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What is Sukuk-al-Ijara ( Sale and leaseback structure)

slang — Wed, 09 Dec 2009 10:13:40 +0000

The sale and leaseback sukuk structure is the most widely used, as it has been tried, tested, and accepted by most Shariah scholars, both in the Gulf region and Asia. All sovereign sukuks issued to date have been based on the sale and leaseback structure. The documentation is fairly standard, with a broad consensus among Shariah scholars and Shariah Boards.

The sukuk-al-ljara (sale and leaseback structure) has the following characteristics:

An SPV may be formed to purchase assets from the obligor.

The assets are then leased to the obligor against payment of periodic rentals.

The SPV is usually incorporated in a tax-friendly jurisdiction, i.e., the Cayman Islands, Jersey, etc.

It is usually an orphan SPV with a single share issued in favour of a charitable trust.

The sukuk can be structured either as an amortising issue or as a bullet repayment at maturity.

The payment obligations of the obligor are similar to any other full-recourse financing – i.e., the issue amount is reflected as a liability and the profit payments are expensed out through the income statement.

The underlying assets in the Sukuk-al-Ijara structure have the following characteristics:

They are limited to fixed/real assets (such as land, office buildings, plants and machinery, etc.), where ownership remains with the obligor.
They are limited to sale of existing assets – i.e., the underlying asset pool should be in existence at the time of sale.
The underlying asset pool should consist of unencumbered assets with a market value at least equal to the sukuk issue amount.
The underlying asset pool is used for structuring purposes only and is not to be construed as security. This implies that investors have no recourse to the underlying asset pool.

In case of a default or non-payment, the SPV will normally invoke the purchase undertaking, return the sukuk assets to the obligor, and make a claim of payment against the obligor. This claim ranks pari-passu with all senior, unsecured claims against the obligor. Therefore, the sukuk holder no longer has any recourse against the underlying assets but a direct recourse against the obligor. Essentially, the sukuk holder has the same claims as the other unsecured bondholders have on the obligor’s assets.

What Is Sukuk, Types Of Sukuk, And Characteristics Of Sukuk

slang — Wed, 09 Dec 2009 10:07:22 +0000

Sukuk definition:

The sukuk concept is based on the premise that any Islamic financing contract representing ownership of a tangible asset can be bought or sold, and hence can be structured in the form of tradable securities.

A sukuk represents:

An undivided proportionate beneficial ownership interest in an asset or portfolio.

The corresponding right to the Islamically acceptable income streams generated by the asset or portfolio.

A sukuk is similar to a conventional bond in most respects – such as trading, listing, and rating – but is structured in a Shariah-compliant manner. The sukuk structure has several advantages, one of which is that it provides access to a growing Islamic liquidity pool in addition to the conventional investor base.

Different Types of Sukuk:

A sukuk can be structured in a number of ways, depending on its underlying assets and business purpose. Some of the generic sukuk structures used for international sovereign and corporate structures are:

(a) Ijara sukuk

Concept: Certificates of equal value based on sale & leaseback of an asset.

Examples: International sovereign issues: Malaysia, Qatar, Pakistan, DCA Domestic issues: Bahrain, Malaysia

(b) Musharaka sukuk

Concept: Based on the concept of partnership, with the aim of using the mobilised funds to establish a new project or develop an existing project, so that the certificate holders become the owners of the project or the assets as per their respective shares.

Examples: Emirates Airlines

© Sale of co-ownership of Ijara contracts

Concept: Ijara contracts between the bank & the customer, shown on the bank’s books.

Examples: Dubai Islamic Bank sukuk

Key characteristics of sukuk:

Issuer – Typically a Special Purpose Vehicle (SPV) that issues sukuk certificates on the back of a Shariah-compliant asset/contract with the obligor. The investors purchase sukuk certificates to fund the issuer, who passes the funds to the obligor. This is unlike a conventional bond issue, where the obligor is also the issuer. However, in both instances, the recourse of investors is ultimately to the obligor.

Obligor – The beneficiary of the funds or the entity which is raising the funds through the sukuk. Typically, investors take ultimate credit risk on the obligor for both coupon and principal repayments, as with a conventional bond.

Profits versus interest – Because interest is not allowed under Shariah principles, contracts are structured so that the investor has a share in the profits generated from the use of the underlying asset/financial contract. These are distributed as regular ‘profit’ or ‘coupon’ payments on the sukuk on predetermined dates (comparable to regular coupon servicing in conventional bonds).

Ratings – The certificates issued by the SPV can be rated by recognised rating agencies. Typically, for a straight unsecured senior sukuk, the rating of the sukuk issue is same as the rating of the obligor, since the ultimate credit is the obligor. Hence, ratings are usually on par with those of conventional bonds.

Clearing – Through Euroclear, Clearstream, or any such mechanism, as with conventional bonds.

Listing – As with conventional bonds, sukuk certificates can be listed on most major stock exchanges.

Governing law – Sukuk certificates are typically governed by UK law for eurobond issues, or by local laws for local-currency issues (as with conventional bonds).

Trustee – In a eurobond, a trustee may be appointed to represent the interests of the bondholders. In a sukuk structure, this role is often effected by a delegate (an independent third party).

Basis of profit payment – Sukuk certificates can be either on a fixed-rate or floating-rate basis and priced against a benchmark such as USD LIBOR, EURIBOR.

First Foreign Sukuk Listed On Bursa Saham Malaysia

slang — Wed, 02 Dec 2009 03:19:08 +0000

In line with Malaysia’s aspiration to internationalize Bursa Malaysia as the Islamic investment centre, recently there is this foreign listing of US$500 million (RM1.7 billion) sukuk issued by GE Capital.

Details:

The five-year Islamic bond is structured based on the globally accepted Syariah principle of Sukuk Al Ijara.
First foreign sukuk listing on Bursa Malaysia and hope to see more foreign issuance of bonds or sukuk listed here in the near future,” he said.
Bursa Malaysia registered its first local sukuk listings by Petronas and Cagamas in August 2009.

Earlier article described the basics of Islamic financing which might be useful for those unfamiliar with such available source of financing.

Incidentally, we should also know that our country, Malaysia is the world’s largest sukuk issuance centre, with more than 60 per cent of sukuk outstanding globally originated here. It also hosts the world’s largest sukuk market worth at an estimated US$66 billion as at end of June 2009, and remains a key driver of growth for the Malaysian Islamic market

Sukuk And Islamic Capital Market

slang — Thu, 24 May 2007 04:22:46 +0000

The emergence of the Islamic capital market in 2002 with the inaugural sukuk issued by the Malaysian Governement spearheaded the capital markets exponentially as it became the blue print to an increasing variety of instruments which can be used to create an efficient Islamic portfolio in line with portfolio theory and financial planning.
Increasingly, many companies have begun to tap into the sukuk market to take advantage of the increased liquidity in the Islamic world.

This article seeks to give a basic understanding of the sukuk market and to understand what are the various common types of sukuk so that accountants can tapped into this market for their financing needs.

What is sukuk?

Frequently referred to as an Islamic bond but more accurately translated it is an Islamic investment certificate.
Unlike a bond where the issuer is contractually obliged to pay to the bondholders on certain specified dates, interest and principal, under a sukuk structure, holders of the sukuk each hold an beneficial ownership in the underlying assets. Consequently sukuk holders are entitled to share in the revenues generated by the sukuk assets as well as been entitled to share in the proceeds of the realization of the sukuk assets.
Is a form of assets-backed securities
It requires an underlying tangible assets transaction either in an outright sale and purchase transaction or in a master lease transaction
The primary condition for the issuance of sukuk is the existence of assets on the balance sheet of the issuing entity that wants to mobilize its financial resources.
However, the assets need to be Shariah compliant. Hence, the identification of a suitable asset is a critical step in the process of issuing sukuk certificates.

If you noticed, it is very important that sukuk assets need to be Shariah compliant.

So what is Shariah compliant?

Shariah-compliant investment is “ethical” investment organized in compliance with Islamic law.
To comply with Shariah Law, investment must not involve ‘riba’, a kind of usury practised during pre-Islamic times among the Arabs, which involves delaying the payment of debt in return for an increase in its amount – in other words, interest.

For example, Shariah property investment funds must not rent properties to organizations involved in alcohol, armaments, cinema, conventional financial services, tobacco, pornography, pork or gambling
The common types of sukuk are as follows:

	TYPE	BRIEF DESCRIPTION
1	Murabaha Sukuk	One of the most widely used instruments for Islamic short-term financing Based on the notion of purchase finance. The structure is based on a declared mark-up integrated into the selling price with a deferred payment
2	Istisna’a Sukuk	Use to advance funding of real estate development, major industrial projects or purchase of large equipment like aircraft/ships. Generally, the financial institution funds the purchaser or the manufacturer during the construction of the assets,acquires title/ownership of the asset and upon completion of its construction, passes the title/ownership to the purchaser on an agreed deferred payment terms.
3	Salam Sukuk	Refers to a sale wherein the seller undertakes to supply a specific commodity to the buyer at a future date in return for an advanced price paid in full on the spot. Represents a type of forward contract but with actual physical delivery at the maturity of the said contract.
4	Ijara Sukuk	A leasing structure coupled with the right to the lessee to purchase the asset at the end of the lease period The certificates are issued on stand-alone assets identified on the balance sheet. Presently most sukuk issued follow this structure.
5	Mudarabah Sukuk	Comprise an agreement between a party who provides the capital and another party (the entrepreneur) to enable the entrepreneur to carry out business projects based on pre-determined profit sharing ratios. Losses to the business are borne by the provider of the funds.
6	Musharakah Sukuk	Similar to Mudarabah concept except that this structure requires both parties to participate in the funding of the project. Any losses will be shared by both parties up to the size of their respective investments.