Abstract

Investors of Sukuk (Islamic instruments of investment) are also exposed to a number of business and financial risks like conventional instruments, such as market, credit, liquidity, operational, regulatory, legal and fiduciary risks. Yet, the ability of Islamic instruments investors in mitigating the various risks is significantly impeded. The sharī‘ah principles that govern the Islamic financial system invalidate many of the conventional risk management products due to the presence of objectionable elements in their structuring. Hence, without appropriate risk management tools and frameworks, the Sukuk investors are put in an uncompetitive position compared to investors of conventional securitized instruments. As such, one of the major challenges in the global Islamic finance industry has been to ‘structure’ sharī‘ah-compliant risk management tools and techniques. To this end, this paper assesses the business and financial risk characteristics of Sukuk and proposes a number of innovative sharī‘ah compliant risk mitigation tools and techniques that could be adopted to minimize risk exposures. The contributions from this paper are expected to generate significant interest from all Sukuk market stakeholders as risk is an integral element of the industry and its effective management is a primary concern for most, if not all, connected parties.

Keywords

Islamic Risk Management; Sukuk; Islamic Derivatives; Financial Risks; Business Risks.