It is a scholarly article regarding practical aspects of Islamic bonds or Sukuk in Afghanistan. It entails the general info about Sukuk as well as specific info how Islamic bonds can be launched in Afghanistan and which model is better for Afghanistan plus ways of launching them

1. Introduction of Islamic Bonds and their uses for Economic
Development
By: Dr.Alam Khan Hamdard Ahmadzai
Islamic Bonds Adviser/ Consultant
Founder of Islamic Banking in Afghanistan and Islamic Bonds in Afghanistan
Phone No +93787500015
Email: alamhm@gmail.com
This article is divided into 2 parts:
1st
Part: Introduction of Islamic bonds
2nd
Part: How Islamic bonds can be launched and used for economic purposes
What is Islamic Bonds or Sukuk
Definition: Islamic Bonds (Sukuk) are equity based bonds structured as per
Shariah law and backed by government and sellable in Market
Islamic Bonds Worldwide
 Malaysia, Saudi Arabia, UAE, Qatar, Belgium and UK are the global Sukuk
issuers and up to 60 countries issue Islamic bonds.
 Government issues Sovereign Sukuk and private sector may issue corporate
Sukuk worldwide.
 Sukuk contribution in Global Islamic Financial Market is 30%, which is
almost767.Billions US$ as per Global Sukuk Report 2016.

2.  More than 60 countries included developed countries issue Islamic bonds
to raise the fund.
 Ijarah and Istisna are most favorite models to finance infrastructure
economic projects worldwide.
 Beside Muslim countries None Muslims most developed countries like UK,
France, USA, Japan, China and Germany also issue Islamic bonds
 Islamic Bonds issued by government is called Sovereign Sukuk and generally
government stared bonds issuing as government issued Sovereign Sukuk
 Corporate Sukuk: Islamic bonds originated and issued by Private sector and
end user is private sector called Corporate Sukuk
Islamic Bonds Sukuk salable in international markets called International Sukuk
Islamic Bonds sellable in domestic of markets of issuing country is called
Domestic Sukuk
• There are 7 types of Sukuk which called Models of Sukuk
• Legitimacy and Permission
• Verse # 29 chapter 4 of the Holy Quran says:
﷽
ِ‫م‬ ٍ‫اض‬َ‫ر‬َ‫ت‬ ‫َن‬‫ع‬ ً‫ة‬َ‫ار‬َ‫ج‬ِ‫ت‬ َ‫ُون‬‫ك‬َ‫ت‬ ‫ن‬َ‫أ‬ َّ‫َل‬ِ‫إ‬ ِ‫ل‬ِ‫اط‬َ‫ب‬ْ‫ل‬‫ا‬ِ‫ب‬ ‫ُم‬‫ك‬َ‫ن‬ْ‫ي‬َ‫ب‬ ‫ُم‬‫ك‬َ‫ل‬‫ا‬َ‫و‬ْ‫م‬َ‫أ‬ ‫وا‬ُ‫ل‬ُ‫ك‬ْ‫أ‬َ‫ت‬ َ‫َل‬ ‫وا‬ُ‫ن‬َ‫م‬‫آ‬ َ‫ين‬ِ‫ذ‬َّ‫ل‬‫ا‬ ‫ا‬َ‫ه‬ُّ‫ي‬َ ‫ا‬َ‫ي‬ْ‫م‬ُ‫ك‬‫ن‬
• Translation: Oh you who have believed, do not consume one another's
wealth unjustly but only [in lawful] business by mutual consent.
• Through Islamic Bonds government raises money legally from public with
their consent and invests them in lawful Shariah compliance projects and
shares profits.

3. • Islamic Fiqh Academy Saudi Arabia laid the basis for the development of the
Sukuk market through the issuance of a statement in 1988.
Issuance of the Sukuk will be subjected to the approval of Shariah Board
Definitions
• Sukuk: Islamic Bonds which are the ownership certificates in assets or group
of assets backed by government.
• Sovereign Sukuk: Sukuk originated by Government and end user of fund is
government.
• Corporate Sukuk: Sukuk issued by private sector backed by government and
end user of fund is private sector.
• Domestic Sukuk: Marketable within country of issue.
• International Sukuk: Marketable in international market.
• Capital market: a place where financial securities are traded.
• Securitization: Official backing and guarantee statement .
• SPV: Special Purpose Vehicle the Sukuk issuer and implementer.
• Murabaha: Cost plus markup based financing.
• Model of Sukuk: Type of Sukuk.
• Originator: the end user of fund rose via Islamic bonds.
• Obligators: the person/entity who owes the debt under Islamic Bonds, for
instance government.
• Shariah law: Islamic Law

4. • Fiqa Mamelat : Islamic financial transactions
• Modes of Finance: Islamic finance principles
• Islamic Finance Principles: Musharakah, Mudarabah, Murabahah, Bai
Mowajal, Bia Salam, Istisna, Wakala, Kefala
• Appearance of Sukuk: Islamic bonds are in the form of paper and electronic
form sealed and stamped by Government.
• Duration: it depends on the mode of finance and time required for
completing life cycle.
• Denomination: Generally it starts from a denomination as low as 2500 up to
one million and above.
• Buyers: banks, financial institutes, money changers, companies,
associations.
• Originator: Government originates Sovereign Bonds, SPV issues and
investors buy them.
In case of sovereign bonds government outsources fund raising ,implementation
and redeems of bonds to SPV.
• Mudarabah Model of Sukuk: It is a trustee finance model in which investors
are financiers (Rabul Mal) and government is working partner (Mudarib).
• Musharakah Model of Sukuk:Under this model, government as originator
and investor as bond owners both invest in projects as per agreed
proportion financial contribution. Profit and loss gets distributed as per
their shares in partnership. There two kinds of Musharakah
• Permanent Musharakah
• Diminishing Musharakah

5. Murabaha Mode of Sukuk: is a financing tool through which government assigns
licensed SPV to raise money for procurement of goods. SPV raises fund from
investors to purchase goods and re-sell the goods to government on cost+
markup price.
After taking the physical possession of goods, SPV deliver them to Gov’t. Gov’t
pays the price of purchased goods to SPV in installments. SPV pays to investors
(return is principal amount, cost plus markup)
Ijarah Model of Sukuk: It is based on long term leasing where SPV raises fund on
behalf of government to arrange real estate or properties/fixed assets.
• SPV leases the property to (government/ private sec) and gets the rental
incomes.
• The rental income goes via SPV to investors within time specified in Ijarah.
• At the final stage of closing the project, investors receive the principal
amounts.
• At the end SPV transfers the ownership of properties (real estate) to
government
It is used for medium and long terms projects where investors want early cash
return of rentals income and cannot wait for long time.
Istisna means contract financing to build assets or projects. Government raises
money from investors to finance the long term projects.
 It contracts the raising of fund and the construction of targeted projects to
SPV.
 Istisna is used for properties and assets where they are not existed
 SPV subcontracts the construction portion to third party

6.  After completion, SPV operates the project for a specific time period agreed
in Istisna agreement and collect the contracted amount from project and
then transfer the ownership of project to government.
 SPV profit margin is the difference in actual cost price and contracted
amount, which is higher than actual.
 In case of Istisna government is not required to provide materials
 Salam Model Sukuk: Salam means advance payment and differed delivery
arrangements where SPV raises money and pays to farmers in advance
against commitment of future delivery of goods. The delivery times, quality
and quantity must be determined in advance.
 SPV purchases goods in lower price and then sell it on higher price.
Government suggests agriculture projects to be financed by SPV via Salam
Sukuk.
Purpose of use: Can be used for agriculture products enhancement/marketing
Wakla Model of Sukuk
 Wakala is similar to agency agreement where Investors assigns attorney
(Wakeel) to invest and manage their contributed fund.
 Wakala describes a contract of agency or delegated authority pursuant to
which the principal appoints an agent (wakeel) to carry out a specific task
on its behalf.
 Wakala concept is used in financial transactions like sale and purchase,
lending, borrowing, assignment of debt, ect.
 Wakeel creates a permanent Wakala Investment Pool to undertake any
activity on behalf of investors.
 SPV transfers fund to assigned agent of investors.
 Wakeel as agent buys assets and invest into the pool.

7.  Investment pool transfers periodic distribution income to SPV and SPV
transfers the profit to investors.
 It is the mixture of more than one modes of finance to finance single
project.
 Hybrid Sukuk works where different activities are required, like purchases,
labor, management expertise etc
Hybrid Model of Sukuk
 In hybrid Sukuk structuring, multiple modes of finance are used for
instance:
 Government purchases goods on credit basis under Murabah
 Government outsources the operation to third party Under Ijarah
 A third party manufactures/constructs from its raw materials Under
Istisna
These Models their own characteristics which can be used for different purposes
as following:
1-Mudarabah can be used for financing Permanent long term economic programs
2-Musharakah can be used for financing permanent long term economic
programs with financial contributions of government
3-Mrabahah can be used to finance projects need procurement of goods and
government can also use this for its operational budget
4-Istisna Model of Sukuk: It is used for infrastructure projects like Highways,
Hydro power projects Dams, Airports, Railway line
5-Ijarah Model of Sukuk: It can be used for medium and long term project like Big
factories , Workshops, Warehouses, Factories etc

8. 6-Salam Model of Sukuk: It is for agriculture where farmers need cash for crops
growing. Farmers are provided with cash in advance to finance needs of growing
(inputs) and delayed delivery of products
7-Wakala Model: it is more private sector model where financer (investors ) have
control on their fund and can be used for every kind of projects
How government can use Islamic bonds
Mainly government raises via using selected models mentioned. Government
uses Sovereign Islamic bonds by using Ijarah, or Istisna , Musharakah , or
Mudarabah models of Sukuk.
Using different modes of finance depend on the type of project in consideration
with current situation of a country issuing bonds.
Government of Afghanistan will use Islamic bonds to finance its economic
priorities agenda in support of its national economic budget.
But due to long time duration needed to complete the circle of Islamic bonds it is
not suit for financing operating budget and sometime even for development part
of national budget.
Benefits of Islamic bonds:
1-Bringing financial self- sustainability to finance the budget deficit particularly
development budget
2-Financing government priority medium and long term economic projects
3-Financing the infrastructure projects including Dams, Irrigation systems, Power
Generations, Railways, Highways, Airports, Sea and Land ports, Gas Pipelines,
Electricity supply and transmission lines, Oil Refineries, Oil Extraction and
Pipelines etc.
4-Islamic bonds provides the guaranteed and government back millions of
investment opportunities for public

9. 5-Due to range of denomination lower starting from lowest amount of 1000 or
2000 it provides millions of millions investment opportunities
6-It paves the way for opening shares and stock markets in a country with no
shares and stock markets
7-Islamic bonds raise money from internal sources and substitutes the Donors
funding
8-Islamic bonds enhance and strengthen the public trust in economy and attract
public funds investment in national economic projects
9-Islamic bonds have positive effects on balance payments and bring more cash to
government to support its national payment
10-Islamic bonds has significant effects on national monetary policy by collecting
local currencies against financial instruments bonds
11- Islamic bonds help rapid growth of GDP
12-Islamic bonds channelize the dormant money to finance economic growth
within public and private sector
13-Islamic bonds provide best avail safe and secure investment opportunities for
banks and financial institutes
14-Islamic bonds enhance private investment in public projects
15-Islamic bonds are mostly market driven financial instruments directs the cash
flow to finance the Demand, Supply, Production , and Market activities by
providing direct supply into money circulation
2nd
Part will be focus on how government of Afghanistan launches Islamic bonds
in Afghanistan
Regards
Dr.Alam Khan Hamdard Ahmadzai

10. Islamic Bonds and Capital Market Consultant
Ministry of Finance
Islamic Republic of Afghanistan