Sukuk gif
Years ago, Islamic finance was considered to be wishful thinking. However, serious research and the development of Islamic products has shown that Islamic finance is not only feasible and viable but it is also ef- ficient and a productive means of financial intermediation. The development of the Sukuk market has accompanied the trans- formation of the economy, which in turn has now become more diversified and private sector-driven. The market, initially dominat- ed by government debt securities, now re- flects the growing demand for the long term financing requirements of the private sector. In this highly competitive environment, the presence of a deep and liquid Sukuk market thus contributes towards the stability of the financial system.
Sukuk also proved its abilities to help de- velop an economy, even during an economic downturn. For example, Sukuk, [Islamic eq- uity bonds], was issued by the World Bank in 2005 for the redevelopment of Acheh follow- ing the 2004 Boxing Day tsunami, as it was for the Kuala Lumpur International Airport in Sepang, Malaysia through which many for- eign delegates arrive in Malaysia today, was financed by Sukuk in 1996.
Nowadays, Sukuk or Islamic fixed-income securities that have emerged over the past 15 years have become an increasingly im- portant asset class. These products have a number of objectives, one of which is to en- able organisations to raise capital in a Sha- riah-compliant fashion, whilst at the same time expand the investor base and offer in- vestment opportunities to new groups.
Considering their relative infancy, Islamic se- curities can be structured in a number of in- creasingly sophisticated ways. Indeed, new products are being consistently developed and introduced. Therefore, it is essential to remain conversant with the important princi- ples of structuring Islamic securities.
Sukuk may be defined as certificates of equal value that represent an undivided interest (proportional to the investor’s interest) in the ownership of an underlying asset (both tangible and intangible), usufruct, services or investments in particular projects or spe- cial investment activities.
Through this concept, Sukuk enjoy the ben- efit of being backed by assets, thereby af- fording the Sukuk holder or investor a level of protection which may not be available from conventional debt securities. Further- more, unlike conventional debt securities that mirror debts or loans on which interest is paid, Sukuk can be structured based on innovative applications of Islamic principles and concepts.
Nonetheless, Sukuk share some similarities with conventional debt securities, in that they are similarly structured based on as- sets that generate revenue. The underlying revenue from these assets represents the source of income for the payment of profit on the Sukuk.
Regulations Framework of Sukuk Al-Jarhi and Abozaid impose rules and condi- tions (ahkam) related to the tradability of the Sukuk in primary and secondary markets. To begin with, Sukuk must be issued against some tangible assets and not against cash or debts. Therefore, the tradability of Sukuk at the time of issuance (primary market) as well as in the secondary market must follow these rules:
• If Sukuk are issued against specific as- sets (‘ayn) or services, then this issu- ance implies the sale of these assets to the Sukuk holders in return for cash money based on current values of as- sets or services, and therefore the Su- kuk becomes tradable.
• If Sukuk are issued against described assets or services to be manufactured or constructed in the future (mausuf fii zimmah), then this issuance implies the sale of these assets to the Sukuk hold- ers in return for cash money, and these Sukuk are not tradable until the deliver- ability of assets or services.
• If Sukuk are not issued against assets or services, but for the purpose of uti- lising the proceeds to acquire some assets, then Sukuk do not become tradable until the stage at which those assets or services are purchased. This is because the Sukuk up to that point represent liquid proceeds, i.e. cash money, and money cannot be sold against money unless the Shariah rules of sarf are observed.
• If there is any mixture between ‘ayn and dayn, then ‘ayn must dominate dayn in Sukuk issuance.
Products of Sukuk In theory, Sukuk are certificates of equal val- ue representing undivided pro-rata owner- ship of tangible assets, usufruct or services. Although Sukuk are in principle nonrecourse asset-backed instruments, the Originator typically undertakes to repurchase the un- derlying assets at a fixed or referenced price, rendering the Sukuk asset-based and giving certificate holders exposure to the credit risk of the Originator.
Although in principle Sukuk are required to represent underlying assets that are tangi- ble (‘ayn) as opposed to a debt (dayn), there
have been Sukuk issuances in which the un- derlying assets are a mix of cash and tangi- ble assets. There have also been issuances of convertible and exchangeable Sukuk.
Sukuk can be structured alongside different techniques. While a conventional bond is a promise to repay a loan, Sukuk constitutes partial ownership in a debt (Murabahah Sukuk), asset (Al Ijarah Sukuk), project (Al Istisna’a Sukuk), business (Al Musyarakah Sukuk) or investment (Al Istithmar Sukuk). Recently, there has been a new type of Su- kuk introduced, known as the hybrid Sukuk.
• Ijarah Sukuk: It is divided into purchase agreement, lease agreement, servicing agreement and purchase undertaking. It is based on letting property rights to any other benefits based on the agreed price. Al Ijarah Sukuk is issued on a sale and leaseback arrangement (Ija- rah) of real estate and has been a pop- ular structure for sovereign issuers in particular. The issuer applies the Sukuk proceeds to purchase real estate from the Originator and then leases it back to the Originator. The Originator under- takes to repurchase the real estate at maturity or upon early settlement at the original purchase price. The Issuer is re- quired by Shariah law to undertake the major maintenance of the asset but will often appoint the Obligor to carry out such activity on its behalf.
• Mudharabah Sukuk: It is divided into Mudharabah agreement and purchase undertaking. It is a cooperation agree- ment between two parties that inves- tors and managers of capital. Mudhara- bah Sukuk are investment Sukuk that represent common ownership of units of equal value in the Mudharabah eq- uity; the holders of Mudharabah Sukuk are the suppliers of capital (Rabb al- mal) and own shares in the Mudhara- bah equity and its returns according to the percentage of ownership share. Mudharabah Sukuk holders have the right to transfer the ownership by sell- ing the deeds in the securities market. Mudharabah Sukuk also should not contain a guarantee from the issuer or the manager for the fund, for the capi- tal or a fixed profit, or a profit based on any percentage of the capital.
• Musyarakah Sukuk: It is divided into Musyarakah agreement, management agreement, purchase undertaking, it in- volves the cooperation of two parties to incorporate a capital for a motivation. Al-Musyarakah Sukuk was a popular structure among corporate issuers until the Accounting and Auditing Organisa- tion for Islamic Financial Institutions
2012 April Global Islamic Finance 53
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