Sukuk by hamad rasool bhullar


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Sukuk by hamad rasool bhullar

  1. 1. 1
  2. 2. Sukuks for AGRICULTURE November 28 & 29, 2011 ISLAMABADHamad Rasool Bhullar FCMA, FCIS, FPA, M.Com, DCMA 2
  3. 3. Defination Sukuk is the Arabic name for a financial certificate, Islamic alternative to conventional bonds, Sukuk is a Trust certificate in which investor returns are derived from legal or beneficial ownership of assets. Certificates of equal value representing proportionate ownership of tangible assets or usufructs or services or (of) the assets of a project or in an investment activity. (AAOIFI) This ownership comes in effect after the completion of subscription and with the investment of received funds. 3
  4. 4. Introduction 4
  5. 5. A Sukuk represents:An undivided proportionate ownership interest in an asset, with the corresponding right to the Islamically acceptable income streams generated by the asset, as these current income streams are established and translated into tradable securities Trust Notes or Certificates similar to Trust Certificates and Unit Trusts Issuer creates a trust over the leased Assets Trustee issues Sukuk to the Primary Subscribers (the beneficiaries under the trust) in the Primary Market 5
  6. 6. A Sukuk represents: Contd…. Sukuk-Holders have pro-rata undivided beneficial ownership of the leased Assets / Portfolio held in trust – As the beneficial owners the Sukuk-Holders are entitled to the income streams from the Leased Assets / Portfolio The Primary Subscribers can resell the Sukuk in the Secondary Market The Secondary Buyer will become the new pro-rata beneficial owner of the Leased Assets held in trust with the same rights as the original was. 6
  7. 7. Growth in Sukuks Liquidity Management of Islamic Financial Institutions. Islamic financial institutions are seeking to diversify their portfolio and increase their portfolio size of tradable instruments with fixed income profile The industry requires Sukuk funds for retail distribution. Islamic Inter-Bank or Short term Islamic Finance market can be developed through sukuks. The underlying assets are purely used as a means of transacting and do not constitute a Transaction specific pool of security Sukuks are usually issued through special purpose vehicle (‘SPV’) 7
  8. 8. Growth in Sukuks InPakistan a Limited Liability Company has acted as the issuer and is registered with and regulated by SECP Short and long term 5 – 10 Years Tenor London Stock Exchange has now 31 listed Sukuks with a value of $19bn in 2011 There were record number of Sukuk Issues in 2007 Worldwide with a Total volume of US$32.65 Billion 119 New Issues of Sukuk in 2007 - 26% Sovergine and 74% Corporate (31: 88) with an average deal size of US$269.8 Million in 2007 from US$175 Million in 2006 8
  9. 9. Growth in Sukuks2007 was an extraordinary Sukuks year In GCC- Gulf Co-operation Council UAE 58 % Saudi Arabia 30 % Bahrain 06 % Kuwait 04 % Qatar 02 % Bloomberg , & Moody’sMusharika Sukuks remained popular in 2007 in Amount but Ijarah Sukuks in Global Issues Number of IssuesIn Asia Pecific, Malaysia is dominating with 95% share Pakistan stands second with only 3% Sukuks in Value20-25% annual Growth was expected onwards 9
  10. 10. Growth in Sukuk GloballyHistorically Sukuk rapidly rose from $1bn a year in 2002 to $34bn in 2007Recovery in the past two years, rising by 54% to a new high of $50bn in 2010 from $33bn in 2009, which was itself 65% up on $20bn in 2008 after a drop from $34bn in 2007In 2010, 71% of issues were by government or quasi government organizations while the financial sector contributed 10%.Malaysia dominated the global market in 2010 by issuing total of $33bn (two thirds), $3bn each from Indonesia and Saudi Arabia, and $2bn from Qatar, while Pakistan and UAE each had issues of around $900m10 last year.
  11. 11. Advantages to Sukuk IssuerDiversification of funding sourcesCreating and enhancing profile in international marketsSecondary liquiditySizeable financing.Ease of clearing and settlement 11
  12. 12. Advantage of Sukuk InvestorDiversification in InvestmentProvides Leveraging CapabilitiesSecondary Market LiquidityEase of clearing and SettlementInvestment available to Institutional and Retail investorsAllows for many computation of Risk – Credit /Mkt. /Duration etc 12
  13. 13. Issuance of Sukuk- Factors tobe consideredIdentifythe investorsRating – by a Credit Rating AgencyUnderlying AssetsSecondary Market ConsiderationsApplicable laws – SECP rulesCosts to the IssuersDrafting of Legal DocumentsRegularity Framework 13
  14. 14. Parties InvolvedOriginator : Initial OwnerSPV : Set up for the IssueInvestors: Subscribers.Servicer: Servicer to the assets.Collection and Paying Agent : BanksCredit Enhancement provider : hedges, Guarantees, Takaful etc Need to be Explored 14
  15. 15. Parties InvolvedMerchant Banker (s) :Credit Rating Agency:Legal & Tax Counsel: a Challenging RoleAuditors 15
  16. 16. Challenges for the MarketLimited number of issues that constrains active trading of these instruments in the secondary marketBuy and Hold Strategy by major investors of SukuksLimited quality of assets available for Ijarah securitizationLimited Corporate Focus - Changing 16
  17. 17. Ideal models for structuring Sukuks forAgriculture Sector 17
  18. 18. Sukuk StructuresSukuk Structuring may based on following modes of businessMudarabah (Trust Financing/Trust Investment)Murabahah (Sale and Purchase)Muzaraat (Partnership in Agriculture Development)Musharaka (Partnership, Project Finance Participation)Musaqah (Partnership with defined roles)Istishna (Purchase by Order or to Manufacture)Ijarah (Operating Lease Concept) 18
  19. 19. Applications on Agriculture Agricultural producers (farmers) are subject to severe production and market risks, which are reflected in wide fluctuations in output and incomesMuzaraatMuzaraat is derived from Musharakah as a partnership based mode of business. It is a partnership applicable in farming whereby two or more individuals enter into a contract to invest in an agricultural enterprise or operation. Output or produce is shared by the partners in accordance with the agreement stipulated in the contract. 19
  20. 20. Applications on AgricultureMusaqaatMusaqah is an agreement between two individuals wherein one provides the orchards or trees owned and the other the labour and arrangements for irrigation services and up keep and share the profit as per agreement. 20
  21. 21. CASE STUDIES Case studies on SukuksWAPDA First Sukuk Issue for Mangla Dam Raising Project - Jan 2006 21
  22. 22. WAPDA SukukWAPDA’s financing requirement: PKR 8,000 million to (partially) fund the Mangla Dam Raising ProjectKey objectives for WAPDA were: To raise financing in a cost efficient manner Strengthen its presence in the local financial markets Diversify and cultivate WAPDA’s investor base Undertake a landmark transaction which will catalyze the promotion of Islamic Financial instruments and lead the way for other public sector entities 22
  23. 23. Transaction Structure 23
  24. 24. Transaction Structure 24
  25. 25. Sukuks for AgricultureThanks for the Patience Any Questions ??? 25