Islamic stock products in the securities market
Islamic securities are unique flexible tools for raising capital and structuring financial flows.
While the issuance of traditional securities (shares, bonds) in Kyrgyzstan is highly regulated as a result of the privatisation era, the provisions on Islamic securities were introduced into Kyrgyz legislation much later and do not contain such a level of bureaucratic barriers.
As an example, a joint stock company may issue bonds only for an amount not exceeding the size of its equity capital, only not earlier than the third year of its activity, only on condition of break-even of the previous activity, etc. At the same time, any company can issue Islamic “bonds” (sukuk) of approximately equal functionality without these restrictions.
To some extent, the Shari’ah principles to which the issue of securities and underlying assets must conform restrict the freedom to use the funds raised, but in most cases these restrictions are not critical. The most important principle in issuing Islamic securities is that the issuer cannot promise a fixed interest for the money raised. The return on securities should, by some formula, depend on the success of the asset or business financed by the issue.
Also, funds from the issue of Islamic securities may not be used to finance activities and assets that fall under religious prohibitions in Islam (e.g., alcohol sales or interest-based lending). One of these religious prohibitions is participation in gambling.
Otherwise, Islamic securities provide businesses that attract financing with substantial flexibility not found in traditional securities. If we try to describe the formula for issuing Islamic securities in a very simple way, it is that investors finance a certain asset or business, and their income is somehow tied to the profitability of this business or asset. It is noted that Islamic financing certificates (sukuk) contain elements of both debt and equity.
Thus, through Islamic securities, it is possible to finance:
- rental business (business of renting out real estate, or other assets)
- development of any other business (including trading business – i.e. through Islamic securities it is possible to raise funds to replenish the working capital of trading companies)
- investment projects (e.g., factory construction, real estate or mine development)
- attracting funds into trust management on investment markets (almost a full analog of an investment fund, but only in the form of a simple security rather than a cumbersome fund structure).
The current Kyrgyz legislation provides for the following types of Islamic securities:
- Islamic rental certificates (sukuk al ijarah), where the originator transfers the ownership or right to use certain assets to the issuer and the issuer leases those assets back to the originator for a rental fee on the terms and conditions set out in the prospectus for Islamic securities;
- Islamic rental certificates (for investment in rental or leasing businesses);
- Islamic project finance certificates (sukuk al istisna), where the issuer authorises the originator to produce certain assets, and upon completion of the production of the assets, the issuer leases the assets to the originator for a rental fee on the terms and conditions set out in the prospectus for Islamic securities;
- Islamic project finance certificates (where investors finance the creation of an asset and partake in the profits from its operation);
- Islamic equity certificates (sukuk al mudaraba), where the issuer appoints the originator as its limited partner to manage the issuer’s investment in a particular business and the profits are shared on the terms and conditions set out in the prospectus for Islamic securities;
- Islamic equity certificates (where investors provide money to manage a business in exchange for a share of the profits);
- Islamic investment agency certificates (sukuk al wakala bi al istithmar) where the issuer appoints the originator as its investment agent to manage the issuer’s investments on the terms and conditions set out in the prospectus for Islamic securities;
- Islamic investment agency certificates (similar to an investment fund but in the form of a security, where investors entrust funds to a professional asset manager through a security; akin to an Actively Managed Certificate popular in some countries such as Switzerland);
- Islamic partnership certificates (sukuk al musharaka), where the issuer and the originator bring capital or assets to a particular business and the originator is appointed as the manager of that business, with the profits from that business being shared on the terms and conditions set out in the prospectus for Islamic securities;
- Islamic partnership certificates (where investors finance the business alongside its organiser and share the profits).
In Kyrgyzstan, the exchange listing of Islamic securities is available on the Stock exchange of Kyrgyzstan – BTS and is represented by both the highest listing categories (A & B), which offers tax benefits under local legislation, and the free category (C), which provides inexpensive and unencumbered listing of Islamic securities.
The following are the normative legal acts of the Kyrgyz Republic on entry and circulation of the Islamic securities on its stock market.
The regulatory legal acts of the Kyrgyz Republic on the entry and circulation of Islamic stock market instruments on the securities market:
- Law of the Kyrgyz Republic “On the Securities Market”
- Regulation on issuance, circulation and repayment of Islamic securities issued on principles of Islamic financing. Approved by the decree of the Government of the Kyrgyz Republic on June 1, 2017, N°323.