Benjamin Clarehugh on SRI Sukuk

Socially responsible investment sukuk, or SRI sukuk, are a new and upcoming type of investment in Islamic finance.

Many proponents of Islamic finance have over the years tried to draw parallels between the principles of Islamic finance and ethical finance.

So for example, both of them they have restrictions in terms of what they can invest into or what is deemed unethical and those restriction apply to both of them.

Now one of the most recent developments in the market was the first SRI sukuk issued by Khazanah Nasional, a sovereign wealth fund based in Malaysia, and the proceeds raised from that issuance are used for a trust schools programme. And that is the social impact aspect of it.

So the Khazanah sukuk issued previously was designed so that it had unique features and aspect to it which would be reinforced the socially beneficial aspect of an SRI sukuk.

So there was two principle features that were notable of this particular sukuk.

The first being that there was a KPI performance implemented on the trust school itself.

So the trust school that received the funding as part of the sukuk issuance actually had to be measured in terms of its performance in the way that it taught, in the way that the pupils were educated, and an independent report was developed to show its performance, and that was then tied directly to the profit payments of the sukuk issuance.

Now what this does is it creates an incentive for the school to perform brilliantly and then the obligor in the sukuk structure would then have to pay less profit to the investors.

And obviously the investors that do invest into the sukuk knew from day one, had to understand that what they’re doing is agreeing up front to reduce their income from the sukuk if the school performed excellently.

The second aspect of this particular issuance was that the principal plus the profit of the issuance could be waived by investors.

So for example what this did was it actually allowed not just the traditional investors to come into the sukuk but it also allowed charities and say, institutions with budgets for CSR.

And what it means is that these institutions they have restrictions in terms of what they can actually donate to.

So, one of the restrictions obviously that it has to be something which they don’t receive any income for.

So, since they waive the principal plus the profit at any time from the date of issuance almost until maturity that means they would then receive nothing, they would have made a donation, and that would also be tax deductible for them.

So, what this did was, this was very beneficial because the sukuk now was open to a widening investor base, not only those traditional investors such as banks and funds and other investors who would be interested in perhaps a reduced yield, but for the benefit of investing into a trust school, but also those charities as well. So what you have is a wider investor base.

Now we see many types of projects available at the moment across the world which have this social impact element to them.

However, what we don’t see is Islamic finance eager to take those opportunities or to invest into those areas.

We believe that, given the compatibility between socially responsible investments and the principles of Islamic finance, this should be a space where Islamic finance should tap much more frequently.

For this to happen I believe there is a few things that need to take place: number 1) there needs to be education for investors in terms of how these particular sukuk work, how these types of investments work.

And the second aspect is obviously for more projects to be developed in perhaps Muslim countries or countries where Islamic finance is very prominent.

What that would do is allow, obviously, for Islamic finance institutions to be able to see the potential, know the impact within their own communities, and that would obviously entice them much more.

So, given these two aspects, if these are implemented properly, we foresee that there would be a lot more socially responsible investments in Islamic finance.

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