Conventional Bond Sukuk bond shared some similar characteristics with the conventional bond. For instances, both of these bonds have a fixed term maturity, can bear a coupon and are tradable on the normal yield price. Besides, both of the sukuk bond and conventional bond have similarities in the following features: marketability, rate ability, enhance ability and also the versatility. (What is Sukuk?) Both of them are liquid instruments, therefore can be easily transferred and tradable in the financial markets. Furthermore, both of these bonds are structured based on the assets that generate revenues. The revenue generated from the underlying asset is the source of income to pay for the profit on the sukuk bond. (Bank Negara Malaysia and Securities Commission Malaysia, 2009) However, there still have differences among the sukuk bond and the conventional bond. First of all, conventional bond is structured in such a way that the interest is the main point of all those transactions. The issuance of conventional bond is based on the exchange of paper and it doesnt represent the ownership of conventional bondholders in the enterprises that issue the bond. Rather, it represents the interest-bearing debt owed to the conventional bondholders. Consequently, the issuer of conventional bond has the contractually obligation in paying the interest and also the principal to the bondholders on a specific date. On the other hand, sukuk bond is structured in a way that the issuance is based on the exchange of an approved asset. Because of the prohibition of interest charging by Islamic law, sukuk bond allows the sukuk bondholders to claim an undivided ownership in the underlying asset and share the revenues generated from the underlying asset. Furthermore, sukuk bond is different with conventional bond due to its asset-based features. When the situation occurs where the issuer of conventional bond is unable to pay for the debt they owed to the bondholders, the bondholders which is the investors will face a great loss on their investments. This is because the contract usually doesnt guarantee that the asset can be secured and be used to recover at least partial of the investments. However, for sukuk bond, because it is asset-based and the sukuk bondholders have undivided ownership on the underlying asset, even how bad the situation, the investors can claim against major part of their investment. Hence, the sukuk bondholders are more protected from this kind of risk compared to the conventional bondholders. Besides, the issuance of sukuk bond must compliant with the Islamic law in its nature and use. However for the conventional bond, it can be issue for almost any purposes as long as it is legal under jurisdiction. Next, for the sukuk bondholders, the expenses that related to the underlying asset may be attached to them while the conventional bondholders are not responsible in these asset-related expenses. 2.3 Benefits of Sukuk Bond Sukuk bond which structured compliant with the Islamic law have the following benefits. First of all, it acts as a tool for banks and Islamic financial institutions in liquidity management. (Benefits of Sukuk) When the bank and financial institutions have excess amount of liquidity, they can use these excess money to purchase and invest in sukuk bond. Meanwhile, when theyre in the need of liquidity, they can choose to sell their sukuk bond through the secondary market. This clearly shows the features of sukuk bond which is liquid and hence can be easily traded in the financial market. Besides, sukuk bond provides a way in raising funds. It allows the corporate to raise funds through the issuance of sukuk bond. However, the sukuk bond can only be issue for any purpose that complaint with Islamic law. Furthermore, due to the asset-based feature of sukuk bond, it offers a lower risk and hence reduces the cost of financing. This is because even when bad situation happen to the issuer of sukuk bond, the investors can claim against the ownership on the underlying asset and get recover from major partial of their investment. 2.4 Sukuk Guidelines Starts from 1 July 2000, any issuance, offer or invitation of sukuk has to get approval from the Securities Commission Malaysia (SC) under section 212 of the Capital Markets and Services Act 2007 (CMSA)  [2]  (Malaysia S. C., Introduction, 2011) The following information are the guidelines which stated by Securities Commission Malaysia (SC) and effective from 12 August 2011 (Malaysia S. C., 2011). Any corporation that wishes to issue, offer or make an invitation of sukuk has to first appoint a principal adviser who specified by the SC in the Principal Adviser Guidelines. The purpose of appointing a principal adviser is to help the corporation to seek approval from SC for the proposed issue, offer or invitation of sukuk. (Malaysia S. C., Issuers Submission of Proposals, 2011) Therere a set of documents and a declaration letter that SC requires the issuer to submit through the principal adviser. These documents and the declaration letter are needed to obtain the approval from SC. (Malaysia S. C., Appendix, 2011) Two hard copies and one electronic copy of these documents should be submitted. Within 14 working days after SC receives the required documents and declaration letter, SC will either grant its approval or reject the proposal which doesnt fully follow the guideline. Once the issuer obtains the approval from SC, they should submit another set of documents (Malaysia S. C., Appendix, 2011) to SC through their principal adviser. (Malaysia S. C., Documents and Information Required, 2011) Besides, the issuer is required to conjunct with the principal adviser in appointing a Shariah adviser to make sure that the documentation, structure and the mechanism of sukuk are following the Islamic law. Therere plenty of Shariah rulings that have to follow for all types of sukuk as well as some specific type of sukuk in the requirement of underlying asset, asset pricing, compensation and so forth. (Malaysia S. C., Appointment of Shariah Adviser Shariah Rulings Applicable, 2011) Meanwhile, the underwriting of any issue, offer or invitation of sukuk will depends on the decision of the issuer. (Malaysia S. C., Underwriting, 2011) The implementation time frame for sukuk issuance is within one year from the date of the approval of SC except for the case of shelf registration scheme which must be implemented within two years. (Malaysia S. C., Implementation Time Frame for Sukuk Programme or Sukuk Issuance, 2011) 2.5 Sukuk Market in Malaysia From the journal, we know that the sukuk market has been developed rapidly in this decade with the evidence that more than 50% of Malaysias bond market belong to the sukuk market. Sukuk market in Malaysia successfully attract the attention of international corporations and multilateral agencies and drawn a lots of participation of these parties in raising funds and as well as investing in the sukuk market. Moreover, sukuk market of Malaysia is now having continuous innovation such as it offers the chance for international corporations to participate and plays a role in our Islamic financial system. As mentioned before, there have a greater development compared to the beginning of Malaysias sukuk market which our country started with a RM125 million of issue size by Shell MDS Sdn. Bhd.. The improving development once again can be clearly proven by the shoot up of the value of sukuk issue which is at RM15.4 billion by the Binariang GSM Sdn. Bhd. Besides, Malaysia is the fastest growing country in the global for the area of sukuk market with 22% of average annual growth within the period of 2001 until 2007. Therere a lots of efforts that has been put in the sukuk market to enhance its stability. First of all, to ensure the financial stability, Malaysia had cooperated with several regulatory authorities and participates in Islamic Financial Services Board (IFSB), Islamic Financial Stability Forum (IFSF), Islamic Development Bank (IDB) and also involve itself in the International Islamic Liquidity Management Corporation (IILM). Besides, the introduction of new type of financial instruments which has the extended maturity profiles has brought the Malaysias sukuk market to become more innovative. This is because it increases the diversity of both local and foreign participants and also meets the requirements of both issuers and investors so that there will be a win-win situation. Meanwhile, the increasing number of issuance in foreign currency had successfully extended the international gateway and attracts the participations from foreign countries in Malaysias sukuk market. This in turns s peed up the development of our sukuk market and also facilitate a good relationship with the international financial markets. The development of Malaysias sukuk market brings the economy to become more diversified and more driven by the private sector than the government. This is shown by the increasing demand for the financing requirements from private sector compared to the market which is previously mainly control by the Government debt securities. In a nut shell, Malaysia leads the development of sukuk market not only in terms of total sukuk issuance which accounted 68.9% of total global outstanding at the end of 2007, but at the same time showed excellent performance in the innovative sukuk structure and is more competitive in attracting the investors. In the future, Malaysia will continue its efforts to enhance the relationship with others international financial markets through ways such as partnership or maybe cooperation. (Technology, Sukuk Market in Malaysia, 2011) 2.6 Challenges of Sukuk Market According to the journal, we understand about few challenges that occur in sukuk market. First of all, the sukuk market faced the problem when there is lack of uniformity in the procedures that applied Shariahs principles. The lack of professional in Shariah standards and also the lack of awareness of the employers and manager of sukuk even make the things worse. Besides, when it comes to the collaborations among the countries, things become challenges because each country has their own laws and some of their laws will conflict with Islamic financial system and has to be amending in order to operate the system. Furthermore, therere still occur the gap of knowledge even though AAOIFI, Central Bank of Malaysia and also other organizations have put efforts in distributing the information to the public. Therefore, more focus have to put at the information dissemination through ways such as forums, training as well as set up more education center. Last but not least, it is difficult to maintain the unique features of sukuk. This is because those who already get used with the characteristics of conventional products will tend to request for the products which has the same characteristics with conventional products. This in turns will neglect the identity of the unique sukuk bond. (Technology, Challenges in Sukuk Market, 2011) Trading of Sukuk Market in Malaysia Between these ten years, the institutional arrangements particular gave a greater focus to develop the sukuk market. The sukuk market now accounts for more than fifty percent of Malaysias bond market. The market has drawn the participation from a wide range of international corporations and multilateral agencies in raising funds and investing in the sukuk issuances out of Malaysia. More lately, there has also been continuous innovation and an increasing number of issuances in foreign currency. As Malaysia offers international participation in the Islamic financial system, also offer to be an international gateway, particularly in strengthening the link between the two important dynamic growth regions of Asia and the Middle East. (Zeti Akhtar Aziz, 2010) Shell MDS Sdn. Bhd. started Malaysias sukuk market with a simple issue size of RM125 million in 1990 and is growing in size and increasingly sophisticated now. This development is evident in the largest sukuk issue recently valued at RM15.4 billion which is USD4.7 billion by Binariang GSM Sdn. Bhd. Now, the sukuk market in Malaysia with an average annual growth of 22% issued for the period 2001-2007 is among the fastest growing in the world. Malaysia has continued it success by introducing innovative sukuk structures such as convertible sukuk musyarakah by Khazanah Nasional Berhad, the Malaysian government investment holding company after introducing the first sovereign global sukuk in the world in 2002. This combines the features of the first full convertibility is usually only used for conventional equity-linked transactions is a historic issue of the first of its kind in the world. (Central Bank of Malaysia, 2007) Malaysia also continues to collaborate with other regulatory authorities to ensure financial stability in the Islamic financial system. This will be through Malaysias active involvement in the Islamic Financial Services Board (IFSB), the Islamic Financial Stability Forum (IFSF), the initiatives by the Islamic Development Bank (IDB), and finally in the newly formed International Islamic Liquidity Management Corporation (IILM). Depth and liquidity of the market has increased by secondary trading in the Malaysian sukuk market with the participation of more companies, including foreign-owned companies continued use of this market for funding purposes. Long-term funding needs are financed by a large number of corporate issuance. The diversity and size of the sukuk transaction was the increasing value proposition is very attractive to investors who want to diversify their asset portfolios, therefrom creating a vibrant secondary market. The Malaysian sukuk market has also grown to become more sophisticated and innovative to meet the multiplex risk-return requirements and profiles of both investors and issuers. Diversified range of players have been generated by the proliferation of new types of instruments with extended maturity profiles , both local and foreign to participate in the market. This was facilitated by the liberalization of the market in 2005 to allow for issuance of debt securities by foreign corporations and multilateral agencies in ringgit denominated papers. This was extended to foreign currency denominated issuances in year 2007. Actually, this has attracted many multilateral agencies, multinational corporations and foreign corporations to raise funds and invest in origination and issuances out of Malaysia, therefore enhancing the Malaysian market, and strengthening Malaysias inter-linkages with other international financial markets. The transformation of the Malaysian economy has been accompanied by the development of the sukuk market in Malaysia that has now become more private and diversified sector driven. The Government debt securities initially dominated the market, now reflects the growing demand for the long term financing requirements of the private sector. Now, the corporate sector raises 58% of their financing requirements through the sukuk market and debt securities compared to ten years ago is about 33%. The presence of a liquid and deep debt securities and sukuk market thus contributes towards the stability of the financial system. Now, with a number of Malaysias sukuk issues by 68.9%, or USD62 billion (or RM213 billion) of total global outstanding at the end of year 2007, Malaysia is the worlds largest sukuk market. Amount of corporate sukuk in Malaysia more than RM30 billion in year 2007. Malaysia not only lead the development of the sukuk market in terms of total sukuk issuance, even in terms of the introduction of innovative sukuk structures and competitive to attract more individual or corporation investors. Moving forward, Malaysia will continue its efforts in strengthening our international linkages in the global Islamic financial system through cooperation and collaborative partnerships with the objective of contributing towards greater economic integration and international financial. Certainly, sukuk ( Islamic bond ) proved that it is among the most successful Islamic financial product in the industry and be one of the fastest-growing sectors in the global financial landscape. Type of Sukuk Bonds Ijarah Sukuk Ijarah sukuk is an Islamic alternate of conventional leasing. Ijarah is a contract the distribution of funds to use right transfer (benefit) of an item within a certain time to the lease payments (ujrah), between the finance company as the lessor (muajjir) with tenants (mustajir) not followed by transfer of ownership of the goods themselves [1]. These are sukuk that represent ownership of equal shares in a rented real estate or the usufruct of the real estate. In other words, issuing certificates of ownership of assets, leased to a particular consumer is known as Sukuk Al Ijarah or simply Ijarah Sukuk. Other than that, Ijarah sukuk also is a bond between a bank with consumer to take on an item or even object leases and bank-owned banks have a service fee for items which is rent, and at the end with the purchase of leasing object by the consumer. (In Shaukats (2010) article, Common Structures of Sukuk, Ijarah sukuk were described as Ijarah sukuk are the securities representing ownership of well defined existing and known assets tied up to a lease contract, rental of which is the return payable to sukuk holders. (p. 10).) Ijarah sukuk have a main concept which means selling the benefit of apply or service for a fixed price or salary. Base on this concept, the Islamic bank make it available to the consumer applies of service of assets or equipments for a fixed period of time and also the price. 1Source: Sharia Economy Journal, Ijarah Definition (2011) Figure 5: The process of Ijarah SukukSukuk al-Ijarah.png The chart above shows few stages of the transaction process. First stage is Contract of Cash Sale. SPV purchases property from obligator as the step 1 above, such as SPV purchases hospital from government. After that, the assets purchased by the SPV are funded by the issuance of sukuk which is trust certificates which represents beneficial  ownership in the assets and the lease as the step 3 shown above. Besides that, government received cash proceeds as step 7 while Stage 2 is Contract of Leasing (Ijarah). At first, SPV rents property to the government for specified period which is step 2 shown above. After that, step 6 shows that SPV collects rentals. During the tenure, SPV passed the rentals to investors as the step 9. For your information, example is periodic distribution or coupon. Continually, at the maturity, SPV sells the property to the government at an agreed price. Government pays cash to SPV. Lastly, SPV simultaneously pay investors cash for sukuk redemption. Musharakah Sukuk Musharakah sukuk is a structure of partnership which is used in Islamic finance instead of interest-bearing loans. It is also a mode of financing against which Sukuks can be issued for. It does not differ from the Mudaraba sukuk except in the organization of the relationship between the party issuing such sukuk and holders of these sukuk, whereby the party issuing sukuk forms a committee from the holders of the sukuk who can be referred to in investment decisions [1]. Musharaka Sukuk are used for mobilizing the funds for establishing a new project or developing an existing one or financing a business activity on the basis of partnership contracts (Shaukat, 2010). Moreover, Musharakah Sukuk have a specified maturity date, and are negotiable in the secondary market. In the assets of the Musharakah sukuk, for every sukuk would have a representative holders proportionate ownership. These Musharaka certificates can be treated as negotiable instruments and can be bought and sold in the secondary market [2]. Musharakah sukuk  allows each party involved in a business to share in the profits and risks. Other than that, profit earned by the Musharakah sukuk is shared according to an agreed ratio between the Issuer and Investors at an agreement. Although the profit and loss is sharing, while it shared between the investors as per investment ratio only. Besides that, to ensure the tradability of Musharakah sukuks, all the assets should not be in liquid form. 1Source: Accounting and Auditing Organization for Islamic Financial Institution, AAOIFI 2Source:Common Structure of Sukuks, Mughees Shaukat Figure 6: The process of Musharakah SukukSukuk al-Musharaka.png From the above shown that, at the beginning, Corporate and the Special Purpose Vehicle (SPV) enter into a Musharakah Arrangement for a fixed period and an agreed profit-sharing ratio. Thus, the corporate undertakes to buy Musharakah shares of the SPV on a periodic basis. First, Corporate (as Musharik) contributes land or other physical assets to the Musharakah. After that, in 2 a b shown that SPV (as Musharik)

Chinese Fireworks Essay

The Chinese fireworks industry thrived the late 1970s, and grew to make up 90 % of the world’s fireworks export sales. However, starting from the mid-1990s, safety concerns led governments both in China and abroad to set up stricter regulations. At the same time, there was rapid growth in the number of small family-run fireworks workshops, whose relentless price-cutting drove down profit margins. . Jerry Yu is an American-born Chinese in New York who has been invited to invest fireworks factory in Liuyang, Hunan. The industry analysis, estimating the industry  attractiveness, and proposing possible ways to improve the industry attractiveness from an individual investor’s point of view, has been presented in this report. Other investment options are introduced for the investor in this report. Introduction Situated in the Hunan province of China, Liuyang has a greater concentration of fireworks manufacturers than anywhere else in the world. Liuyang currently produces about 65% of the world`s fireworks. In fact it has over 1,000 factories in Liuyang each specializing in a specific product, thus there are factories making only sparklers, only firecrackers, etc. To support these factories, Liuyang also has related manufacturing such as chemical processing, paper mills, fuse factories, printing factories. It also has a highly skilled fireworks workforce. These factors make Liuyang the most economical place to manufacture fireworks. Furthermore, the support of the local government makes Liuyang a fireworks friendly environment. Liuyang has been producing fireworks for more than 1300 years. The earliest fireworks were produced in the Tang Dynasty (618-907), and Chinese fireworks manufacturing began to flourish during the Song Dynasty. During the Yongzheng reign of the Qing Dynasty (1644 -1911), Liuyang was honored to be the official supplier of fireworks to the royal families. After 1949 government- run factories replaced the family- owned workshops. Since 1979 legal restrictions, local protectionism, aggressive price competition, hard to penetrate distribution channels have limited the domestic sales of Liuyang fireworks. The Chinese fireworks industry thrived after China adopted the open door policy in the late 1970s, and grew to make up 90% of the world`s fireworks export sales. Chinese companies began to export fireworks to more than 20 countries and regions. Today, Chinese fireworks are amongst the best in the world and the quality and variety of the pyrotechnics. But on the other hand, the Chinese fireworks industry also has weaknesses. Indeed, the fireworks industry in general is unstable. In terms of quality, packaging and timing devices. There are problems with distribution channels in which it is hard for companies to penetrate established chain of delivery. The most common form of factory in Chinese fireworks industry is the family-run workshop which is poorly funded and lacks R&D capital, and managerial input. The competition is intensified bythe emergence of a huge amount of small companies. The abundance of small, flexible, competitive shops has created a climate of intense commercial rivalry. It is common that certain companies copy any popular product design and sell it for much less prices than government-owned or some collectively-owned factories, which results in price drop, and this fact has become a serious problem for the whole industry. Furthermore, foreign competitors also threaten the Chinese fireworks industry. Therefore, whether to invest in this industry is still a challenge to most investors. The objective of this report is to advise the investor on his decision to invest to a Liuyang fireworks industry or consider other alternatives. Proposals on how to improve the attractiveness and the competitiveness of Chinese fireworks industry at a long-run level are presented. To achieve this objective, an industry analysis is carried out, using Evironmental analysis and Porter`s Five-Force model analysis, and a gross conclusions are drawn based on the analyses and suggestions. The Environmental analysis describes a framework of macro-environmental factors. The model’s factors vary in importance to a given company based on its industry. Porter’s five forces model aims to examine the competitive status of an industry. According to this model, the nature of the competition that determines industry structure is personified in the following five forces: bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitute products or services, and rivalry among common competitors. These five forces are very significant for strategy formulation of a company can succeed. Industry Analysis Each industry is different, and to be able to provide the necessary information for the investor the analysis of the industry environment and Five- Forces analysis on the state of the market of Chinese fireworks will be completed. Environmental Analysis Before creating business plans or making decisions, it is important to ‘scan’ the external environment. This can be achieved through an Environmental analysis, which is an investigation of the demographic, political, economic, social and technological influences on an industry. It  is a tool to identify changes in a business environment that can create great opportunities for the fireworks industry – and cause significant threats. Demographic factors China’s population growth rate is only 0.47% and the population of Liuyang is estimated of 1,278,928 by 2010. The Chinese domestic market is expanding and has potential to grow. Despite the fact that the market is faced with a number of the legal restrictions, a very intense price competition, local protectionism and difficulties to penetrate distribution channels there are still a number of opportunities to succeed in the fireworks industry. The foreign direct investment has opened up in China lately. Considering a global population growth rate of around 1.14% per year and a number of baby booms worldwide, an international market has a big potential to expand. Economic factors Heavy competition in the market is faced with reduced prices and profit margins affecting the whole industry. There has been an increase in level of income, better and increased job opportunities to the workforce in emerging markets. This is good for the industry with increased demand, but it is a disadvantage when skilled workers are lost to a different industry. The industry will be faced with constant increasing cost of labor and raw materials. Technological There is not much technological innovation in Fireworks production process or new kinds of innovations in the industry. The raw materials basically remained the same. Although machines could now complete some manual processes, the process technology also basically remained the same. The R&D investments have been low when compared to variation in manufacturing, mixing and process improvements. This led to some concerns over quality issues. Initially there was not much R&D, so in response the government began initiatives aimed at upgrading the traditional fireworks industry. There were new technological competitors that were being developed. On the positive side, the internet has become a large means of procuring fireworks for foreign customers. Socio Cultural factors The green-house gases emitted globally are on the rise affecting our environment every day. Lately, there is greater concern and consciousness towards the environment. The industry will have to deal with this due to environmental impacts. Due to advanced technology and other improvements, there are many other alternative options. Lately there are many other outdoor activities such as laser shows with music and water fountains with music. However, the demand and usage of fireworks along with these is still dominant. All over the world, there is a safety concern for either display or consumption of fireworks. Political / Legal factors There are both advantageous and disadvantageous aspects. One disadvantage is the safety issues associated with fireworks that resulted in them being heavily regulated in most countries. This industry is still highly regulated in most countries due to the nature of this product. Regulation exists at all stages right from manufacturing, distribution and consumption phase. Maximum impact to safety is during production process and quality of raw materials used. Industry faced with ever increasing environmental impact and concerns globally. Another disadvantage is that there is no pricing regulation. The legal system is not strong enough in China to enforce protection of intellectual property rights, copying of brand, identity and duplicates. One advantage, however, is the offensive strategy applied in 1997, which resulted in many legal restrictions being lifted. One in particular that was eased was foreign direct investment. Global factors Fireworks are manufactured not only in China, but in many other south East Asian countries. Globally emerging markets and developed markets are the primary importers of fireworks and the demand has been steadily increasing. Increased use of fireworks across nations traditionally has been during their major holidays such as Chinese New Year, July 4th in US, etc. There is also evidence of additional consumption in developed and emerging markets. Demographic Trends China’s population growth rate is 0.47% World`s population growth rate is 1.14% Socio-cultural Influences Environmentally conscious society Fireworks are a huge tradition in China Macroeconomic Impacts Due to heavy competition, the market is faced with reduced prices Industry with increased demand Workers are lost to a different industry The industry faces with constant increase in cost of labor and raw materials. Demand of domestic market is declining Export sales are rising Political-legal Pressure Highly regulated industry: -manufacturing -distribution -consumption No protection for: -intellectual property rights -copying of brand -identity -duplicates Technological Developments Low R&D investment New kinds of innovations in industry Quality issues Global Trade Issues Globally emerging markets Steadily increasing demand -New Year celebration -major celebrations as Olympics etc. Fireworks is manufactured in many other south East Asian countries and Europe Five-Force Model Bargaining Power of Suppliers The bargaining power of suppliers is low because of the large number of suppliers of raw materials available, a limited product differentiation among fireworks products and just variation in the quality. Bargaining Power of Buyers The bargaining power of buyers is high due to a steadily increasing demand for fireworks both domestically and internationally and very low switching costs. The customers in fireworks and firecrackers market can be divided into individuals and business units such as government institutions, private associations or general companies. Every country has different regulations about manufacturing, selling and using fireworks and firecrackers. Because more and more countries prohibit the public launching fireworks and firecrackers, the individuals market declined dramatically. In the contrast, the business units market went up because in the display fireworks market, the buyers were often central and local governments who purchase product for public shows on national holidays or special celebrations. The foreign buyers have a high power due to the high demand in international market. Besides, foreign buyers are very well-informed and dealing usually directly with the factories, which results in high power as well. Threat of New Entrants The threat for new entrants is high. The opportunity for potential entrants is high due to the fact that the capital requirement for establishing a fireworks factory is very low. The economy of scale is high and the brand identification within this industry is relatively low. Furthermore, there is easy access to a labor force, materials and suppliers plus easy licensing  process. All these facts provide very good opportunities for the new companies to enter this industry. Threat of Substitute Products or Services In terms of the threat of substitute products or services, several modern technologies already are applied in some performances, firecrackers still cannot be replaced because firecrackers present certain meanings and culture. Furthermore, fireworks can create several kinds of patterns in the air such as peony, ground bloom flower, etc. No real substitutes can replace fireworks. There are substitutes such as make-believe firecrackers and laser beams that have potential to replace the firecrackers in the future. Rivalry Rivalry of the fireworks industry is high due to the fact that it is easy to enter the industry and the exit barrier is low. There is also a little differentiation among products which makes competition even fiercer. According to exhibit one in the case, firecrackers and fireworks total revenue in China increased 36 % from 2007 to 2009. The revenue went up 68 % from 750.000.000 USD to 1.262.500.000 USD. Most factories are dominated by small family-owned –and –operated workshops and most of the employees in the factories are regular farmers who had learned how to make fireworks just by watching and following their elders. As a result, those factories only manufactured fireworks instead of designing fireworks. In terms of international rivalry, a number of different brands has become well known around the world, Chinese fireworks have lower reputation in quality control and packing comparing to the products made in Japan or Korea. In addition, some fireworks merchants will buy the products from China and repackage them, then resell them for much higher price. Domestic competition and foreign competition is very high. Assessment of the industry attractiveness Every industry has life cycle includes introduction phase including early phase and innovation phase, growth phase, maturity phase and decline phase. The Chinese fireworks industry is no longer in a period of growth and has begun to plateau. As a result, it is it`s maturity phase now. However, if the investor can input different strategy into this sunset industry,  fireworks industry will probably start another life cycle. The investor can focus on high-end market and provide unique products and service in order to gain high profits. A good business model can make a company to succeed but it may take time and investment capital in order to prepare the company to start another life cycle. Fireworks industry is still a global opportunity because every country still has fireworks shows every year and the scare seems to become larger and larger. The revenue in both domestic the international market still also grows up. Implementation considerations This analysis indicates that rivalry of fireworks industry is extremely high and hence, if the company was to survive in competition, it should make great effort to differentiate their strategies to achieve sustainable competitive advantages. There are opportunities in this sunset industry if the company can build a totally new infrastructure. In terms of infrastructure and product development the investor should focus on the product diverseness and SOP (Standard Operating Procedures) management to have more competitiveness to their rivals. First of all the investor should concentrate on R&D to produce the fireworks that can shoot long distance and safely. R&D department also has to develop more environment-friendly fireworks by changing materials. Every New Year, most of the big cities in the world will schedule the large-scale fireworks displays. Those displays all are high altitude fireworks. However, more and more cities regulate the consumption and launch of the fireworks and firecrackers because of increased concerns about environmental pollution and safety. Launching fireworks becomes a business program to attract domestic and international tourists. Investor should recruit more young employees with art and design background to make fireworks to a brilliant shows. Furthermore, investor should enforce training programs such as enhancing working safety classes and machining. Experienced employees also need to learn new skills and learn how to work more efficiently. Labor costs in China are relatively low compared with that in Japan and Korea. As a result, fireworks made from China always have price superiority to provide lower price. Since Liuyang is investor’s hometown, he can also understand the working culture in China and can more easily to manage the local employees.  Doing business with the Chinese government is not easy because interpersonal relationship is a very important element. Bureaucracy is also a problem. In contrast, the export market is not easy, either. Unfortunately, many products made in China have a doubtful reputation. Investor has to reverse the company imagine. Creating a brand identity costs long period of time and money. However, once the brand becomes famous and international one, customers will trust the quality of the produces from the company and the value of company will also increase because of brand value. The company can attend more international exhibition to get popularity and also focus on quality control and time control. Investor should reorganized the company structure and improve the equipment in my company to pass international identification and put more budgets in marketing to enlarge the popularity of the company. The company can sponsor different international events such as Olympic, etc. In terms of technological development fireworks and firecrackers displays can still combine with laser beam, computerized firing and music accompaniment to strengthen the visual, audio and emotional effects. Moreover, the investor should focus on the fireworks display design. What the company sells is not only the fireworks themselves but also the ideas of how to present more colorful modeling during the displays. The company should put more creativity into the display to make impossible turn to possible and impress all audiences. Most fireworks displays are launched at night. However, some events take place during a daytime, which can also be an opportunity for the company to distinguish itself from its rivals. Establishing relationships with universities worldwide and develop prototypes for new fireworks can help a brand building and for the company. Another strategy is to establish strategic alliances with other companies like suppliers, government agencies, distributors, etc. Such relationships can develop synergy that thrives in the industry and help to gain access to better quality raw materials at cheapest price and absorb foreign direct investments to improve equipment, capital and the above R&D facility. Jerry Yu should be prepared that all those changes, both internal and external, will take time to implement and require capital investment. Probably in terms of long-term investment the fireworks industry will sooner or later shift towards more environmentally friendly industry and use substitutes more and more. Recommendations Considering China’s one-child policy has led to one of the world’s largest elderly populations. Roughly 10 percent of the population is expected to be over 65 by 2015 and, by 2050, the average age in China is forecast to be nearly 45 – one of the oldest in the world. Additionally, some 20 percent of the population is already suffering from liver disease, cancer, diabetes and similar inflictions, and this number is likely to grow alongside its aging population. Private healthcare expenditures are expected to grow another 36 percent by 2015 to over US$200 billion. The entire medical services market is expected to reach US$500 billion by 2015. So if Jerry Yu may consider other investment opportunities I would advise him to invest in China’s medical industry and health care industry. In terms of more sustainable investments for a longer period of time the health care industry is more attractive both domestically and internationally. References Beamish, Paul W. Chinese Fireworks Industry – Revised. Richard Ivey School of Business. 2011 Porter E. Michael. The five competitive forces that shape strategy. Harvard Business Review. 2008 T. Hesketh and W. X. Zhu. The healthcare market. BMJ. 2007 May 21 http://www.chinadaily.com.cn/china/2007-10/24/content_6201487.htm http://www.mindtools.com/pages/article/newTMC_09.htm#sthash.gasxWHcJ.dpuf http://businesscasestudies.co.uk/business-theory/external-environment/pest-analysis.html#ixzz2fnrTq

Instant Solutions to Argumentative Paper Essay Topics in Step by Step Format

Instant Solutions to Argumentative Paper Essay Topics in Step by Step Format Up in Arms About Argumentative Paper Essay Topics? Students are part of the educational system and in addition, they play a part in politics so such issues touch just about all students in all nations. Obscure issues are also not the ideal choice even if they're exciting. Political issues are the ideal example. Environmental problems, such as climate change, are undoubtedly among the most essential ones nowadays, which explains why many students are often given the job of writing an academic paper about the surroundings. Finding the most suitable arguments can help you prove your point and win. Before starting, you should collect all the crucial proof to back up your arguments. Another reason is to observe how well students argue on distinct views and demonstrate understanding of the studied subject. If students can't pick a particular perspective, they are normally searching for different argument s to tell. 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Personal Ethics Essay - 865 Words

Personal Ethics In todays world, individuals can make a single decision that can have a profoundly positive or negative effect on their family, their employer, coworkers, a nation, and even on the entire world. The life we lead reflects the strength of a single trait: our personal character. Personal ethics are different for each person but for the most part, people want to be known as a good person, someone who can be trusted, and he or she are concerned about his or her relationships and personal reputations. As we go through this paper, we will focus on answering what are ethics, what are your ethics, where do your ethics come from, and how do you manifest your ethics? What are ethics? Let us start off with the definition of†¦show more content†¦Morals are the intrinsic beliefs developed from the value systems of how we should behave in any given situation. Ethics, on the other hand, are how we behave in the face of difficult situations (Bottorff, 2005). What are your ethics? 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