The Brunei Government will have its first public debt very soon. The Finance Ministry officially launched the short term Brunei Dollar Islamic Bond Sukuk Al-Ijarah yesterday. The questions which a lot of people are asking - what is sukuk and why is the government issuing this?
To the completely uninitiated, a bond is basically an IOU note issued by the government which you buy and the government promises to pay you back after a specified period with an interest, or the government pays you a yearly interest or a combination of the two depending on the type of bond you buy. In the meantime the government uses your money for whatever purposes it wants to do. It may be used to balance the budget, to build new schools or whatever. This is essentially an overdraft by the government with only the trust of the government as its collateral. The interest which the government promises to pay depend on how much you trust the government. A poor and not so trusted government may have to pay higher interests so that you as an investor will be willing to buy its bonds. However in the Islamic Principles, any type of bond that contains the element of interest (or riba) is prohibited.
An Islamic Bond (known as sukuk) is, on the face of it, similar to the above. You as the investor will still get whatever returns the government promises when you buy the government bonds. The government still gets its hands on your money to do whatever it wants. But the major difference is the principles behind it. Unlike a conventional bond, the Islamic bond will be dependent not just on the goodwill of the government but will be based on an income or returns made by the government. In the case of the Brunei Islamic Sukuk, the government will base the bond on an income stream or revenue from the rental of government buildings built on government lands. You as the investor is indirectly part owner of the income stream and should the government default, then you can go to the court and force the government to pay that income stream to you to compensate for the sukuk that you bought. Unlike the conventional bond, where you have only the goodwill of the government, in the Brunei Islamic sukuk, you actually have a handle on something tangible.
Back to the most important question - why is the Brunei government doing this? Doesn't the government have enough money? I can assure you that the government in the present $60 a barrel oil price, has more than sufficient revenues. The Brunei Government is probably one of the few countries in the world that will be issuing debt notes but actually has no use for the revenues that it generates.
It issues the Islamic sukuk because of several technical reasons - firstly, to create a capital market as currently there is not much financial activity to stimulate the market and hence the government has to step in. Secondly, it is to generate an international rating as rating agencies have not been able to rate the country's sovereign rating and by having sovereign rating, then private sector issuance in Brunei can also be rated. Thirdly, this is to help the private sector be able to raise capital directly from the market by issuing bonds and other instruments cheaply as compared to borrowing from the banks and with rating agencies providing ratings, those instruments can be marketed internationally.
At the same time, even though the government has no immediate use for the additional revenues generated from the sukuks, the government may invest the revenues and keep whatever profits it make after paying off the investors. The government may also opt not to use its own investment savings to pay for government expenses and continue to earn a higher rate of return by investing those savings. In the meantime it may be able to use the 'cheaper' funds from the bonds. So, by issuing the sukuks, the government will have for the first time, public debts in its books but at the same time, there will be much more intangible gains that can be had by issuing the sukuks.
So I do hope today's rather serious blog compared to the usual light hearted one, in a nutshell enables you all to know what the Brunei Government Sukuk Al-Ijarah is all about and why the government will be issuing the first B$150 million worth of sukuks by the end of the month. To find out more about sukuk, you can logon to www.bruneiresources.com/pdf/sukuk.pdf to read the Ministry of Finance's statement as well as www.bruneiresources.com/sukuk2.html to read about an article written by lecturers from Universiti Brunei Darussalam.