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Islamic Capital Market-Sukuk- Sukuk Mudarabah
I. Core Concept: Partnership
  • Foundation: Based on the Mudarabah contract, a partnership where one party provides capital (Rabb al-Mal) and the other provides management expertise (Mudarib).
II. Mudarabah Contract Features in Sukuk Structure
  • Capital Providers (Rabb al-Mal): Sukuk Investors
  • Manager (Mudarib): The issuing company (or SPV).
  • Capital & Profit: Neither is guaranteed.
  • Loss Liability: Mudarib not liable for losses unless due to negligence or misconduct.
  • Profit Sharing Ratio (PSR):
    • Can be revised with mutual consent.
    • Investors may agree to limit their rate of return (Tanazul).
    • Remainder given to the manager as an incentive/performance fee.
III. Key Shari'ah Principle: Tanazul
  • Definition: Allows a party to a contract to relinquish their right/entitlement to another party without compensation.
  • Application: Investors may waive a portion of their profit, granting it to the Mudarib.
IV. Sukuk Mudarabah Structure (See Figure 7.2)
  1. Issuance: Company/SPV issues Sukuk at a nominal value (e.g., $100 million).
  2. Subscription: Investors pay subscription amount.
  3. Investment: Proceeds used for identified business venture (construction, manufacturing, trading, services, mining, or oil production).
  4. Profit Distribution:
    • (a) Profit shared according to agreed PSR (e.g., 'x'% to investors).
    • (b) Remainder, if any, goes to the SPV/Manager 'y'%
  5. Redemption: Principal investment redeemed at maturity (e.g., $100 million).
  6. Loss Allocation: Investors bear losses up to the investment amount.
V. Special Purpose Vehicle (SPV)
  • Purpose: Issuance vehicle to facilitate the partnership.
  • Function: Holds Sukuk assets separately from the issuer's other assets.
  • Nature: Typically a trust company, assets held for the benefit of Sukuk investors.
  • Protection: Creditors of the issuer cannot liquidate the SPV. Protects Sukuk holders' interests.​
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Islamic Capital Market -Sukuk-Sukuk Ijarah: Global Acceptance and Structuring Considerations
Key Concept: Sukuk Ijarah's global acceptance stems from its representation of ownership rights in tangible, non-financial assets.
Core Principles:
  • Asset-Based Nature: Sukuk Ijarah are structured to reflect ownership of a specific asset (e.g., real estate, equipment), making them attractive to investors seeking tangible backing.
  • Non-Financial Asset Focus: The underlying asset is typically non-financial, further distinguishing it from conventional debt instruments.
Important Considerations:
  • Not Necessarily Asset-Backed Securitization: While asset-based, Sukuk Ijarah structures may not qualify as true asset-backed securitizations due to specific structural features.
  • 'True Sale' Implications: The sale of the asset from the originator to the SPV/issuer is a critical element.
    • Impact of 'Put Option': The presence of a 'put option' (giving the originator the right to repurchase the asset) can negate the 'true sale' characteristic.
    • Why it Matters: If a 'true sale' is not achieved, the Sukuk Ijarah may be reclassified as a debt instrument rather than a true ownership representation.​
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Islamic Capital Market-Sukuk-Sukuk Ijarah: Risk Analysis & Mitigation
I. Types of Risk
  • A. Credit Risk:
    • Relates to the originator's ability to pay the rental payments.
  • B. Market Risk:
    • Concerns the value fluctuations of the underlying leased asset.
II. Mitigation Strategy: The "Put Option"
  • A. Mechanism:
    • Incorporates a Wa’d (unilateral binding promise) from the originator to repurchase the leased asset upon rental payment default.
  • B. Repurchase Price:
    • Equivalent to the outstanding principal amount, less any future rental payments.
  • C. Default Consequence:
    • Future rental payments are waived to ensure compliance with Sharia principles (no payment without corresponding benefit).
III. Investor Protection
  • A. Put Option Defined:
    • Gives investors the right to sell the leased asset back to the originator using an agreed formula in case of default.
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Islamic Capital Market -Sukuk Ijarah: Rental Payment Structures
Key Concept: Sukuk Ijarah structures can accommodate both fixed and floating rental payments.
Fixed Rental Payments: (Not explicitly discussed in the provided text, but implied)
  • Rental amount is predetermined and remains constant throughout the lease period.
Floating Rental Payments:
  • Rental amount is periodically adjusted based on a pre-agreed benchmark.
  • Example: Malaysian Global Sukuk Ijarah: Rental revised every six months.
  • Benchmark: London Interbank Offered Rate (LIBOR).
  • Shari'ah Compliance: Using conventional benchmarks (like LIBOR) is permissible if:
    • Both lessee and lessor agree to the benchmark before the lease contract is signed.
    • The benchmark serves only as a reference point for determining the cost of funds and, consequently, the new rental amount.
    • The structure remains free from any actual interest-based transactions or dealings.
Rationale for Permissibility:
  • The benchmark is solely a reference point.
  • No actual payment or charging of interest occurs within the Sukuk structure.​
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Islamic Capital Market-Sukuk -Sukuk Ijarah
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.
Structure of Sukuk Ijarah
  1. 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).
  2. 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.
  3. Payment of Purchase Price: SPV pays the Originator the $500 million from the issuance of Sukuk.
  4. Leaseback of Asset: The SPV leases the asset back to the originator.
  5. 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.
  6. Distribution to Investors: The SPV distributes the lease rental payments to the Sukuk investors.
Key Points
  • 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-Based Securitization
  • 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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IIslamic Capital Market - Sukuk -Features, Types, and Mechanisms
​ I. Fundamental Distinction: Sukuks vs. Islamic Bonds
  • Sukuk:
    • Monetary-denominated participation certificates.
    • Represent proportionate ownership in underlying assets.
    • Subject matter of securitization: Tangible assets, usufruct, or interest in a project.
    • Holders share in revenues generated by underlying assets.
  • Islamic Bonds:
    • Debt certificates or "IOUs."
    • Subject matter of securitization: Obligations/indebtedness or receivables.
II. Core Characteristics of Sukuks
  • Ownership: Sukuk holders possess an undivided beneficial ownership interest in the underlying assets.
  • Returns: Returns are not fixed or guaranteed. They are subject to the performance of the underlying asset or project.
  • Investment Type: Evidence of investment in an asset or project (typically income-generating).
  • Riba Compliance: Structured to avoid Riba (interest).
III. Revenue Generation by Sukuk Type
  • Sukuk Mudarabah & Musharakah: Revenue shared is based on the profits generated by the underlying business venture or partnership.
  • Sukuk Ijarah: Revenue is generated from lease rental payments made by the lessee to the SPV (Special Purpose Vehicle), then distributed to Sukuk investors.
IV. Historical Context: Early Islamic Bonds & the Rise of Sukuk
  • Early issuances of Islamic bonds (especially in Malaysia) faced criticism.
  • These bonds were primarily based on receivables securitization.
  • Trading based on sale of debt concept was contentious as receivables are considered monetary assets.
  • Trading of receivables-based securities must be at par value to avoid Riba (unequal exchange of money).​
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Sukuk-An Introduction to Islamic Securitisation
Overview
  • Securitisation: Raising finance secured by predictable cash flows from a specific asset pool.
  • Sukuk: Islamic finance's equivalent of conventional securitisation, facilitating funding through Shariah-compliant securities.
  • Significance: Sukuk are a crucial component of the Islamic Financial System (IFS), driving economic growth in Islamic nations.
Main Focus
  1. Salient Features of Sukuk:
    • Fundamental characteristics differentiating Sukuk from conventional bonds.
  2. Types of Sukuk:
    • Common Sukuk structures (e.g., Ijarah, Mudarabah, Musharakah).
  3. Sukuk Mechanism:
    • The process of structuring and issuing Sukuk.
  4. Market Overview:
    • Examples of existing Sukuk in the market.
  5. Recent Trends:
    • Factors influencing new Sukuk issuances.
  6. Contentious Issues:
    • Specific challenges within the Sukuk market, particularly in the Middle East.​
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