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

1. SUKUK
BY
WAQAS GULL
MBA,ACPG.CISI

2. We studied the following concepts of Islamic investment funds in our
previous class;
Principles of Islamic investment funds.
Modes of investment of funds and their management under Islamic financial
system.
1. Equity fund
2. Ijarah funds
3. Commodity funds
4. Murabaha funds
5. Bai al Dain
6. Mixed funds
Challenges being faced by Islamic funds
Opportunities in the market
SUMMARY OF THE PREVIOUS
LECTURE

3. After this lecture you will be able to understand the concept of Sukuk
regarding their
Definition
Introduction
Objectives of Sukuk
Shariah Bases of Sukuk Issue
Basics of Sukuk
Sukuk in Secondary Market
Sukuk – Guiding principles
LEARNING OUTCOMES

4. Advantage of Sukuk – Issuer
Advantage of Sukuk – Investor
Parties Involved
Popular Sukuks
Sukuk al Murabaha
Sukuk al Ijarah
Sukuk al Musharakah
Sukuk Growth
Controversies in different types of Sukuks
Differences between Sukuk and Bonds
LEARNING OUTCOMES

5. Sukuk is the Arabic name for a financial certificate.
Its an Islamic alternative to the conventional interest
bearing bonds.
Sukuk is a Trust certificate in which investor returns are
derived from legal or beneficial ownership of assets.
DEFINITION

6. 6
Suku
k
Bond

7. Sukuk refer to securitization, a process in which
ownership of the underlying assets is transferred to a
large number of investors.
These are certificates of equal redeemable value
representing undivided share in ownership of tangible
assets of particular projects or specific investment
activity and services.
INTRODUCTION OF SUKUK

8. Its great potential is in transforming an asset’s future
cash flow into present cash flow .
Sukuk may be issued on existing as well as specific assets
that may become available at a future date.
INTRODUCTION OF SUKUK

9. Objective of Sukuk is to enable organizations
1. To raise capital in a Shariah -compliant fashion ,
whilst at the same time
2. Expanding the investor base and
3. Offering investment opportunities to new groups.
OBJECTIVES OF SUKUK

10. Equity Based: Conditions of Musharakah and
Mudarabah
• Salam based – salam Rules
• Ijarah based – Rules of Ijarah
SHARIAH BASES OF
SUKUK ISSUE

11. While a conventional bond is a promise to repay a loan,
Sukuk constitutes partial ownership in a debt (Sukuk
Murabaha), asset (Sukuk Al Ijara), project (Sukuk Al
Istisna), business (Sukuk Al Musharakah), or investment
(Sukuk Al Istithmar).
Sukuk structures replicate the cash flows of
conventional bonds, and are listed on exchanges and
tradable in the secondary markets.
BASICS OF SUKUK

12. Sukuk is popularly known as 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.
The Sukuk structures rely on the creation of a Special
Purpose Vehicle (SPV).
BASICS OF SUKUK

13. SPV would issue Sukuk certificates which represents the
ownership of an asset, entitlement to rental incomes.
The return provided to Sukuk holders therefore come in the
form of profit from a sale, rental or a combination of both.
Sukuk could be based on Mudaraba, Musharakah, Murabaha,
Salam, Istisna, Ijarah or hybrid of all these.
BASICS OF SUKUK

14. Sukuk securities are normally purchased and held by the
investors, as a result, little of the securities enter the
secondary market.
Furthermore, only public Sukuk are able to enter this
market, as they are listed on stock exchanges
SUKUK IN SECONDARY MARKET

15. Shirkah based and Ijarah Sukuk - Marketing based on the market signals and
forces.
Murabaha , Salam and Istisna Sukuk representing a claim only so can be
negotiated only at face value.
Instruments representing a pool of different categories are subject to the rules
relating to the dominant category in the pool, i.e. proportion of liquid and
illiquid assets.
SECONDARY MARKET OF SUKUK

16. Islamic certificates of investment referred to as Sukuk involve
structuring of pools of Shariah compliant assets.
Investors have an undivided interest in the underlying assets and
are therefore entitled to share jointly the related returns.
Could take place through application of various Shariah
principles such as Ijarah , Salam, Musharakah , Mudaraba and
mixed pools.
SUKUK – GUIDING PRINCIPLES

17. Provision for credit enhancement and/or liquidity
enhancement features.
From credit perspective, investors expect the Sukuk
issue to represent the same credit risk as that of the
ultimate issuer/guarantor.
SUKUK – GUIDING PRINCIPLES

18. Diversify funding source
Create and enhance profile in international market
Pricing benchmark
Secondary liquidity
Sizeable financing.
Ease of clearing and settlement
ADVANTAGE OF SUKUK - ISSUER

19. Diversify 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, market,
duration etc.
ADVANTAGE OF SUKUK -
INVESTOR

20. Factor to be considered
• Identify investors
• Rating – by a credit rating agency
• Underlying assets
• Secondary market considerations
• Applicable laws – SECP rules
• Cost to the issuers
• Drafting of legal documents
• Regularity frame work
ISSUANCE OF SUKUK

21. Originator : Initial Owner
SPV : Special Purpose Vehicle
Investors: Subscribers.
Receiving /Paying Agent : Banks
Credit enhancement provider : Hedges, Guarantees,
Takaful etc.
PARTIES INVOLVED

22. • Merchant Banker
• Credit Rating Agency
• Legal & Tax Counsel
• Auditor
PARTIES INVOLVED

23. Originators:
• Sukuk originators are mostly governments ; also Corporate firms
• High costs of rating, contract documentation, investment banking and
distribution fee.
• Sukuk option is not attractive to most Islamic banks due to high
proportion of short term assets.
KEY PLAYERS IN SUKUK MARKET

24. 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.
DIFFERENCE BETWEEN
CONVENTIONAL BOND AND SUKUK

25. • Sukuk Structuring may based on following modes
• Mudarabah (Trust Financing/Trust Investment)
• Murabahah (Sale and Purchase)
• Musharaka (Partnership, Project Finance Participation)
• Istishna (Purchase by Order or to Manufacture)
• Salam (Upfront Payment Sale)
• Ijarah (Operating Lease Concept)
SUKUK STRUCTURES

26. • Sukuk Structuring may based on following modes
• Mudarabah (Trust Financing/Trust Investment)
• Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ul-maal) to
the other (mudarib) for investment in a commercial enterprise.
• Murabahah (Sale and Purchase)
• An Islamic financing structure, where an intermediary buys a property with free and clear title to
it. The intermediary and prospective buyer then agree upon a sale price (including an agreed
upon profit for the intermediary) that can be made through a series of instalments, or as a lump
sum payment.
SUKUK STRUCTURE

27. Musharaka (Partnership, Project Finance Participation)
A joint enterprise or partnership structure with profit/loss sharing implications that is
used in Islamic finance instead of interest-bearing loans. Musharakah allows each party
involved in a business to share in the profits and risks. Instead of charging interest as a
creditor, the financier will achieve a return in the form of a portion of the actual profits
earned, according to a predetermined ratio. However, unlike a traditional creditor, the
financier will also share in any losses.
Istishna (Purchase by Order or to Manufacture)
Istishna is a Sharia mode of financing widely used by Islamic banks and financial
institutions to finance the construction of buildings, residential towers, villas and related
products, and manufacturing of aircrafts, ships, machines and equipment, etc.
SUKUK STRUCTURE

28. Salam (Upfront Payment Sale)
It is an advance payment commodity sales contract where the delivery of the commodity is deferred.
When a bank signs to purchase a commodity on salam and pays out the price, its receivable is the
commodity due at a specified future date that is stipulated in the contract.
Ijarah (Operating Lease Concept)
In an ijarah contract the bank first owns an asset which it leases to its customer. Or the bank gets a
tangible asset on lease from a third party and subleases it to the customer
SUKUK STRUCTURE

29. In todays lecture we studies the following concepts of Sukuk.
Basics of Sukuk
Sukuk in Secondary Market
Sukuk – Guiding principles
Advantage of Sukuk – Issuer
Advantage of Sukuk – Investor
Parties Involved
Popular Sukuks
SUMMARY OF THE LECTURE

30. WAQAS GULL
waqassultangull@yahoo.com
Linkedin M.WAKKAS GUL
THANK YOU