a complete description about Salam Sukuk. its featurs, working and its history from where it originates.

1. Islamic Principles of Business
and Finance

2. Sukuk Al Salam

3. Group Members
• Tehmina Kousar MC15205
• Maryam Fayyaz MC15236
• Memona Maqsood MC15218
• Rabia Ashraf MC15226
• Hira Zafar MC15248

4. Contents
• Introduction of Sukuk
• Evolution of Sukuk
• Introduction to Salam contract
• Introduction to Sukuk al Salam
• Model of Sukuk al Salam
• Parties involved
• Mitigation of Risk
• Key features of Sukuk al Salam
• Summarization

5. The introduction of
Sukuk

6. What is
Sukuk?

7. Sukuk
• Sukuk is popularly known as an islamic or sharia compliant
“Bond” whilst in actual fact it is an asset–backed trust
certificates.
• Sukuk is a plural of SAKK, which means legal documents ,
deed and cheque. It is an Arabic name for financial
certificates but it can be seen as Islamic equivalent of the
conventional bond.

8. Sukuk
• In its simplest form Sukuk is a certificate evidencing the
ownership of an assets or its usufruct and was developed by the
sharia experts for the express purpose of answering the
financial world ‘s demand for a sharia compliant debt
instrument

9. Sukuk
• The development of Sukuk was in response to sharia’ s
prohibition on earning returns from loan contracts which
returns are based on interest.

10. Sukuk
Islamic bonds, structured in such a way as to generate returns to
investors without infringing Islamic law (that prohibits riba or
interest).

11. Evolution of Sukuk
• The debut of sukuk began in 1990 with the issuance of
RM125 million (USD 30 million) Al Bai’ Bithaman
Ajil sukuk by Shell MDS Malaysia
• In September 2001, the State of Bahrain issued the
world’s first sovereign sukuk for USD 250 million.
This Sukuk Al Ijarah carried a fixed lease payment
for 5 years
• In December 2001, Kumpulan Guthrie, a Malaysian
government linked company issued a USD 150
million Sukuk Al Ijarah with a floating rate of return

12. • In 2002, the Federation of Malaysia issued a USD600
million Sukuk al Ijarah that was listed in Luxembourg
Stock Exchange and rated by Standard & Poor’s and
Moody’s
• This is a landmark sukuk as it is the first global Sukuk
that complied with the US Regulation S and Rule 144
A and meets conventional bond practices such as
listing, ratings, dematerialized scripts and centralized
clearance (Rafe Haneef, 2009)

13. Types of Sukuk
These are the different types of Sukuk (Islamic Bonds):
• Mudarabah sukuk
• Musharakah Sukuk
• Ijarah Sukuk
• Salam Sukuk
• Istisna‘a Sukuk

14. Salam
Salam simply may be defined :
Contract executed with spot payment in full for the purchase of
assets which have commodity like characteristics such as Base
metals , e.g, copper and zinc , and grain promised for future
delivery.

15. Salam
• Secondly, salam can be only used for commodities that are
standardized and where the quality and quantity are
measured exactly.
• Originally , such contracts were used for purchase of grains
such as wheat, barly and rice but salam contracts could also
be used for commodities such as oil, or copper, or electricity
supplies that can be measured in kilowatts.

16. • The salam contract was allowed as a special case during the
Prophet’s time to avoid farmers and traders being forced to
take usurious loans.

17. Mc15226
RABIAASHRAF

18. Salam
• For example
A builder specifying slate roofing tiles of a
particular size and colour, with 5000 to be delivered
to a designated construction site on 14 August 2015.
the salam contract cannot be used for spot delivery.
• Salam also known as
Futur delivery pre- financing

19. Sukuk Al Salam
• Sukuk al salam (singular: Sakk al salam) are certificates of equal value
which are issued in order to raise Salam capital. The underlying goods
to be delivered on the basis of salam contract will be owned by the
certificate holders.
• These sukuk are issued by the seller of salam goods, and are subscribed
by the buyers of those goods. The subscription proceeds provide the
funds needed to pay the cost of the salam product.
http://www.investment-and-finance.net/islamic-finance/s/sukuk-al-
salam.html

20. Sukuk al Salam
• Since salam sukuk results in a purely financial claim that is not linked
to the underlying asset, the Shari’ah only allows such securities to be
traded at par value.
• This affects its trading in the secondary market and investors are
forced to hold this security until maturity. ◦
• This contract resembles the conventional forward contract (which is
not permissible in Shari’ah) except that in case of salam contract,
payment is made in advance and in the case of the latter payment it is
usually settled at the delivery date

21. Contd
• How can certificates based on salam contracts be issued? The
onus is on the purchaser who can finance advance payments by
issuing certificates that are equivalent to the purchase price, which
are then sold.
• The buyers of the certificates are entitled to the commodities for
which the original purchaser contracted at the end of the one or
three months, or whatever period was stipulated in the contract.

22. Contd
• For them the attraction is that they are purchasing the
commodities at a discount, the difference between this and the
eventual selling price of the commodities representing their
return.
• Sami Homoud states that it is not permissible to resell the commodity
covered by a salam contract before receiving it, but this does not
preclude the recipient from reselling the commodity by another
contract parallel to the first one

23. Contd
• The aim of such a parallel or back-to-back salam contract is to ensure that
the financier, usually a bank, is not left with a commodity that it has no
expertise in trading.
• However, creating salam certificates could also be viewed as a way out of this
dilemma for a bank.
http://www.slideshare.net/CamillePaldi/types-of-sukuk

24. Contd
• Muslims farmers used salam to receive cash advances in order
to meet immediate commitments until their crops were grown
as they were not able to borrow on the basis of Riba
• The attraction for the buyer of a salam contract is that the
advance payment is usually less than the amount that would
have to be paid if the buyer deferred his purchase and bought
the same commodity spot in one or three months’ time.

25. Contd
• There has been some debate amongst Shari’ah scholars about whether
it is legitimate to exchange the rights to commodities sold on a salam
basis prior to delivery, or, in other words, to trade salam certificates.
• Ibn Taymiyyah ruled that such exchanges are permissible as long as
when the certificates were sold to the seller it was not for a price higher
than that agreed originally, as this might be seen as exploitation. Sales
to third parties could be at any price that such buyers are willing to pay.

26. Contd
• The Maliki School of Islamic jurisprudence stipulated that salam
contracts relating to foodstuffs should not be traded, as this could be
interpreted as speculating on necessities.

27. Memoona Maqsood
MC15218

28. Parties Involved in Sukuk
Originator
The SPV
Investment bank
Subscribers of sukuk
The obligor
The lead manager

29. Contd
The servicer
The cash administrator
The credit rating agency
The legal and tax council
The auditor
The custodian

30. Structure

31. Parties in Sukuk al Salam
Originator:
Enters into a sale and purchase arrangement with Trustee.
The Investors:
Subscribe for sukuk and pay the proceeds to Issuer SPV.
Issuer SPV:
Issues sukuk, which represent an undivided ownership interest in
certain assets (the Salam Assets) to be delivered by Originator.
Originator(obligor):
Purchase Salam assets from SPV and pay price.

32. Explanation
1
Issuer SPV issues sukuk, which represent an undivided
ownership interest in certain assets (the “Salam Assets”) to be
delivered by Originator
2
The Investors subscribe for sukuk and pay the proceeds to Issuer
SPV (the “Principal Amount”). Issuer SPV declares a trust over
the proceeds and thereby acts as Trustee on behalf of the
Investors
Issuer SPV
Investors
1:Sukuk
certificate
2:cash

33. 3
Originator enters into a sale and purchase arrangement with
Trustee, pursuant to which Originator agrees to sell, and Trustee
agrees to purchase, the Salam Assets from Originator on
immediate payment and deferred delivery terms.
SPV
Originator
As seller
3:Sale of salam
asset with
delivery on a
deferred basis
4
Trustee pays the sale price to Originator as consideration for its
purchase of the Salam Assets in an amount equal to the Principal
Amount.
4:Sale price
(consideratio
n for sale)

34. 5
 Prior to each date on which Periodic Distribution Amounts are
due to the Investors, Originator delivers a proportion of the
Salam Assets to Trustee.
 Originator (as Obligor) purchases a proportion of the Salam
Assets from Trustee for an agreed Purchase Price.
SPV
Originator
As seller
5:Delivery
of salam
assets

35. 6
Originator pays the Purchase Price as consideration for
purchasing a proportion of the Salam Assets.
The amount of each Purchase Price is equal to the Periodic
Distribution Amount payable under the sukuk at that time.
SPV
Originator
Purchase Undertaking
6:Periodic sale
back of salam
assets

36. Maryam Fayyaz
MC15236

37. 7
This amount will be calculated by:
By reference to a fixed rate or variable rate (e.g. LIBOR or
EIBOR)
Depending on the denomination of sukuk issued
Mutual agreement of the parties in advance.
SPV
Originator
Purchase Undertaking
7:Purchase price

38. 8
Issuer SPV pays each Periodic Distribution Amount to the
Investors using the Purchase Price it has received from
Originator.
9
 Upon An event of :
Default or at maturity or The exercise of an optional call
or the occurrence of a tax event
 Originator will be obliged to deliver all of the Salam Assets
 Trustee will sell
 Originator will buy
 At the applicable Exercise Price
Issuer SPV
Investors
Originator
As obligor under purchase
and as sale undrtaking
8:Periodic
distribution
amounts
9:Sale back of
salam assets

39. 10
Payment of Exercise Price by Originator (as Obligor).
11
Issuer SPV pays the Dissolution Amount to the Investors using
the Exercise Price it has received from Originator.
Issuer SPV
Investors
Originator
As obligor under purchase
and as sale undrtaking
11:Dissolutio
n amount
10:Exercise
price

40. Necessary Documents
Document Parties Summary / Purpose
Salam Agreement
Originator (as Seller) and
Trustee (as Purchaser)
From the Trustee›s (and the
Investors’) perspective, this is the
document which gives the right to
receive delivery of the Salam Assets,
which once delivered to the Trustee
will be sold by the Trustee in order to
generate revenue to service the sukuk.
From the Originator’s perspective, this
is the document under which it
receives the funding

41. Document Parties Summary / Purpose
Purchase Undertaking (Wa’d) Granted by Originator (as
Obligor) in favour of Trustee
Allows the Trustee to sell the
Salam Assets back to the
Originator*: (i) periodically,
prior to the date on which a
Periodic Distribution Amount is
due in return for which the
Originator is required to pay an
amount equal to the Periodic
Distribution Amount (through
the Purchase Price) so that the
Trustee can pay the Periodic
Distribution Amount to the
Investors; and (ii) if an event of
default occurs or at maturity, in
return for which the Originator
is required to pay all outstanding
amounts (through an Exercise
Price) so that Trustee can pay
the Investors.

42. Document Parties Summary / Purpose
Sale Undertaking (Wa’d)
(Wa’d) Granted by Trustee in
favour of Originator (as
Obligor)
Allows the Originator to buy
the Salam Assets back from
the Trustee* in limited
circumstances (e.g., the
occurrence of a tax event), in
return for which the Originator
is required to pay all
outstanding amounts (through
an Exercise Price) so that
Trustee can pay the Investors.

43. Hira Zafar
MC15248

44. Features
No uncertainty between the Originator and the Issuer.
Payment of the salam capital immediate at the time of entry into
the salam contract.
The Salam Assets can only be
a)Fungible goods
b)Asset manufactured by standardize specifications.

45. Salam assets cannot be
a) gold silver
b) any asset for which originator is not responsible ( land or trees)
c) asset whose value changed (precious stones)
Salam Assets must be assets for which a specification can be drawn up
at the time of sale.

46. Quality, quantity and time of delivery of the Salam Assets must be
clearly known.
Delivery of the Salam Assets prior to the agreed delivery date is
permissible.
Sukuk certificates held by the Investors are generally non-tradable as
they represent a debt.
Association of liabilities.