The Islamic financial service industry has experienced phenomenal growth since its inception 40 years ago, boasting annual growth rates of 15% to 20% to reach an estimated USD 1 trillion in present assets, up from USD 150 billion in the mid 1990s (Hawser, 2010). The growth of Gulf Co-operation Council (GCC) countries is expected to reach 4.1% in 2011, and with the region awash with petrodollars, it will further accelerate development of Islamic finance to cater to an increasing population of Muslim High Net Worth Individuals (HNWIs).
Closer to home, Malaysia has successfully positioned itself as an Islamic financial powerhouse and its Islamic finance sector is one of the most progressive and attractive in the world. Continuous innovation in developing Shar’iah (the body of Islamic laws) compliant products drives the industry forward. Within ASEAN, Indonesia boasts the world’s largest Muslim population, standing at around 200 million (CIA, 2009). Furthermore, warm bilateral ties with India, home to the world’s 3rd largest Islamic population, will maintain the strong demand for Islamic financial products and Singapore is well positioned to capitalize on it.
Islamic finance is also gaining popularity outside of the traditional Muslim environment. The US$500 million GE Capital sukuk in November 2009 embodies a key milestone deal and more of such products can be expected as Western corporations tap into the wealth of Muslim HNWIs. In fact, the biggest buyers of sukuk are usually from outside the Islamic world. (O'Neill, 2010).
With the growing importance of Islamic finance in the global economic scene, this paper aims to give an introduction to Islamic financial instruments. Section 2 contains a brief outline of the restrictions placed on such products to make them Shar’iah compliant. We have also constructed a Shar’iah compliant portfolio to track its performance against a benchmark index. Section 3 and 4 will focus on sukuk, the equivalent of...