A critical analysis of Islamic bond: A case study on Sunway Treasury Sukuk

Sukuk has been playing a significant role in developing Islamic finance, more specifically, Islamic capital market. Islamic financial institutions have very limited number of liquid investments other than hard cash to hold as conventional short-term bonds, commercial papers and notes are interest based and prohibited in Shari’ah. The rapid growth in Sukuk market not only in Malaysia but also internationally indicates huge potential of this innovative financial instrument. In this paper, an attempt has been made to study accounting issues connected with Sunway treasury sukuk and we discussed in details financial performance of Sunway group, accounting disclosure needed for Sukuk issuance, model accounting treatment of Mudarabah sukuk in general and Sunway Treasury Sukuk in specific, in depth analysis of Shari’ah issues related with the Sukuk, various risks associated with it. Our analysis shows that Sunway Group is a one of the leading construction and development in company in Malaysia and it has presence in other south-east Asian country also in India. The slowing down in real-estate industry has put a lot of pressure on Sunway and it has been evident in the financial statements of the company. We found that accounting of Sukuk is not necessarily different from conventional bond, even though, we consider Sukuk to be closer to equity but in reality it is closer to debt. Analysis shows that IFRS and AAOIFI accounting have different objectives and perspectives. Subsequently, IFRS is more concerned with the substance, while AAOIFI focuses on legal form while considering accounting transactions, however, Sukuk in both cases are shown as a liability in the balance sheet. It is found that some authors argue that in addition to preparing its own accounts as SPV, accounts should be prepared for the investment fund represented by the sukuk in accordance with Financial Accounting Standard 14 "Investment Funds". Capital guarantee, fixed rate Mudarabah, later payment charge, promise to buy back are found to be critical Shari’ah issues in Sunway Treasury Sukuk. Default risk in Treasury sukuk is very low considering company reputation and its huge fixed asset back of more than 3000 acres of land. The sukuk has some sort of market risk, namely interest rate/profit rate risk in rising interest rate environment. Shari’ah risk found to be the main problem of this Sukuk.