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Islamic Capital Market-Sukuk -Sukuk Ijarah
Overview
Overview
- Sukuk Ijarah was the first Islamic fixed-income instrument widely accepted globally.
- Based on a sale and leaseback concept.
- The Malaysian Global Sukuk Ijarah (2002) was a key development, introducing asset-based securitization.
- Sukuk represents undivided and proportionate beneficial ownership of the leased asset.
- Sukuk is tradable in the secondary market due to representing ownership of an asset, not just receivables.
- Sale of Asset: The originator/owner of an asset sells it to a Special Purpose Vehicle (SPV) for a specified amount (e.g., $500 million).
- Sukuk Issuance: The SPV issues Sukuk Ijarah to investors for the same amount (e.g., $500 million). These proceeds are then used to pay the originator for the asset.
- Payment of Purchase Price: SPV pays the Originator the $500 million from the issuance of Sukuk.
- Leaseback of Asset: The SPV leases the asset back to the originator.
- Payment of Lease Rentals: The originator makes periodic lease rental payments to the SPV (e.g., every six months). The rental amount is calculated as "[cost of funds + spread]" multiplied by the initial asset value.
- Distribution to Investors: The SPV distributes the lease rental payments to the Sukuk investors.
- Originator sells the asset to SPV (Sukuk issuer).
- SPV then leases the asset back to the originator.
- Investors are effectively the owners of the asset through their Sukuk holdings.
- Rental payments represent the return on investment for the Sukuk holders.
- Asset is packaged and transformed into units (Sukuk).
- Investors purchase a share in the asset and its associated ownership rights.
- Investors are entitled to receive rental payments as the owners/lessors of the asset.
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