This document provides an introduction to Sukuk, which are Sharia-compliant financial certificates that are an alternative to conventional bonds. It discusses the types of Sukuk, including Sukuk al-Ijara (lease-based), Sukuk al-Salam (advance purchase), Sukuk al-Murabaha (cost-plus), and others. For each type, it outlines the basic transaction structure, steps involved, and examples of Sukuks that have been issued using that structure. The document aims to explain the underlying principles and structures of various Sukuk models for practitioners in the Islamic finance industry.
The Presentation is meant for learning purpose where it defines what is Sukuk, Types of Sukuk, Structure of Sukuk, Islamic Mode , Riba, Difference Between Sukuk and Bonds, Islamic structure, Structure Ijarah Murabaha Musharakah Mudarbah Istisna salam Bai Salam
Islamic Capital Market is a long term market transactions are carried out in ways that does not conflict with the conscience of Muslims and Islam religion. It follows the religious law or Shariah compliance that is free from any activities prohibited by Islam such as usury (riba), coercion, ambiguity (gharar), and gambing (maysir). The Shariah Advisory Council (SAC) was established in May 1996 as advisor of the Comission on Shariah matters especially in Islamic Capital Market.
The Malaysia Islamic Capital Market has experienced phenomenal growth and raised the bar globally for product innovation and financial intermediation. Islamic financial system is running with conventional system has seen a continuous development in the Gulf cooperation council (GCC) countries. While it has also get success to attract financial centers of world big countries such as UK, USA, France, China, Italy, Korea, Singapore and Japan. Furthermore, this market comprises the Islamic equity sector and fixed income. Various Islamic Capital Market products are available especially for Muslims who only seek into invest and transact in it such as Islamic Unit Trust, Sukuk, Shariah Indices and warrants.
Sukuk and Their Contemporary Applications
By Mufti Taqi Usmani
Investment Sukuk worth enormous amounts have appeared in our times, and have been widely subscribed to by many Islamic banks. At the same time, many scholars have expressed their opinions in relation to the compliance of Sukuk with the precepts of the Shariah.
The Presentation is meant for learning purpose where it defines what is Sukuk, Types of Sukuk, Structure of Sukuk, Islamic Mode , Riba, Difference Between Sukuk and Bonds, Islamic structure, Structure Ijarah Murabaha Musharakah Mudarbah Istisna salam Bai Salam
Islamic Capital Market is a long term market transactions are carried out in ways that does not conflict with the conscience of Muslims and Islam religion. It follows the religious law or Shariah compliance that is free from any activities prohibited by Islam such as usury (riba), coercion, ambiguity (gharar), and gambing (maysir). The Shariah Advisory Council (SAC) was established in May 1996 as advisor of the Comission on Shariah matters especially in Islamic Capital Market.
The Malaysia Islamic Capital Market has experienced phenomenal growth and raised the bar globally for product innovation and financial intermediation. Islamic financial system is running with conventional system has seen a continuous development in the Gulf cooperation council (GCC) countries. While it has also get success to attract financial centers of world big countries such as UK, USA, France, China, Italy, Korea, Singapore and Japan. Furthermore, this market comprises the Islamic equity sector and fixed income. Various Islamic Capital Market products are available especially for Muslims who only seek into invest and transact in it such as Islamic Unit Trust, Sukuk, Shariah Indices and warrants.
Sukuk and Their Contemporary Applications
By Mufti Taqi Usmani
Investment Sukuk worth enormous amounts have appeared in our times, and have been widely subscribed to by many Islamic banks. At the same time, many scholars have expressed their opinions in relation to the compliance of Sukuk with the precepts of the Shariah.
This presentation include the brief history of Mutual funds in Pakistan, its present worth, future trends and prospects, Hopefully will help the interested students.
Asset-backed sukuk: Is the time right for true securitisation?White & Case
In the ‘conventional’ finance space, asset-backed financings have proved a successful method of funding social and civil infrastructure. However, in Islamic finance, asset-backed sukuk have not yet taken off. Debashis Dey and Claudio Medeossi of global law firm White & Case examine why.
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Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
This presentation include the brief history of Mutual funds in Pakistan, its present worth, future trends and prospects, Hopefully will help the interested students.
Asset-backed sukuk: Is the time right for true securitisation?White & Case
In the ‘conventional’ finance space, asset-backed financings have proved a successful method of funding social and civil infrastructure. However, in Islamic finance, asset-backed sukuk have not yet taken off. Debashis Dey and Claudio Medeossi of global law firm White & Case examine why.
Taurus Zodiac Sign_ Personality Traits and Sign Dates.pptxmy Pandit
Explore the world of the Taurus zodiac sign. Learn about their stability, determination, and appreciation for beauty. Discover how Taureans' grounded nature and hardworking mindset define their unique personality.
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
Memorandum Of Association Constitution of Company.pptseri bangash
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
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Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
https://seribangash.com/difference-public-and-private-company-law/
Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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𝐓𝐉 𝐂𝐨𝐦𝐬 (𝐓𝐉 𝐂𝐨𝐦𝐦𝐮𝐧𝐢𝐜𝐚𝐭𝐢𝐨𝐧𝐬) is a professional event agency that includes experts in the event-organizing market in Vietnam, Korea, and ASEAN countries. We provide unlimited types of events from Music concerts, Fan meetings, and Culture festivals to Corporate events, Internal company events, Golf tournaments, MICE events, and Exhibitions.
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"𝐄𝐯𝐞𝐫𝐲 𝐞𝐯𝐞𝐧𝐭 𝐢𝐬 𝐚 𝐬𝐭𝐨𝐫𝐲, 𝐚 𝐬𝐩𝐞𝐜𝐢𝐚𝐥 𝐣𝐨𝐮𝐫𝐧𝐞𝐲. 𝐖𝐞 𝐚𝐥𝐰𝐚𝐲𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞 𝐭𝐡𝐚𝐭 𝐬𝐡𝐨𝐫𝐭𝐥𝐲 𝐲𝐨𝐮 𝐰𝐢𝐥𝐥 𝐛𝐞 𝐚 𝐩𝐚𝐫𝐭 𝐨𝐟 𝐨𝐮𝐫 𝐬𝐭𝐨𝐫𝐢𝐞𝐬."
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Remote sensing and monitoring are changing the mining industry for the better. These are providing innovative solutions to long-standing challenges. Those related to exploration, extraction, and overall environmental management by mining technology companies Odisha. These technologies make use of satellite imaging, aerial photography and sensors to collect data that might be inaccessible or from hazardous locations. With the use of this technology, mining operations are becoming increasingly efficient. Let us gain more insight into the key aspects associated with remote sensing and monitoring when it comes to mining.
India Orthopedic Devices Market: Unlocking Growth Secrets, Trends and Develop...Kumar Satyam
According to TechSci Research report, “India Orthopedic Devices Market -Industry Size, Share, Trends, Competition Forecast & Opportunities, 2030”, the India Orthopedic Devices Market stood at USD 1,280.54 Million in 2024 and is anticipated to grow with a CAGR of 7.84% in the forecast period, 2026-2030F. The India Orthopedic Devices Market is being driven by several factors. The most prominent ones include an increase in the elderly population, who are more prone to orthopedic conditions such as osteoporosis and arthritis. Moreover, the rise in sports injuries and road accidents are also contributing to the demand for orthopedic devices. Advances in technology and the introduction of innovative implants and prosthetics have further propelled the market growth. Additionally, government initiatives aimed at improving healthcare infrastructure and the increasing prevalence of lifestyle diseases have led to an upward trend in orthopedic surgeries, thereby fueling the market demand for these devices.
India Orthopedic Devices Market: Unlocking Growth Secrets, Trends and Develop...
Sukuk-Structures.pdf
1. ••• a global think tank for
the Islamic finance industry
An Introduction to the Underlying Principles and Structure
June 2006
Sukuk
DIRE/SUK/06
2. 2
Table of Contents
Note from the Managing Director 4
Executive Summary 5
Introduction 8
Overview of Sukuk Market 8
Benefits and Features 8
Sukuk origination 9
Common uses of Sukuk funds 10
Types of Sukuk 11
Sukuk al-Ijara 11
Sukuk al-Ijara transaction structure 12
Steps involved in the structure 13
Sukuk al-Ijara in practice 14
Sukuk al-Salam 15
Sukuk al-Salam transaction structure 16
Steps involved in the transaction 17
Sukuk al-Salam in practice 17
Sukuk al-Murabaha 18
Sukuk al-Murabaha Transaction Structure 19
Steps involved in the structure 20
Sukuk al-Murabaha in practice 20
3. 3
Sukuk al-Musharaka 21
Sukuk al-Musharaka Transaction Structure 22
Steps involved in the structure 23
Sukuk al-Musharaka in practice 24
Sukuk al-Mudaraba 25
Sukuk al-Mudaraba Structure 26
Steps involved in the structure 27
Sukuk al-Mudaraba in practice 27
Sukuk al-Istisna 28
Sukuk al-Istisna Transaction Structure 29
Steps involved in the structure 30
Sukuk al-Istisna in practice 30
The Hybrid Sukuk 31
Structure of hybrid Sukuk 32
Steps involved in the structure 33
Hybrid Sukuk in practice 33
Conclusion 34
Disclaimer 35
4. 4
Notes from Managing Director
Dar Al Istithmar Ltd offers Sharia-compliant solutions to the institutions offering Islamic financial services. We serve as a think-tank
for the Islamic finance industry and we aim to expand the frontiers of the Islamic finance industry through a continuous process of
innovation in finance and Sharia advice. To this end we hope this paper will contribute to the continued process of evolution and
development within the industry.
This paper was prepared by the team at Dar Al Istithmar Ltd and sincere gratitude is extended to the team for its tireless effort and
time invested in producing this document.
Dr Humayon Dar
Managing Director
Dar Al Istithmar Ltd
5. 5
Executive Summary
Preamble
Sukuk is popularly known as an Islamic or Sharia compliant ‘Bond’ whilst in actual fact, it is an asset-backed trust certificate. In its
simplest form Sukuk is a certificate evidencing ownership of an asset or its usufruct and was developed by Sharia experts for the
express purpose of answering the financial world’s demand for a Sharia compliant debt instrument. The development of Sukuk was in
response to Sharia’s prohibition on earning returns from loan contracts which returns are based on interest. Conventional bonds and
other derivative instruments that rely on profiting holders by providing returns based on interest are therefore unavailable to Muslims
who wish to invest in Sharia compliant investments.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) which issues standards on accounting, auditing,
governance, ethical, and Shari'a standards has laid down 14 different types of Sukuk. This particular Introduction sets out 7 types
which are favoured in the market and explains each structure and set up in great detail. The Sukuk structures set out in this
Introduction rely on the creation of a Special Purpose Vehicle (SPV) which responsibility is to issue certificates which represent for
example the ownership of an asset, entitlement to a debt or to rental incomes or even accumulation of returns from various Sukuk (a
hybrid Sukuk). The return provided to Sukuk holders therefore come in the form of profit from a sale, rental or a combination of both. A
distinguishing feature of a Sukuk is that in instances where the certificate represents a debt to the holder, the certificate will not be
tradable on the secondary market and instead should be held until maturity. It is evident that Sukuk for the most part fulfils the Islamic
financial industry’s need for a Sharia compliant debt instrument.
6. 6
In light of the above Sukuk has become extremely popular in the debt market and has been embraced by the Islamic banking and
finance sector with sovereign and corporate Sukuk issuance rising at a rate of 300 % in 2004 alone. So far about US$20 billion worth
of Sukuk certificates have been issued. With demands at present, it is expected that the market for Sukuk will continue to grow and
that the industry will similarly respond to the needs of the market by developing versions which are tradable in the secondary debt
market.
Prohibition
Sharia prohibits the trading of short-term debt instruments at other than face value, or from drawing upon the established interbank
money markets as these transactions involve interest and excessive uncertainty (Gharar). This means that Islamic financial
institutions tend to have highly liquid balance sheets with limited investment opportunities available for their current assets. Thus
Sukuk have, over the past few years, created opportunities for the short and medium term placement of such funds.
Alternative Basis of Financial Instruments
The essence of Sukuk is to provide Sharia compliant instruments for investment which do not involve interest and excessive
uncertainty (Gharar). The Sukuk market has been a primary area of growth, providing an avenue for the short and medium-term
placement of funds by investors. This development has been fuelled not only by the desire of institutions to raise funds in a Sharia
compliant manner but also by investor demand for such products.
Sukuk are entitlement to rights in certain assets inclusive of some degree of asset ownership. These Sukuk are based on Ijara,
Salam, Mudaraba, Musharaka, Murabaha, Istisna mode of finance and on the basis of pooled portfolios.
The surge in Sukuk issuance by sovereign borrowers and corporate entities has mainly resulted from the Sharia standardization of the
model agreement. The Accounting and Auditing Organization for the Islamic Financial Institutions (AAOIFI) adopted an Exposure
Draft of Sharia Standards concerning Investment Sukuk.
Sukuk promises the global financial arena many opportunities for managing the capital needs of the emerging economies of the
Islamic world in a manner consistent with Islamic values.
7. 7
Sukuk Defined
Sukuk is frequently referred to as an Islamic bond, but a more accurate translation of the Arabic word would be an Islamic investment
certificate.
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) Standard 17 defines Investment Sukuk as being:
“Certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as
planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special
investment activity”.
AAOIFI lays down 14 different types of Sukuk.The most popular structure is the Sukuk Al Ijara, based on an Islamic leasing
transaction.
Difference between conventional bond and Sukuk
In its simplest form, a bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on
certain specified dates, interest and principal. In comparison, under Sukuk structure the Sukuk holders each hold an undivided
beneficial ownership in the underlying assets. Consequently, Sukuk holders are entitled to share in the revenues generated by the
Sukuk assets as well as being entitled to share in the proceeds of the realization of the Sukuk assets.
Similarities between conventional bond and Sukuk
ƒ Marketability: Sukuk are monetised real assets that are liquid, easily transferred and traded in the financial markets
ƒ Rateability: Sukuk can be easily rated
ƒ Enhanceability: Different Sukuk structures may allow for credit enhancements
ƒ Versatility: the variety of Sukuk structures defined in the AAOIFI standards allow for: structuring across legal and fiscal domains,
fixed and variable income options etc.
8. 8
Introduction
Overview
The issuance of international Sukuk is one of the most significant mechanisms for raising finance in the international capital markets
through Islamically acceptable structures. Multinational corporations, sovereign bodies, state corporations and financial institutions
use international Sukuk issuance as an alternative to syndicated financing. Sukuk represent an undivided proportionate ownership
interest in an asset with the corresponding right to the Islamically acceptable income streams generated by the asset. These current
income streams are established and translated into tradable securities, which can be issued in the capital markets for investors’
participation.
The Islamic banking and finance market is one of the fastest-growing global niche markets, estimated to be somewhere between USD
500 - 750 billion. The Sukuk market is expanding since the launch of the first Sukuk a few years back. ISI Emerging Market's Islamic
Finance Information Service (IFIS) reports that Islamic Bond Issuance grew over 300% in 2004. To date, US$20 billion worth of Sukuk
certificates have been issued.
Benefits and Features
ƒ Tradable Sharia-compliant capital market product providing medium to long-term fixed or variable rates of return.
ƒ Assessed and rated by international rating agencies, which investors use as a guideline to assess risk/return parameters of a
Sukuk issue.
ƒ Regular periodic income streams during the investment period with easy and efficient settlement and a possibility of capital
appreciation of the Sukuk.
ƒ Liquid instruments, tradable in secondary market.
9. 9
Sukuk Origination
The origination of Sukuk typically involves the packaging or structuring of pools of Sharia-compliant assets with or without credit
enhancement into securities.
The structure is based on a specific contract of exchange that can be made through the sale and purchase of an asset based on
deferred payment, leasing of specific assets or participation in a joint-venture business.
The issuance of Sukuk requires an exchange of a Sharia-compliant underlying asset for financial consideration through the
application of various Sharia principles such as Ijara, Salam, Istisna, Murabaha, etc. The structure of Sukuk has to be reviewed and
approved by Sharia advisers to ensure compliance with Sharia.
In addition, the structuring process may also involve the provision of additional protection for investors against late payment, pre-
payments, potential write-offs and other similar risks. Such protection is often provided in the form of credit and/or liquidity
enhancement schemes.
10. 10
Common uses of Sukuk funds
Three common uses of Sukuk have emerged in the recent years viz. project, asset, and balance sheet specific.
An example of project-specific Sukuk is the Qatar Global Sukuk issued by the Government of Qatar in 2003 to mobilize resources for
the construction of Hamad Medical City (HMC) in Doha. A joint venture special purpose vehicle (SPV), the Qatar Global Sukuk QSC,
was incorporated in Qatar with limited liability. This SPV acquired the ownership of land parcel, that was registered in the name of
HMC. The land parcel was placed in trust and Ijara-based Trust Certificates (TCs) were issued worth US$700 million due by October
2010 at an annual floating rate of return of LIBOR plus 0.45 per cent.
The use of Sukuk issued by the governments of Bahrain and Malaysia were asset specific. In February 2004, Bahrain announced the
launch of its first US$250 million five-year Sukuk al-Ijara issue to fund the extension of the airport. The underlying asset was the
airport land sold to an SPV. The arranger of this Sukuk issue was Citi Islamic Investment Bank. In 2002, the Government of Malaysia
issued a US$ 600 million Sukuk al-Ijara Trust Certificates (TCs), due for maturity in 2007. Under this arrangement, the beneficiary
right of land parcels have been sold by the government of Malaysia to an SPV, which was then re-sold to investors for five years. The
SPV kept the beneficiary rights of the properties in trust and issued floating rate Sukuk to investors.
An example of the balance sheet specific use of Sukuk funds is the Islamic Development Bank (IDB) Sukuk issued in August 2003.
The need for resource mobilization by the IDB emerged in the wake of expected financing requirements of the member countries. The
IDB made its debut resource mobilization from the international capital market by issuing US$ 400 million five-year Sukuk due for
maturity in 2008. The IDB Sukuk is intrinsically balance sheet specific because the performance of its pooled securitized assets has
been guaranteed by IDB.
11. 11
Types of Sukuk
Sukuk al-Ijara
Ijara (lease) is a contract according to which a party purchases and leases out equipment required by the client for a rental fee. The
duration of the rental and the fee are agreed in advance and ownership of the asset remains with the lessor.
Sukuk al-Ijara are securities representing the ownership of well defined existing and well known assets, that are tied up to a lease
contract. This means that Sukuk al-Ijara can be traded in the market at a price determined by market forces.
Characteristics of Sukuk al-Ijara
ƒ Sukuk al-Ijara are subject to risks related to the ability and desirability of the lessee to pay the rental instalments. Moreover, these
are also subject to real market risks arising from potential changes in asset pricing and in maintenance and insurance costs.
ƒ The expected net return on some forms of Sukuk al-Ijara may not be completely fixed and determined in advance, since there
might be some maintenance and insurance expenses that are not perfectly determined in advance.
ƒ Sukuk al-Ijara are completely negotiable and can be traded in the secondary markets.
ƒ Sukuk al-Ijara will offer a high degree of flexibility from the point of view of their issuance management and marketability. The
central government, municipalities, awqaf or any other asset users, private or public can issue these Sukuk. Additionally, they can
be issued by financial intermediaries or directly by users of the leased assets.
ƒ Sukuk al-Ijara holders, as owners, bear full responsibility for what happens to their property. They are also required to maintain it
in such a manner that the lessee may derive as much usufruct from it as possible.
12. 12
Sukuk al-Ijara transaction structure
Sukuk holders
SPV
Obligator as
seller
Obligator leases back
asset as lessee
4a.Periodic rentals
4a.Periodic rentals
and capital
and capital
amount payments
amount payments
3.Lease agreement
3.Lease agreement
2b.Sukuk
2b.Sukuk
proceeds
proceeds
1.Title to assets
1.Title to assets
2a.Sukuk
2a.Sukuk
proceeds
proceeds
4b.Periodic rentals
4b.Periodic rentals
and capital amount
and capital amount
distributions
distributions
Same entity
13. 13
Steps involved in the structure
1. The obligator sells certain assets to the SPV at an agreed pre-determined purchase price.
2. a. The SPV raises financing by issuing Sukuk certificates in an amount equal to the purchase price.
b. This is passed on to the obligator (as seller).
3. A lease agreement is signed between SPV and the obligator for a fixed period of time, where the obligator leases back the assets
as lessee.
4. a. SPV receives periodic rentals from the obligator;
b. These are distributed among the investors i.e. the Sukuk holders.
5. At maturity, or on a dissolution event, the SPV sells the assets back to the seller at a predetermined value. That value should be
equal to any amounts still owed under the terms of the Ijara Sukuk.
14. 14
Sukuk al-Ijara in practice
ƒ US$150 million Serial Islamic Lease Sukuk by First Global Sukuk Inc
The US$150 million Islamic Lease Sukuk is part of a US$395 million Serial Islamic Sukuk issuance that Bank Islam (Labuan)
Limited has been mandated to arrange by Kumpulan Guthrie Berhad (Guthrie). In December 2000, Guthrie was granted a RM1.5
billion (US$400 million) Al-Ijara Al-Muntahiyah Bit-Tamik by a consortium of banks. The original facility was raised to re-finance
Guthrie’s acquisition of a palm oil plantation in the Republic of Indonesia. The consortium was then invited to participate as the
underwriter/primary subscriber of the Sukuk Transaction.
ƒ US$250 million Sukuk Trust Certificate by BMA International Sukuk Company
The Kingdom of Bahrain, acting through the Ministry of Finance and National Economy (in such capacity, the Head Lessor),
will lease by way of head lease for a term of 100 years a certain land parcel to the Issuer pursuant to the Al-Ijara Head Lease
Agreement. The Kingdom of Bahrain, acting through the Ministry of Finance and National Economy, (in such capacity, the Sub-
Lessee), will lease by way of sub-lease from the Issuer the Land Parcel on the terms set out in the Al-Ijara Sub-Lease Agreement for
a period of 5 years commencing on the Closing Date and terminating on the Periodic Distribution Date falling in June 2009. The sub-
lease is subject to earlier termination if the trust is dissolved early.
ƒ US$350 million Sukuk Trust Certificates by Sarawak Corporate Sukuk Inc. (SCSI)
Sarawak Economic Development Corporation (SEDC) raised financing amounting to US$350 million by way of issuance of
series of trust certificates issued on the principle of Sukuk al-Ijara. For purposes of the proposed Sukuk, SCSI was incorporated on 23
November 2004 as a special purpose company, under the Offshore Companies Act (OCA), 1990 in Labuan. The certificates were
issued with a maturity of 5 years and under the proposed structure, the proceeds will be used by the issuer to purchase certain assets
from 1st Silicon (Malaysia) Sdn Bhd. Thereafter, the issuer will lease assets procured from 1st Silicon to SEDC for an agreed rental
price for an agreed lease period of 5 years. The rental payable by SEDC will be supported by the State Government of Sarawak via a
letter of support.
15. 15
Sukuk al-Salam
Salam is the sale of a specific commodity, well defined in its quality and quantity which will be delivered to the purchaser on a fixed
date in the future against an advanced full payment of price at spot.
Sukuk al-Salam are certificates of equal value issued for the purpose of mobilising Salam capital so that the goods to be delivered on
the basis of Salam come to the ownership of the certificate holders.
The issuer of the certificates is a seller of the goods of Salam, the subscribers are the buyers of the goods, while the funds realised
from subscription are the purchase price (Salam capital) of the goods. The holders of Salam certificates are the owners of the Salam
goods and are entitled to the sale price of the certificates or the sale price of the Salam goods sold through a parallel Salam, if any.
Salam-based securities may be created and sold by an SPV under which the funds mobilized from investors are paid as an advance
to the company SPV in return for a promise to deliver a commodity at a future date. SPV can also appoint an agent to market the
promised quantity at the time of delivery perhaps at a higher price. The difference between the purchase price and the sale price is
the profit to the SPV and hence to the holders of the Sukuk.
All standard Sharia requirements that apply to Salam also apply to Sukuk al-Salam, such as, full payment by the buyer at the time of
effecting the sale, standardized nature of underlying asset, clear enumeration of quantity, quality, date and place of delivery of the
asset and the like.
One of the Sharia conditions relating to Salam, as well as for creation of Sukuk al-Salam, is the requirement that the purchased goods
are not re-sold before actual possession at maturity. Such transactions amount to selling of debt. This constraint renders the Salam
instrument illiquid and hence somewhat less attractive to investors. Thus, an investor will buy a Salam certificate if he expects prices
of the underlying commodity to be higher on the maturity date.
16. 16
Salam Sukuk
holders
(Investors)
SPV
Obligator
(undertakes future
sale of commodity
for the investors)
4b.Commodity sale proceeds
4b.Commodity sale proceeds
4a.Commodity sale
4a.Commodity sale
proceeds
proceeds
2a.Sukuk proceeds
2a.Sukuk proceeds
Obligator
(sells commodity
on Salam basis)
2b.Salam proceeds
2b.Salam proceeds
1.Undertaking
1.Undertaking 3.Commodity
3.Commodity
Sukuk al-Salam transaction structure
17. 17
Steps involved in the transaction:
1. SPV signs an undertaking with an obligator to source both commodities and buyers. The obligator contracts to buy, on behalf of the
end-Sukuk holders, the commodity and then to sell it for the profit of the Sukuk holders.
2. a. Salam certificates are issued to investors and SPV receives Sukuk proceeds.
b. The Salam proceeds are passed onto the obligator who sells commodity on forward basis
3. SPV receives the commodities from the obligator
4. a. Obligator, on behalf of Sukuk holders, sells the commodities for a profit.
b. Sukuk holders receive the commodity sale proceeds.
Sukuk al-Salam in practice
ƒ Aluminium has been designated as the underlying asset of the Bahrain Government al Salam contract, where by it promises to sell
aluminium to the buyer at a specified future date in return of a full price payment in advance. One bank, namely the Bahrain
Islamic Bank (BIB), has been nominated to represent the other banks wishing to participate in the Al Salam contract. BIB has been
delegated to sign the contracts and all other necessary documents on behalf of the other banks in the syndicate. At the same time,
the buyer appoints the Government of Bahrain as an agent to market the appropriate quantity at the time of delivery through its
channels of distribution. The Government of Bahrain provides an additional undertaking to the representative (BIB) to market the
aluminium at a price, which will provide a return to al Salam security holders equivalent to those available through other
conventional short-term money market instruments.
18. 18
Sukuk al-Murabaha
Murabaha is basically the sale of goods at a price comprising the purchase price plus a margin of profit agreed upon by both parties
concerned.
Sukuk al-Murabaha are certificates of equal value issued for the purpose of financing the purchase of goods through Murabaha so
that the certificate holders become owners of the Murabaha commodity.
The issuer of the certificate is the seller of the Murabaha commodity, the subscribers are the buyers of that commodity, and the
realised funds are the purchasing cost of the commodity. The certificate holders own the Murabaha commodity and are entitled to its
final sale price upon the re-sale of the Commodity.
The possibility of having legally acceptable Murabaha-based Sukuk is only feasible in the primary market. The negotiability of these
Sukuk or their trading at the secondary market is not permitted by Sharia, as the certificates represent a debt owing from the
subsequent buyer of the Commodity to the certificate-holders and such trading amounts to trading in debt on a deferred basis, which
will result in Riba.
Despite being debt instruments, the Murabaha Sukuk could be negotiable if they are the smaller part of a package or a portfolio, the
larger part of which is constituted of negotiable instruments such as Mudaraba, Musharaka, or Ijara Sukuk.
Murabaha Sukuk have, however, become popular in Malaysian market due to a more liberal interpretation of fiqh by Malaysian jurists
permitting sale of debt (bai-al-dayn) at a negotiated price.
20. 20
Steps involved in the structure:
1. A master agreement is signed between the SPV and the borrower
2 a & b. SPV issues Sukuk to the investors and receive Sukuk proceeds.
3 a & b. SPV buys commodity on spot basis from the commodity supplier.
4 a & b. SPV sells the commodity to the borrower at the spot price plus a profit margin, payable on instalments over an agreed
period of time
5 a & b. The borrower sells the commodity to the Commodity buyer on spot basis.
6. The investors receive the final sale price and profits.
Sukuk al-Murabaha in practice
Arcapita Bank, a Bahrain-based investment firm has mandated Bayerische Hypo-und Vereinsbank AG (“HVB”), Standard Bank Plc
(“SB”) and WestLB AG, London Branch (“WestLB”) (together the “Mandated Lead Arrangers”), to arrange a Five Year Multicurrency
(US$, € and £) Murabaha-backed Sukuk. Sukuk will have a five year bullet maturity and proposed pricing three month LIBOR +
175bps.
21. 21
Sukuk al-Musharaka
Musharaka means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in
the joint business. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is
distributed among the partners in pre-agreed ratios, while the loss is borne by every partner strictly in proportion to respective capital
contributions.
Sukuk al Musharaka are documents of equal value issued with the aim of using the mobilised funds for establishing a new project or
developing an existing one or financing a business activity on the basis of one of partnership contracts. The certificate holders
become the owners of the project or the assets of the activity as per their respective shares. These Musharaka certificates can be
treated as negotiable instruments and can be bought and sold in the secondary market.
22. 22
Sukuk al-Musharaka transaction structure
SPV
Musharaka
Corporate
Investors
1.Physical
1.Physical
Asset
Asset
contribution
contribution
2b. Issue
2b. Issue
proceeds
proceeds
2a. Sukuk
2a. Sukuk
proceeds
proceeds
5. Issues sukuk
5. Issues sukuk-
-
Al
Al-
-musharaka
musharaka
+Periodic profit
+Periodic profit
3. Periodic profit
3. Periodic profit
4. Periodic profit
4. Periodic profit
+Incentive fee
+Incentive fee
6. Undertakes to buy
6. Undertakes to buy
Musharaka
Musharaka
Shares of the SPV
Shares of the SPV
on a periodic basis
on a periodic basis
23. 23
Steps involved in the structure:
Corporate and the Special Purpose Vehicle (SPV) enter into a Musharaka Arrangement for a fixed period and an agreed profit-sharing
ratio. Also the corporate undertakes to buy Musharaka shares of the SPV on a periodic basis.
1. Corporate (as Musharik) contributes land or other physical assets to the Musharaka
2 a & b. SPV (as Musharik) contributes cash i.e. the issue Proceeds received from the investors to the Musharaka
3. The Musharaka appoints the Corporate as an agent to develop the land (or other physical assets) with the cash injected into the
Musharaka and sell/lease the developed assets on behalf of the Musharaka
4. In return, the agent (i.e. the Corporate) will get a fixed agency fee plus a variable incentive fee payable.
5. The profits are distributed to the Sukuk holders.
6. The Corporate irrevocably undertakes to buy at a pre-agreed price the Musharaka shares of the SPV on say semi-annual basis and
at the end of the fixed period the SPV would no longer have any shares in the Musharaka.
24. 24
Sukuk al-Musharaka in practice
ƒ US$550 million sukuk transaction for Emirates, Dubai's national airline, the seven year deal was a structured on a Musharaka
contract. The Musharaka or joint venture was set up to develop a new engineering centre and a new headquarters building on land
situated near Dubai's airport which will ultimately be leased to Emirates. Profit, in the form of lease returns, generated from the
Musharaka or joint venture will be used to pay the periodic distribution on the trust certificates.
ƒ Sitara Chemical Industries Ltd, a public limited company, made a public issue of profit-and-loss sharing based term finance
certificates (TFC’s) worth Rs 360 million which were subscribed on 19 and 20 June 2002. The TFC’s had a fixed life tenor of five
years and profit and loss sharing was linked to the operating profit or loss of the Chemical Division of the company. The
Musharaka contract stipulated semi-annual profit distribution on account payment (provisional) on the basis of projections
irrespective of profit and loss and the final profit payment was to be determined on the basis of annual audited accounts of the
company and adjustments made accordingly.
ƒ Kuwait Finance House (KFH), Liquidity Management Center B.S.C. (LMC) and Al Muthanna Investment Company (MIC), the
mandated lead arrangers, have launched the $125 million Lagoon City Musharaka Sukuk in support of the Lagoon City residential
and commercial real estate development as part of Kheiran Pearl City project. The 2-year Musharaka Sukuk which is structured as
a reducing Musharaka will offer a return of 200 basis points over 6 months US$ LIBOR payable semi-annually and has an average
maturity of 1.25 years.
25. 25
Sukuk al-Mudaraba
Mudaraba means an agreement between two parties according to which one of the two parties provides the capital (capital provider)
for the other (Mudarib) to work with on the condition that the profit is to be shared between them according to a pre-agreed ratio.
Mudaraba certificates: The issuer of these certificates is the Mudarib, the subscribers are the capital providers, and the realised funds
are the Mudaraba capital. The certificate holders own the assets of Mudaraba and the agreed upon share of the profits; losses, if any,
are borne by capital providers only.
Mudaraba Sukuk give its owner the right to receive his capital at the time the Sukuk are surrendered, and an annual proportion of the
realised profits as agreed. They play a vital role in the process of development financing, because it is related to the profitability of the
projects.
Mudaraba Sukuk neither yield interest nor entitle owners to make claims for any definite annual interest. This shows that Mudaraba
Sukuk are like shares with regard to varying returns, which are accrued according to the profits made by the project.
Mudaraba Sukuk must represent a common ownership and entitle their holder to shares in a specific project for which the Sukuk have
been issued to fund. A Sukuk holder is entitled to all rights, which have been determined by Sharia upon his ownership of the
Mudaraba bond in matters of sale, gift, mortgage, succession and the like.
On the expiry of the specified time period of the subscription, the Sukuk holders is given the right to transfer the ownership by sale or
trade in the securities market at his discretion.
27. 27
Steps involved in the structure:
1.Mudarib enters into an agreement with project owner for construction/commissioning of project.
2. SPV issues Sukuk to raise funds.
3. Mudarib collects regular profit payments and final capital proceeds from project activity for onward distribution to investors.
4. Upon completion, Mudarib hands over the finished project to the owner.
Sukuk al-Mudaraba in practice
Shamil Bank of Bahrain B.S.C. raised 360 million Saudi riyal investment capital through the Al Ehsa Special Realty Mudaraba,
representing an investment participation in a land development transaction with a real estate development company in the Kingdom of
Saudi Arabia. The investment objective of the Mudaraba is to provide investors with annual returns arising from participation in the
funding of a land financing transaction Profits due to investors will be accrued on the basis of returns attained from investing the
subscriptions.
28. 28
Sukuk al-Istisna
Istisna is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery
or a future payment and future delivery. A manufacturer or builder agrees to produce or build a well described good or building at a
given price on a given date in the future. Price can be paid in instalments, step by step as agreed between the parties. Istisna can be
used for providing the facility of financing the manufacture or construction of houses, plants, projects, and building of bridges, roads
and highways.
Sukuk al-Istisna are certificates that carry equal value and are issued with the aim of mobilising the funds required for producing
products that are owned by the certificate holders.
The issuer of these certificates is the manufacturer (supplier/seller), the subscribers are the buyers of the intended product, while the
funds realised from subscription are the cost of the product. The certificate holders own the product and are entitled to the sale price
of the certificates or the sale price of the product sold on the basis of a parallel Istisna, if any.
Istisna Sukuk are quite useful for financing large infrastructure projects.
The suitability of Istisna for financial intermediation is based on the permissibility for the contractor in Istisna to enter into a parallel
Istisna contract with a subcontractor. Thus, a financial institution may undertake the construction of a facility for a deferred price, and
sub contract the actual construction to a specialised firm.
Sharia prohibition of Riba precludes the sale of these debt certificates to a third party at any price other than their face value. Clearly
such certificates, which may be cashed only on maturity, cannot have a secondary market.
29. 29
Sukuk al-Istisna transaction structure
Sukuk holders
(Investors)
SPV End buyer
Contractor/Builder
1.Sukuk
1.Sukuk
proceeds
proceeds 5. US$
5. US$
3. Title to assets
3. Title to assets 4a. Title to assets
4a. Title to assets
4b. Monthly payments
4b. Monthly payments
2. US$
2. US$
30. 30
Steps involved in the structure:
1. SPV issues Sukuk certificates to raise funds for the project.
2. Sukuk issue proceeds are used to pay the contractor/builder to build and deliver the future project.
3. Title to assets is transferred to the SPV
4a & b. Property/project is leased or sold to the end buyer. The end buyer pays monthly instalments to the SPV.
5. The returns are distributed among the Sukuk holders.
Sukuk al-Istisna in practice
ƒ Tabreed’s five-year global corporate Sukuk (on behalf of the National Central Cooling Company, UAE) provided a fixed coupon of
5.50%. It is a combination of Ijara Istisna and Ijara Mawsufah fi al dhimmah (or forward leasing contracts). The issue was launched
to raise funds to retire some existing debt, which totals around US$136 million, as well as to finance expansion.
ƒ The Durrat Sukuk will finance the reclamation and infrastructure for the initial stage of a broader US$ 1 billion world class
residential and leisure destination known as 'Durrat Al Bahrain', currently the Kingdom of Bahrain's largest residential development
project. The return on the Sukuk is 125 basis points over 3 months LIBOR payable quarterly, with the Sukuk having an overall
tenor of 5 years and an option for early redemption. The proceeds of the issue (cash) will be used by the Issuer to finance the
reclamation of the land and the development of Base Infrastructure through multiple project finance (Istisna) agreements. As the
works carried out under each Istisna are completed by the Contractor and delivered to the Issuer, the Issuer will give notice to the
Project Company under the Master Ijara Agreement and will lease such Base Infrastructure on the basis of a lease to own
transaction. If the Sukuk is listed during the Istisna period, the Istisna receivable (amounts held as cash) shall be traded only at par
value.
31. 31
Hybrid Sukuk
Considering the fact that Sukuk issuance and trading are important means of investment and taking into account the various demands
of investors, a more diversified Sukuk - hybrid or mixed asset Sukuk - emerged in the market.
In a hybrid Sukuk, the underlying pool of assets can comprise of Istisna, Murabaha receivables as well as Ijara. Having a portfolio of
assets comprising of different classes allows for a greater mobilization of funds. However, as Murabaha and Istisna contracts cannot
be traded on secondary markets as securitised instruments at least 51 percent of the pool in a hybrid Sukuk must comprise of Sukuk
tradable in the market such as an Ijara Sukuk. Due to the fact the Murabaha and Istisna receivables are part of the pool, the return on
these certificates can only be a pre-determined fixed rate of return.
The hybrid Sukuk have yet to make headways in the market, the structure nevertheless represents the potential of new structures and
benefits to the investors.
32. 32
Structure of a Hybrid Sukuk
Islamic Finance
Originator
SPV
Investors
3. Purchase of Assets (Ijara
3. Purchase of Assets (Ijara
contracts, Murabaha contracts,
contracts, Murabaha contracts,
Istisna contracts)
Istisna contracts)
4. Fixed payment of the
4. Fixed payment of the
return on the assets
return on the assets
2. Sukuk proceeds
2. Sukuk proceeds
Direct recourse
Direct recourse
1.Transfer of
1.Transfer of
tangible assets,
tangible assets,
Murabaha deals
Murabaha deals
33. 33
Steps involved in the structure:
1. Islamic finance originator transfers tangible assets as well as Murabaha deals to the SPV.
2. SPV issues certificates of participation to the Sukuk holders and receive funds. The funds are used by the Islamic finance
originator.
3. Islamic finance originator purchase these assets from the SPV over an agreed period of time.
4. Investors receive fixed payment of return on the assets.
Hybrid Sukuk in practice
ƒ Islamic Development Bank issued the first hybrid Sukuk of assets comprising 65.8% Sukuk al-Ijara, 30.73% of Murabaha
receivables and 3.4% Sukuk al-Istisna. This issuance required the IDB’s guarantee in order to secure a rating and international
marketability. The $400 million Islamic Sukuk was issued by Solidarity Trust Services Limited (STSL), a special purpose company
incorporated in Jersey Channel Islands. The Islamic Corporation for the Development of Private Sector (ICD) played an
intermediary role by purchasing the asset from IDB and selling it to The Solidarity Trust Services Limited (STSL) at the
consolidated net asset value.
34. 34
Conclusion
„ The market for Sukuk is now maturing and there is an increasing momentum in the wake of interest from issuers and investors. Sukuk
have confirmed their viability as an alternative means to mobilise medium to long-term savings and investments from a huge investor
base.
„ Investors are able to focus on the underlying asset and viability of a project and not just on the credit of the issuer.
„ Different Sukuk structures have been emerging over the years but most of the Sukuk issuance to date have been Sukuk al-Ijara, since
they are based on the undivided pro-rata ownership of the underlying leased asset, it is freely tradable at par, premium or discount.
Tradability of the Sukuk in the secondary market makes them more attractive.
„ Although less common than Sukuk al-Ijara, other types of Sukuk are also playing significant role in emerging markets to help issuers
and investors alike to participate in major projects, including airports, bridges, power plants etc.
„ The sovereign Sukuk issues, following Malaysia’s lead, are enjoying widespread and positive acclaim among Islamic investors and
global institutional investors alike.
„ In general corporate Sukuk tend to have lower credit rating than sovereign Sukuk and are also smaller in size.
„ As the universe of investors becomes more diverse, so too will their appetites, and with these there will be issuances beyond the
currently prevalent Ijara and Salam contracts into more profit-and-loss sharing contracts.
35. 35
Disclaimer
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permitted without the explicit written consent of Dar Al Istithmar Ltd. Any such permission may only be granted upon receipt of written
request for the same.
This document contains preliminary Sharia advice only and in no way it should be considered as a Fatwa on the issues discussed. DI
does not recommend structuring and marketing any product based on the information contained in this document without obtaining
relevant prior legal documents conforming Sharia approval and before DI has at least issued provisional Sharia approval of its Sharia
Supervisory committee.