Sukuk is an Arabic word which means legal instrument, cheque or title normally used to mention fiscal certifications that are backed by Islamic shariha. Sukur is tantamount to bonds but wholly equal. As the affair of fact that the fixed income instruments which generate fixed rate of return are non allowed in Shariha, sukuk securities are structured in such a manner that adheres to Shariha rules and investing aims. Sukuk securities do non pay involvement on any security issued. The word sukuk is plural of Saak therefore usage of word “ Sukuks ” is wrong. It is as though you add “ s ” to do plural of kids which is plural of child ahead.If any one wants to mention a individual bond ( Islamic bond ) , Sakk is to be used or other manner out as Sukuk in plural of Islamic bonds.
In authoritative period of Islamic system, sukuk is used to mention any papers or contract of right/obligation backed by Shariha. It is found in the literature that the sukuk were used in historical Islamic epoch for the really intent of interchanging goods and carry oning trade related activities.
The construct of Sukuk is fundamentally prevarications in the monetisation of plus which is called securitization.Securitization is the procedure of issue sukuk against the assets held.The power of sukuk is that it generates the hereafter hard currency flows today. Sukuk is issued in different signifiers runing plus as Sukuk Al Ijara, as ownership in debt in the signifier of Murabaha, undertaking bassis as Sukuk Al Istisna, spouse as Musharaka or Istithmar as invesmtnet Sukuk.
Sukuk and Conventional Bonds
3.3.1 Similarities between sukuk and conventional bonds
There are some characteristics which are similar to the conventional bonds when you compare both. Similar like conventional bonds Muslim bonds issued today guarantee the return of rule at the adulthood regardless of the entitity ; s fiscal place.
This is accomplished with the aid of doing promise by the issuer to buy back the assets against which sukuk was issued to investors at the monetary value upon which they were purchased at the beginning no issue what of all time the market monetary value be at that clip. This is merely acceptable if the assets are redemptions on the conditions of net value of assets or be it the monetary value as agreed upon.
Sukuk are versatile like conventional bonds. Sukuk as defined by the AAOIFI offer assortment of characteristics like 1 ) To run into diverse fiscal demands by run intoing legal and revenue enhancement spheres. 2 ) can be offered in fixed and variable return options. 3 ) offerings in different characteristics and capabilities.4 ) compatible with international bond administration. AAOIFI has issued guidelines for at least 14 different sukuk strucutrs.
3.3.2 Differences between sukuk and conventional bonds
There are chiefly three differential points between sukuk and conventional bonds. In conventional bond construction, issuer is under duty to pay involvement payments and principal at the maturity.Sukuk represents ownership in the plus against which sukuk are issued as implicit in plus. Whereas bonds do non stand for any direct ownership on the assets. Thus the holder of sukuk receives the portion in the gross and returns upon the realisation of the assets. Sukuk holders can non reassign the ownership unless there is implicit in plus for the same because it sometimes go on that debt is aligned with the assets therefore the debt can non be traded unless sold at par. Bonds normally are issued against the full assets of the company to guarantee refund of chief where as sukuks are issued against specific and identified assets.
Therefore company which simply owns debt can non publish sukuk against the assets purchased on debt.
Sukuks were ab initio considered as plus based instead than they are plus backed.Conventional bonds create relationship between the investor and client as loaner and borrower relationship where as in Sukuk issue, the relationship depends upon the construction of issue i.e Ijaraha or Musharaka.
Benefits and Features
Sukuk is tradable shariha compliant security in the capital market. It ranges from medium to long term investing with return on variable and fixed footing. Sukuk issues are rated and assessed by the independent international bureaus and they provide guidelines for the same backd by shariha bookmans. High net deserving population of Muslim and involvement of big investors make it liquid in the secondary market excessively. Its setllment is easy and efficient. Investors earn by capital grasp of the sukuk and net addition from assets excessively.
Issues On Sukuk- Shariha Resolution by AAOIFI
AAOIFI has passed figure of declarations on Sukuk based structured finance to guarantee shariha conformity mechanisms. Working group met in Bahrain in Jan 2007, attended by assorted Islamic Shariha experts and Financial instititions caputs. The working group presented their study to Board and board reviewed the documents thenceforth formulated model for Sukuk issue and guidelines to supervise the same.
Sukuk must be hold by the sukuk holder whilst the rights and duty of ownership be they touchable, constructive ownership or be they in existent ownership. Manager of publishing sukuk will verify the ownership of assets in the book.
Sukuk that are to be traded must non be backed by the receivables or debt receivable except that company is selling its assets with the stable fiscal place of company in which debts were included accidentally.
It is non allowable that the fund director of any sukuk may offer loan to sukuk holders as mudarib, sharik or as agent for the purpose purportly for investing while the existent net incomes of company that were expected falls.
However it is allowed to set up any modesty history to make full the spread of net incomes on status that the same is mentioned in the prospectus. It is pointout that it is obnoxious if fund director distributes the expected net incomes in front of existent realisation of income on the footing of Mudarha to obtain funding for the sukuk holders.
It is non allowable with mention to Shariha for the fund director to buy back the assets from sukuk holders for the value predominating in market whereas sukuk are cease to exists.However it is allowed to buy the same on the footing of net value of assets. The mention point of monetary value must be determined at the clip of purchase. It is as known that the director is guaranteer of the capital maintaining in position the just market monetary value as sharik. The net value of assets is lesser in Sukuk Al Musharka and Mudharaba/Wakaha than that of in Sukuk Al Ijaraha as that represents the actualy net value of assets backed by sukuk.
In Sukuk Al Ijaraha, leaseholder is allowed to buy the leased assets every bit shortly as sukuk cease to exists and the assets can be purchased at just market value on evidences that lesse is non spouse or works as mudarib.
SS board must non be confined to publish merely fatwas instead they must supervise every dealing critically. They must reexamine the contractual footings and conditions made with investors and with those directors make. All the paperss be reviewed against guidelines provided by the shariha.SS board is to guarantee that returns received against assets are done in proper manner and is done with shariha compliant methods of investing. They must rede fund director to avoid investings in debt related instruments and to take part in existent partnership based musharaka minutess therefore achieve the aims of Islamic economic system.
Issue of Sukuk, frequently involves consideration of aim of conceiver and assets that are to be available to back up the issue of structured finance.In instance if the assets are non identifiable so the Mudarbha based strucuture is more feasible than the Sukuk Al Ijaraha. In Islamic economic system, Mudaraha based funding is defined as equity based partnership in which there is one mudarib who really works on behalf of investor who is called Rabul Mal ( supplier of capital ) and other provides services i.e Mudarib.
The really same characterstics of Mudarba can be be attributed in Mudarbha based sukuks in which investors in Sukuk would stand for value of units in the capital fund of mudarbaha in which the footing of ownership is undivided mudarbha capital.
The ratio of net income distribution is pre agreed between the rabul mal and Rasulmal. The accumulated net income is booked which is so shared between the investor ‘s with regard to their investing in the Mudarbha sukuk. Recetn Mudarbha Sukuk issues in the market include Puple Island, DIB, DP Wolrd ‘s and IIG Funding limited $ 200mn sukuk construction.
Key Features of the Underlying Structure
The basic demands of Murabaha sukuk are as under:
Set out below is a sum-up of the basic demands that should be considered when utilizing mudaraba as the implicit in construction for the issue of sukuk:
The mudarib is to execute direction accomplishments therefore dispatch its duty as per Mudaraba understanding.
Mudaraba understanding would be on restricted footing in which mudarib defines the concern in which to put it.As per shariha demands of Sukuk for the Mudarabha construction, atleast 33 % of entire capital be invested in touchable assets or plus backed all the times.
The net income return can non be fixed in front instead net income ratio be defined merely.
No 1 can repair the sum of net income to be given to any specific spouse.
If the pool suffered any losingss, Issuer would borne it.Although its duty is confined to its investing procced ; investor excessively is non apt more than what he has invested in.
The hazard for Mudarba endeavor can be mitigated with the aid of set abouting in favour of SPV by conceiver for the minute if returns are deficient collectible to investor by SPV so conceiver is asked to buy the assets on just market value by SPV.
Figure Structure of Sukuk al-Mudaraba
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Overview of Structure
Particular purpose vehicle ; an indepednet entity is established to publish sukuk on the footing of undivided ownership in the assets backed by it. Which represents right of investors on the assets and acquire the return against their investing in future on Mudarabha minutess.
SPV collects the financess from investors which maps as legal guardian of investors.
Originator and Issuer enters into Master Mudarbaha contract in which SPV maps as Rabul Maal and Origininator maps as Mudarib.
SPV contributes principle sum for the Mudarbha construction.
The conceiver which maps as Mudarib contributes its direction expertness to Mudarbaha entity. In which Mudarib, takes duty of the administration to guarantee investing aims are met backed by shariha rules.
The ultimate intent is twofold ; functioning investors through Shariha compliant mechanism and generating net income for them
Net income is shared on the footing of pre agreed net income ratio between the rabul mal and the mudarib.
Mudarib in add-on to its net income portion, he may be entitiled if pre determined ; to have public presentation fee provided the fund has generated return transcending the benchmark. It is given one time the issue has completed its tenture and is liquidated.
At the clip of adulthood Mudarbha endeavor is to be dissolved and Trustee would name conceiver to buy the full interest from the legal guardian on just market value such that the returns be passed on to investors.Thereby investors get the return on the footing of pro rata portion of the liquidated capital and net income generated by the entitity. First, SPV receives the return on the capital so SPVshares the net income with the conceiver with the ratios as pre determined.Then the SPV pays returns to investors thereby delivering the certificiate
While structuring Sukuk Al Salam, it is of premier importance to cognize what assets the orginitor has to offer in support of issue of Salam Sukuk.
Sukuk Al Salam can non be affected on a specific trade good or merchandise of specific farm because there is possiblility of loss or harm of peculiar merchandise therefore the bringing of same is unsure. It is compulsory for purchaser and marketer to hold on quality characteristics of capable affair so that there is no room of gharar in least sum. It is besides compulsory to hold on bringing clip and locale specifically mentioned in Contract.
To impact salam, measuring of quality and quantitity is prerequisite if they can non be measured the salam can non be validated. Payment of monetary value in salam is affair of great importance, it is mandatory that purchaser pays the monetary value in full at the clip of bringing or whilst sale is affected. In instance purchaser fails to pay the monetary value in ful it will be equal to sale of liability against debt, which is specifically, prohibited in Shariha. Salam can non be affected for those trade goods which must be supplied on spot.E.g While interchanging barley with wheat it is mandatory that the bringing of both be instaneous. It is indispensable that nature of trade good be defined at the clip of sale so that measure becomes clear to the parties. If the merchandise is quantifiable in footings of its weight so its weight must be quantified through measuring.
It is possible with Sukuk Al Salam that the regular payments are made throughout the funding period. Conditionss of Salam if are met so the sukuk backed by the Sukuk Al Salam can be issued.
Figure Structure of Sukuk al-Salam
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Overview of Structure:
Particular purpose Vehicile issues sukuk which is delivered by conceiver which represents the undivided ownership in Salam footing assets.This represent thw right of investors against issuer to pay periodic returns and disintegration sum at the adulthood.
Investors pay yhe returns to Issuer that is SPV.SPV maps as legal guardian in this full procedure of the investors. SPV collects the chief sum.
At phase four, sale and purchase understanding is made with the Trustee. The footings are deferred bringing, immediate payment for the assets, conceiver sells, legal guardian to buy the same.
Trustee purchase the salam assets from conceiver and pay the chief sum.
Originator purchase the salam assets in proportion prior to day of the month of period distribution sum so conceiver delivers the assets to trusee.
The sum will be calculated against some benchmark for variable rate or it can be fixed rate depends upon the common consent for the same and denomination of sukuk. SPV pays to investors the distribution sum against the returns reiceived from conceiver
Upon the adulthood or defaulting place, conceiver is obliged to present all the salam assets to trustee for forth selling to originator at applicable exercising monetary value. The undelivered assets are sold at the same. The exercising monetary value comprises of sum staying with accruded unpaid distribution sum which is owed to the investors.
Key Features of the Underlying Structure
Mentioned below is the effect of AAOIFI established for the issue of Salam Sukuk:
There must exists no uncertaninity between the issues and conceiver every bit related to currency and manner of payment for the capital.
Payment in full for the salam capital is made shortly the contract is made.
The salam assets may include merely those which are fungible goods, weighed, measured, counted, clearly identifiable, single articles and goods.
Asset can non be any which is priced on subjective judgement or whose value changes with regard to clip to clip.
Asset must be clearly identifibal maintaining in position the specification. Quality, measure, bringing clip and monetary value must be known of the salam assets to the conceiver and trusee. So that it removes any ambiguity and uncertainity component.
Trustee until and unless holds the assets he can non sell them if he does so it would be treated as sale of debt which is restricted by the shariha.
By and large, Sukuk Al Salam certifications are non tradebale due to they represent debt as the assets are delivered on some hereafter date.If some proportion of assets is delivered so the same proportion of sukuk Al Salam certification can be traded
Liability associatied with salam plus remains with the conceiver until the assets have been delivered to trusee.
Allah has permitted trade and has prohibited gaming and involvement rate.Islam has allowed leasing of assets against payment of rent to original proprietor of the same.
In shariha there are certain regulations of contracts hence for Ijaraha same regulations excessively apply for cogency of contract in the eyes of Shariha.Shariha has made it mandatory to adhere to following elements with mention to shariha opinions that include Usurfruct, Asset, Services, Right to utilize and liability of the plus, period of rental, rent, independent contracts.
Sukuk Al Ijaraha is most normally used Sukuk construction. Ijaraha literary agencies to give something on rent. It loosely covers the facets of rental in which plus is transferred to lessee against the rental charges paid for the usage of asset.In Ijaraha sukuk, return for the investors is generated from the public presentation of plus under consideration.
Figure Structure of Sukuk al-Ijara
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Overview of Structure
The issuer of Ijarah sukuk ; sukuk represents undivided ownership in the plus which is under consideration. Holder of sukuk represents the right against SPV for the payment of PDA ( period distribution amlunt ) and DA ( Distribution sum ) .
Investors pay the returns to SPV in exchange of sukuk subcribtion.SPV declares the trust upon the returns because it functions as legal guardian of the investors.
Originator and legal guardian enters into sale and purchase arranement in which conceiver agrees to sell, legal guardian to buy from conceiver.
Trustee pay the returns to originator against the response of assets equal to chief sum.
Trustee now keeping the right on assets therefore leases back to conceiver under Ijaraha contract for specific period of clip as mentioned in sukuk.
Origninator maps as leaseholder therefore makes rental payments to Trustee for the usage of assets after some intervals. The sum paid as rent include PDA which is thereby calculated with some mention point like KIBOR.
Thereby Issuer ( SPV ) passes on PDA to investors against the usage of assets it has received from the conceiver.
Upon the adulthood or defaulting place, conceiver is obliged to present all the assets to trustee for forth selling to originator at applicable exercising monetary value. The undelivered assets are sold at the same. The exercising monetary value comprises of sum staying to be paid which is accrued and unpaid distribution sum owed to the investors.
Trustee will the sell to originator under bargain back agreement at the exercising price.Which will be equal to chief sum, accrued unpaid PDA to investors. SPV pays the returns to investors including disscolution sum utilizing the exercising price.During the class of ijaraha, Trustee and conceiver enters in to Service degree bureau agremenet, in which legal guardian appoints the conceiver as its agent who will be responsible for the maintanenace of plus, insurance & A ; payment of revenue enhancements. The cost of bureau understanding will be adjusted in the leases which is called auxiliary renta which will be adjusted against the servcing costs.
Key Features of the Underlying Structure
Below mentioned is the sum-up of demands for the issue of Ijara sukuk issued by AAOFI in consideration of Shariha experts:
The rental sum must be agreed by all parties to Ijarah and the period for ijarah contract be mentioned in Ijarah footings.
The affair under consideration must be holding some public-service corporation in to. And the usufruct must be transferred.
The rubric of ownership remains with the legal guardian whereas merely the right of usage is transferred to origininator.All the liabilities which are concernd with the ownership of the plus must besides rests with trusee as an proprietor ; in simple words the plus remains on the hazard of Trustee for full period of ijaraha Trustee is responsible for any losingss occurred to assets which are beyond the control of origninator ( leaseholder ) .
The intent of rental must be mentioned in the ijaraha hence Originator can non utilize the plus other than what is mentioned in the ijaraha contract specifically.If the intent is non mentioned in the Ijaraha contract so the conceiver can utilize it for any class of concern which is shariha compliant and non against the Shariha boundries. Asset must be clearly identifiable from the batch of same points.
In Ijaraha client is required to pay the rent after the plus has been handed over to him in useable status.
Ijaraha will be terminated on history the leaseholder has breached the contract, impaired the assets or has behaved negligently. Rental sum of leased plus will non change from clip to clip during the rental period.Amount of rental must be specified and must hold consensus of both parties on it.Itcan non be tied unto some regular benchmark or index like KSE-100 or KIBOR 6Mo. Yes, merely periodic reappraisal is allowable which genuinely reflect the market rate of the rent which finally is affected by the reclamation of the contract.He can notunilatelry increase the sum of rent if he does at his will, contract becomes nothingness.
Any harm to the plus or damage related to plus has to be borne by the lease giver until the lease period expires except the grounds which proves carelessness on the portion of leaseholder. In instance of entire loss, legal guardian can replace the plus because sometimes conceiver goes for Takaful coverage to their plus therefore can have returns to replace the same.If the conceiver is found negligence on its portion sing the usage of plus so he is apt to counterbalance the same to trustee.
In the event of plus has suffered partial harm to it so the Ijaraha will go on to exists after the plus has been repaired and has been handed over to originator.