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Financial Statements of EMAAR

Title: An evaluation of the use of short term and long term

Islamic financial instruments and their impact on the financial statements of EMAAR

Introduction:

Identification and explanation of primary and secondary data collection methods:

With Islamic countries taking over the world majorly in the economic field, changes in the financing industries are taking place every now and then. Among them, the most popular method of the financing system is the issuing of the Sukuk. Sukuks are as simple as can be said are Islamic bonds. They are basically investment certificates which the businesses and individual can buy in order to create a solid financial status for themselves. Unlike conventional bonds, Sukuk does not have the risks caused due to variations in the rates of interest. They abide by the laws of the Islamic government and the banking system. From the following study, it would be easy to understand the various aspects of Sukuk and its uses (Sukuk, 2018).

This section deals with the methods and techniques used in the collection and analysis of data and also to assess the role of Sukuk in the financial sector of the United Arab Emirates and also facilitate the EMAAR. The methods selected for the collection of data for the following research is both primary and secondary. Primary or the qualitative analysis was conducted among three EMAAR officials who are directly linked with the situation that arises out from the implementation of the Sukuk. Questionnaires were formulated and the officials were asked to present their own opinions about the situations and the questions placed before them. Another method that was executed was the secondary or the quantitative method of data collection. As Sukuk is a rather new form of financial approach and is still in the implementation stage in most of the countries as because it is more prominently an Islamic financial statement that is why it is more important to collect and confiscate data from online news and official reports published by the companies and the banking sectors to assess what role did the sukuk play in the development of the business (Corporatefinanceinstitute, 2018).

The quantitative analysis method specifically chosen is, therefore, a phenomenological study based on previous assessment results, news reports, journals written. The research reports are studied according to the timeline of its occurrence.  The previously documented study reports are also considered as it provides the present research with a cross-sectional view of the whole matter. Therefore, it can be well said that the use of both the methods in order to compare and then portray accurate results based on them. Through the collection of data, we also understand the background of the financial crisis because of which the global economic and the financial sections suffered tremendously. It is also to be remembered that Sukuk made a pathway for the development of the financial situations of the Islamic countries where the main source of monetary funding were their oil market which was facing extreme loss.

Identification and explanation of quantitative and qualitative data collection tools including sample size and sampling method:

To conduct a research and to, therefore, accumulate accurate results it is very important for the analysts to collect data and information through different methods. Two most commonly used methodologies are broadly termed as the qualitative and the quantitative methods. Qualitative method deals with surveys and interviews conducted on the chosen subject or group of subjects over a particular period of time and thereby analyzing their opinions and experiences to find out accurate results for the research. Whereas quantitative analysis deals with the collection and accumulation of facts and written data from journals and new reports and then analyse the trends and the differences, thereby come up with more accurate solutions. It is also more fruitful if the research is conducted by using both the methods in order to draw comparisons and therefore gain a much deeper insight. In the present research both the methods were chosen to conduct the study. Firstly, the methods that were followed to conduct the qualitative analysis and the tools that were engaged were the interview method were the sample subjects who were three direct officials of the EMAAR, were sent formulated questions and they were asked to fill them in based on their facts and the situations that occurred in the financial institutions after the global financial crisis of 2008. Secondly, the quantitative analysis was conducted and some of the assessment methods were statistical descriptive analysis where the data are statistically mapped out to print out graphs and logistics that would support the theories applied to the study with a much stronger base (Deloitte, 2018).

Explanation of how the research activities related to the original decisions mentioned in the Proposal and Plan:

The plan of this research was to look in to the role the Sukuk play in the development of the Islamic finance and also how it help in modifying the crisis situation globally by introducing the new rules and methods which were improved and largely sought after in comparison to the traditional monetary bonds through the methods of qualitative and quantitative analysis and there has been no deviation from the plan that was initially fixed. It can be an obvious question as to what exactly is Sukuk. Sukuk are the Islamic financial certificate and their comparison can be found in the traditional bonds that are mostly issued in the western countries as well as the Muslim minority areas. The feature that differentiates the Sukuk from the traditional contemporary bond are that the Sukuk are based on or rather framed according to the laws of the Islamic religions and thus as per the western bonds does not believe in nor does they practice in charging interest. That is why the financial bond or Sukuk is sold to the group of investors thus accumulating a profit with which they can buy the assets in which the investor will also be a partial owner. This transaction is only possible when the issue of the Sukuk promises to buy the financial bond back at a specific par rate. Most of the countries around the world are using Sukuks to improve their financial condition their leverage situation which will in turn increase the profit margins facilitating the liquidity status of the company. EMAAR, one of the most important real estate companies in the United Arab Emirates uses these Sukuk to invest on profitable projects to improve their leverage situation. As Sukuk does not deal with the situation of interest-paying that is why the risks of loses is a lot less that is why risk management of financial institutions are all the more effective to curb out the future problems that risk the sustainability (Abaza, 2011).

Collation, Presentation, and Analysis of Primary Data Collected:

Collation and presentation of Data

Sukuk has become a valuable alternative to raise funds. The corporate in the Islamic worlds are using Sukuk to raise funds for the business. According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in its standard 17, investment Sukuk are certificates of equal value representing after closing subscription. Most of the corporate in Islamic countries including in Malaysia, Bahrain, UAE, and Saudi Arabia are issuing Sukuk to improve leverage position and investing that same in business. Sukuk is the structure ownership and the investment in the assets using Shariah principles (Imoney, 2016).

The research and the data analysis bring us to two questions that need answers to justify that the implementation of Sukuk does help the financial situation over the world. The first question that forms is that, how does Sukuk help in bringing liquidity to the company?

Islamic finance is growing with leaps and bound over the years but, due to the financial crisis of 2008 and owing to many management issues, there has been a lack of proper relationship between the assets and the liquidity ratio. Because of this, there has been a dearth in the liquid cash flow of the companies. Sukuk does cause problems in a number of ways but, if the Sukuk are used properly then the return on investment will be higher than the amount which we pay on borrowed funds and can produce higher profit margins (Deloitte, 2018).

This brings us to the second question of the research that is, how did the Sukuk help the EMAAR to improve their cash flow position after the financial crisis of 2008?

After the global economic and financial crisis in the year 2008, the financial market of the United Arab Emirates faced a major blow and the market value of most of the countries went down to a large extent. To stabilize the situation the government introduced the Sukuk which are based on the Islamic laws to derive more profit. And indeed it resulted in that. The liquidity as well as the profit margins of the notable real estate company went higher thus improving the cash flow situations too.

The annual profits made by corporate are shared with the Sukuk holders, instead of interest. Sukuk is the certificate of equal value divided as the ownership. The investors invest in Sukuk and that investment is essentially tagged with the project or the investment initiated by the company. Generally, Mudharabha Sukuk is available in the market. The profits out of the investment or the project are shared with the Sukuk holder (Rezaei, 2013). The profits are shared according to a pre-agreed profit sharing ratio. The loss from the project or the investment will be will be borne by the investor, unless the loss is incurred due to mismanagement and negligence of the corporate.  Emaar is one of the largest Real Estate Company in UAE. The company has been issuing Sukuk to improve the leverage position. The company also invests those funds in the existing and the future projects. The mega projects initiated by Emaar use more funds gathered by using different investment tools. Sukuk investment has grown significantly and Emaar is using that same for investment (Emaar, 2018).

Year

Sukuk

2017

7318,852

2016

7314,037

2015

6399,132

2014

6391,638

2013

3652,403

These are the actual amount gathered by issuing Sukuk to the general public by Emaar. The amount mobilized from the Sukuk issue has increased over the period of time. Sukuk does not carry interest burden but the company shares certain parts of profit instead at the end of the financial period. The appropriation of the profit to the Sukuk holders is done at a predetermined rate or ratio (Idris, 2015).

The risk and the liability of Sukuk issuing company or the corporate is limited as the corporate does not need to pay interest regularly and it shares a portion of the profit to the Sukuk holders. This has really been beneficial to the companies. Emaar does not need to worry about payment of interest. This certainly does not affect the overall profitability of the company even during an economic slump. In 2018, Sukuk regulation is issued by the UAE market regulator, the Securities and Commodities Authority. It is expected to bolster the issue of Islamic bond, Sukuk but the major problem would be the efficacy of the rule. The move is to bolster its Islamic finance industry and the Higher Sharia Authority is overseeing the industry and the process (Nanaeva, 2010).

Descriptive Analysis of data:

The assessment of the financial statement of Emaar indicates that Sukuk has certainly improved the liquidity position of the company and also it improved the cash flows. The paying out of the profit share to the Sukuk holder is limited. The profit sharing with the Sukuk holder has no impact on the profit and loss statement of the company and it has no impact on the cash flow position of the company. The issue of Sukuk has improved liquidity to Emaar and that funds are used in the future projects and in the existing projects. Since 2008, Emaar is witnessing a decline in the demand of the real estate projects. The slump in the industry is affecting the business of the company. The company needed much-needed liquidity to support the business in the time of economic downturn (Afshar, 2013).

The size of the issue of Sukuk by Emaar has increased after the 2008 crisis. Sukuk offers better liquidity but it also reduces the risk of interest payment at regular interval. The books of the company have also improved due to the issue of Sukuk and the extra liquidity has helped the company to deal with unsold projects and the properties. Sukuk is to be treated as the mechanism that improves the financial health and liquidity of the company. The cash flow position of Emaar is not affected due to Sukuk. The improving cash flow helped the company to offer a better return to the investors as it helped the company to gain more leverage and to use the surplus fund in developing other projects. The Riba free Islamic instrument is recognized as an important Islamic capital market instrument. The rapid development in the Sukuk issue has helped to create a new direction in asset-backed securities (Nanaeva, 2010).

Conclusion:

From the above study, we can understand that Sukuk has become a very important part of the financing system of not only the Middle Eastern countries but of the world. Though Sukuk system was first invented in the Islamic countries to provide the Muslim people a safe form of investments which abided the Islamic laws of the government and the banking system., but after the Islamic countries taking up the idea we can see that not only did other major Muslim containing countries adopt it and are thus reaching new heights but, many western and Asian countries to are incorporating it into their system to reach great heights in the global market. The above study also deals with the methods which help in gathering the data and facts that help in proving that Sukuk though have some major loopholes that are due to the management issues and problems faced during implementations that need new reforms. The quantitative and the qualitative research that was conducted in the above study which included a wide range of published and authorized facts as well as the direct opinions of the most benefited company EMAAR officials. Thus, the analysis provide us with a cross-sectional view of the role of the Sukuk which abides by the Islamic religious laws and rejects the inclusion of interest thus, decreasing the risk issues regarding loses and thereby increasing profit margins of the company and the issuers to a large extent which in turn increases the liquidity as well as the cash flow position (Abaza, 2011).

References

Abaza, I. (2011, July). Fund raising by Sharia compliant companies through Common Stock vs Sukuk. Retrieved Sept 30, 2018, from www.tamimi.com: https://www.tamimi.com/law-update-articles/fund-raising-by-sharia-compliant-companies-through-common-stock-vs-sukuk/ 

Afshar, T. A. (2013, February). Compare and Contrast Sukuk (Islamic Bonds) with Conventional Bonds, Are they Compatible? . Retrieved February 10, 2017, from www.jgbm.org: http://www.jgbm.org/page/5%20Tahmoures%20A%20%20Afshar.pdf 

Corporatefinanceinstitute. (2018, Sept 30). What is Sukuk? Retrieved Sept 30, 2018, from corporatefinanceinstitute.com: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/sukuk/ 

Deloitte. (2018, Sept 30). Corporate Sukuk in Europe. Retrieved Sept 30, 2018, from www2.deloitte.com: https://www2.deloitte.com/content/dam/Deloitte/xe/Documents/financial-services/me_Islamic-finance_corporate-sukuk-in-europe.pdf 

Emaar. (2018, Sept 30). Emaar shapes the future through world-class real estate, mall, and hospitality assets. Retrieved Sept 30, 2018, from www.emaar.com: https://www.emaar.com/en/what-we-do/ 

Idris, U. M. (2015). Evaluation of Research Developments on the Islamic Securities (Sukuk). Asset Securitization in Canada , 1-6.

Imoney. (2016, June 06). Investing In Sukuk: How Does It Work? Retrieved Sept 30, 2018, from www.imoney.my: https://www.imoney.my/articles/investing-in-sukuk-how-does-it-work 

Nanaeva, Z. K. (2010, May). How risky sukuk are: comparative analysis of risks associated with sukuk and conventional bonds. Retrieved February 10, 2017, from bspace.buid.ac.ae: http://bspace.buid.ac.ae/bitstream/1234/29/1/80070.pdf 

Rezaei, Z. (2013). Sukuk: An Islamic Financial Instrument. Retrieved February 10, 2017, from absronline.org: http://absronline.org/journals/index.php/masr/article/viewFile/108/134 

Sukuk. (2018, sept 30). Islamic Development Bank issues US$1.25 billion Sukuk. Retrieved Sept 30, 2018, from www.sukuk.com: https://www.sukuk.com/ 

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