Global Sukuk rebound seen

JEDDAH - The global issuance of Islamic bonds, or Sukuk, fell 35 percent to $5.3 billion in the second quarter compared with a year earlier but a rebound may be within sight, data from Zawya Sukuk Monitor revealed.

Year-on-year declines in the primary Sukuk market were offset by a 164 percent surge in volume compared with the first quarter for Sukuk, indicating renewed demand for Shariah-compliant debt instruments.

Investors are once again putting faith in the Sukuk market despite the ongoing financial crisis, which continues to weigh on banks and finance companies.

 

"The global market for sukuk issuance should recover by the second half of 2009," said Afaq Khan, Standard Chartered Bank's chief executive officer for Islamic banking. "We expect close to $10 billion in primary Sukuk issuance this year," he said.

Malaysia and Indonesia topped Zawya's list of issuers, followed by Bahrain and Saudi Arabia, the largest Middle East economy. A total of 42 bonds went to market in the second quarter, out of which 30 deals where sold by governments, the data shows.

In the Middle East and North Africa close to $1 billion worth of Sukuk were sold during the second quarter, excluding SR7 billion ($1.9 billion) this week by Saudi Electricity Company, or SEC. SEC's Sukuk will close on July 6. The government of Ras Al Khaimah is also seeking to raise $500 million this year through a sukuk that's expected to hit the market soon, Zawya Dow Jones reported last week.

The quarter saw the first US dollar international issuance this year by Islamic finance heavyweight Indonesia, followed by a similar sovereign bond by the government of Bahrain.

Several countries including France, Hong Kong, Kenya and Nigeria have recently, or are in the process of changing their laws to facilitate the introduction of Islamic financial products in a sign of the continued appeal for Shariah-compliant financial instruments.

Standard & Poor's Financial Services expects the $700 billion global Islamic finance industry will weather the financial crisis and resume its growth driven by high demand for Shariah-compliant products, which are considered less risky than convention debt.

"The long-term pipeline for Sukuk issuance is healthy, and the market is attracting interest from an increasing number of issuers in both Muslim and non-Muslim countries," said Mohamed Damak, credit analyst at Standard & Poor's Ratings Services in a recent report. 

Executives at HSBC's Shariah unit corroborated the data from Zawya Sukuk Monitor.

They said the recovery of the global Sukuk market and a lack of Shariah-compliant assets around the world should encourage domestic firms to tap the Islamic financing market,

The Sukuk, or Islamic bond, market is showing signs of recovery, with Indonesia and Bahrain successfully selling international Sukuk this year after almost a year-long hiatus due to the global recession, said Mahmoud Abushamma, head of HSBC Amanah Syariah.

Amid the downturn, the total volume of global sukuk issues halved to less than $15 billion in 2008 from $30 billion the year prior, HSBC said in a statement.

The market virtually ground to a halt in March 2008, it said.

Gahet Ascobat, HSBC Amanah's senior vice president of structured finance, said that many investors seeking Shariah-compliant investments have been unsure about where to put their money, due to a complete lack of Sukuk issues for more than a year.

"But once a Sukuk issue finally came along, investors grabbed it with both hands," Gahet said.

Indonesia's success was followed this month by Bahrain, which just issued a $750 million global Sukuk, beating Indonesia's offering.

The Bahrain issue also elicited strong demand, with an order book of $4 billion.

"The huge oversubscription for both the Indonesia and Bahrain sukuk clearly signals that the sukuk market is on the rebound," Mahmoud said. 

"It also reflects the need for Sukuk instruments among Muslim investors."

Strong demand, combined with a lack of supply, said Mahmoud, should encourage Indonesian firms to "seriously consider the Sukuk market as a viable funding source to diversify their investor base."

© The Saudi Gazette 2009

Fixed Income Sukuk: Prospects for Corporate Issuance

By David Testa, Gatehouse Capital plc

Islamic fi nance is one of the most exciting areas of the capital markets at the beginning of the 21st century, and the Sukuk is very much a product of the new millennium.

The petrodollars boosting the Gulf countries together with the vibrant economies of Southeast Asia have combined to bring Islamic fi nance to the forefront of the international fi nancial community. As a result, the Islamic capital markets are growing at an exponential rate.

In both the leading Islamic centers of the Gulf and Southeast Asia, issuers are seeking to tap the capital markets in a Shariah compliant manner. The rest of the world is catching on as well — from the UK to Japan and back across the Pacifi c Ocean to the US, issuers are

looking to take advantage of investors' increasing demand for Shariah compliant investment products. Oft-quoted fi gures from the World Bank cite some 300 Islamic fi nancial

institutions and funds with more than US$250 billion of assets, growing at approximately 10% to 15% per annum, with a further US$200 billion of assets located in Islamic "windows" or divisions of conventional banks.

Growth of Sukuk market

Sukuk issues are a 21st century product, although they draw on centuries of Islamic fi nancial practice. While the 1990s saw a handful of structured-fi nance corporate deals tailor-made for a carefully delineated audience, the fi rst sovereign issue came in September 2001, with the US$100 million Sukuk issue by the Bahrain Monetary Authority although this was essentially for liquidity management purposes.

Other sovereigns soon followed suit, fi rst with the US$600 million Malaysia Global Sukuk Ijarah in June 2002 — the fi rst truly global offering — while Qatar maintained the momentum in September 2003 with its debut US$700 million Sukuk Ijarah issue.

The Sukuk market has continued to gain pace since those early years and has, more importantly, widened its range of issuers.

In the GCC, 2005 saw 11 issues raising US$2.3 billion, while 2006 saw 17 issues raising almost fi ve times the previous year's volume, with just over US$11.5 billion being raised. Last year was another record year, with global issuance to the end of September reaching almost US$39 billion, from approximately 150 issues.

It is clear from these levels that the Islamic fi nance market in general, and Sukuk issues in particular, are nevertheless still a "niche within a niche" when compared with the international capital markets as a whole. The industry is in the early stages of its life cycle and, as at the beginning of 2007, new ground is being broken with every issue, whether in terms of structure, volume or country of issuer.

In the Gulf Cooperation Council (or GCC, comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), the growth of Islamic fi nance has several major drivers. First and foremost is retailOne leading player in Islamic fi nance has described the business as "R2B" (retail to bank), and there is little doubt that it is the retail

customer (whether the eponymous "Muslim in the street" or the increasing legions of "high net worth individuals" and "ultra-high net worth individuals") who is seeking to invest and deposit money for utilization in accordance with Shariah.

As is well known, the amounts available from this sector have grown steadily in this new century, with the repatriation of funds to the Gulf region spurred on by events such as 9/11 and the fall of Saddam Hussein, the continued high oil and gas prices and the continual development of new Shariah compliant products.

The banking network in the whole of the GCC has been impacted by this new liquidity and is reacting to it in a variety of ways. Existing banks are establishing Islamic retail, commercial and investment banking platforms. For example, in Qatar, Al Safa Islamic Bank has appeared via Commercial Bank of Qatar and QNB Al Islami via Qatar National Bank, while in the UAE MashreqBank has started Shariah compliant operations via Al Badr Al Islami.

Other banks have gone a step further and undertaken conversion to be fully Shariah-compliant, such as Kuwait Real Estate Bank, Dubai Bank and Saudi Investment Bank.

Completely new banks are also being established at a heady pace. Notable recent examples have included Al Rayan Bank in Qatar, Bank Al Bilad in Saudi Arabia, as well as Al Salam Bank and United International Bank in Bahrain.

The latter captured the headlines in the fi nancial pages in the GCC due to the initial authorized capital of US$3 billion, as well as the public involvement of the family of Prince Al Waleed bin Talal in the establishment of the bank.

Investors in the GCC are spreading their wings outside the immediate region as well. Signifi cant investment is being made by several leading players in Southeast Asia, with banks such as Kuwait Finance House and Al Rajhi Bank establishing operations in Malaysia, including signifi cant retail branch networks.

'Double-dip' opportunities

Activity has also been seen in Western Europe, in particular in the UK where fully Shariah compliant institutions such as the Islamic Bank of Britain and the European Islamic investment Bank have been established, with further institutions continuing to start up. Last year saw the authorization of the Bank of London and the Middle East, with

at least two further institutions seeking the necessary authorizations from the Financial Services Authority to start their Islamic banking businesses.

 

From an issuer's perspective, Malaysian corporations have for several years benefi ted from government-led initiatives designed to stimulate Shariah compliant transactions. Companies in the GCC are taking greater strides in the Sukuk market to broaden their appeal to fixed income investors, while at the same time ensuring the issuer's Shariah acceptability" to its shareholders.

Sukuk issuance is also spreading beyond the GCC and Southeast Asia and it is worth examining why issuers outside these two main Islamic hubs should be interested in Shariah compliant fi nancing. The growing numbers of potential issuers investigating the advantages of Islamic issuance are primarily focusing on diversifying sources of funding.

Potential issuers are in particular attracted by the "double-dip" opportunities afforded by a fi nancing product capable of appealing to "conventional" fi xed-income investors, as well as enticing the participation of the vast wall of liquidity latent in the Islamic fi nancial community.

The ball started to roll in August 2004, when the German state of Saxony-Anhalt issued its €100 million (US$148.3 million) Sukuk al-Ijarah. The US broke its duck in 2006, when the US$165 million Sukuk al-Musharakah was closed for East Cameron Partners, while the Sultanate of Brunei also saw its fi rst issue with the US$150 million Sukuk al-Ijarah from the government (issued concurrently with two local-currency issues).

As at the time of writing, debut Sukuk issues for Japan and China had also been announced (although not yet closed), namely a benchmark issue for JBIC and a US$250 million power project respectively.

Perhaps most notably, the UK government announced in April 2007 its intention to study the feasibility of a debut Sukuk issue, with a further discussion paper to be issued by end-2007.

Development and innovation of structures A notable feature of the Islamic Sukuk market to date has not only been the degree of innovation and creativity involved, but also the

pace at which those skills have been, and are increasingly, deployed. Each new issue brings a new structure or a signifi cant refi nement of a previously utilized mechanism.

This is, of course, to be expected given the youth of the modern-day Islamic fi nance market, but there is also little doubt that the overall trend is one of positive and constructive development, with structures tending to be simplifi ed as the underlying Shariah principles become better understood in the context of today's fi nancial environment.

 

The simpler the structures, the more capable they become of wider application and, therefore, of greater appeal to issuers across the globe.

Perhaps one of the most noteworthy recent developments in the GCC Sukuk market was the issue of convertible or equity-linked Sukuk, fi rst by PCFC in January 2006 with its US$3.5 billion Sukuk al-Musharakahissue due 2008, followed in December 2006 by the US$3.52 billion

Sukuk al-Ijarah due 2009 by the Nakheel Group (this latter issue is a novel pre-IPO Sukuk, as well as being the largest Sukuk issue to Both issues combined structural innovation with a successful appeal to investors for support, both within and outside the GCC, raising

signifi cant volumes of fi nancing (even by international standards) and successfully tapping into strong demand for equity-linked products.

For the Nakheel issue, for example, Sukuk holders were given the right to subscribe for any future equity offered as part of an initial (or qualifying) public offering (QPO) by any member of the Nakheel group, such rights subsisting during the lifetime of the Sukuk issue. In addition, "look-back" rights were also given to Sukuk holders, in this case subsisting for a period of 12 months after the maturity date of the Sukuk issue.

In the event of there not being a QPO during the relevant period, the return to Sukuk holders will be enhanced by an additional 2% per annum. Whilet the ground-breaking nature of both of these equitylinked issues cannot be questioned, there is equally no doubt that

both transactions benefi ted by the issuers being seen as integral parts of "Dubai Inc", namely corporate entities closely linked to the ruling parties in the Emirate of Dubai.

Another equity-linked product was the US$460 million issue by Aabar Petroleum, which was also notable for utilizing the Mudarabah structure for the fi rst time in the international capital markets. In March 2007, another exchangeable Sukuk was announced, this time by Aldar Properties in Abu Dhabi, for US$2.53 billion.

The US$225 million Sukuk issue by Sharjah Islamic Bank in October 2006 is also worth mentioning. While being on an altogether smaller scale than the "Dubai Inc" transactions described above, the issue was a capital markets debut for another Islamic structure, the ownership of assets based on the concept of Sharikat al-Melk.

Under this structure, certain rights and interests in specifi ed assets on the balance sheet of Sharjah Islamic Bank were sold to the special purpose vehicle (SPV) issuer of the Sukuk holders so that such assets became effectively "co-owned", with each of Sharjah Islamic Bank and the SPV owning indivisible interests in the Sukuk assets.

The last 12 months have also seen issues featuring put options, or including both put and call options. In Saudi Arabia, Saudi Basic Industries Corporation or SABIC issued a 20-year Sukuk Istithmar ("istithmar" meaning "investment") encapsulating put options every

fi ve years. The structure was geared to ensure that investors are almost certain to put the issue back to SABIC after the fi rst fi ve years, as subsequent redemptions will be at a discount to par.

The Investment Dar's US$150 million Sukuk Musharakah issue due in 2011 illustrated above included both a put and a call option at the end of the third year. This allows Sukuk holders to focus on a shorter maturity fi nancing for an issuer without an investment grade rating from an internationally recognized rating agency, while affording The Investment Dar the opportunity to retire the transaction after only three years should such a rating materialize and allow it to refi nance at a lower cost. Innovation continued to be seen in 2007, despite the moreApril saw the closing of the US$650 million Sukuk al-Manfaa issue

by the Sad Group in Saudi Arabia via its Golden Belt vehicle (utilizing receivables under a master lease and sublease structure), whilst National Industries Group in Kuwait has put in place a ground-breaking US$1.5 billion Sukuk program based on a Mudarabah structure. The

fi rst draw-down under the program closed in July 2007 in an initial issue amount of US$475 million.

Looking ahead

Islamic fi nance and the Sukuk market in particular are on the fast track. The geographical spread of the sector is increasing in pace, while with each successive issue it seems that new structures are being utilized and new investors being attracted to the sector. There

is also no doubt that the label of "Sukuk" in itself generates a higher profi le for any transaction.

Two distinct, but related, trends in the corporate arena will also maintain the momentum in the Sukuk market. First, the turbulence experienced in almost every GCC stock index in 2006 has led many corporations to consider the "Islamicization" of their debt to ensure their equity is able to be treated as "Shariah-acceptable", allowing Islamic equity funds (and individual investors) to invest in their shares. For example, Saudi Aramco and SABIC have each made a public announcement to this effect.

The second trend is the counterpart to this in the private sector, where many companies are family-run and managed, with the owners being Muslim. It is no surprise to understand that many such owners are now considering Islamic fi nance — and the Sukuk market — to address their fi nancing requirements. Both trends will be further reinforced by the steadily increasing variety of Shariah compliant instruments.

For corporations outside the GCC, the main attraction is the burgeoning universe of Islamic investors. The growth in the number of Islamic banks, as well as Islamic "windows" of conventional banks, has been described above and is leading to ever-greater interest by non-GCC corporates looking to tap into this expanding and increasingly liquid investor base.

At the same time, the universe of institutional investors is also growing, with the proliferation of Islamic insurance — or Takaful — companies and the increasing appetite and sophistication of GCC pension funds.

Private banking clients are also showing an increasing interest in Islamic fi xed-income products to bring a degree of compliance to their investment portfolios.

There is no doubt, however, that Islamic funds continue to be dominated by the real- estate and private equity sectors and there is an increasing need for funds focusing on the Sukuk sector to be established.

 

One sector where the market is still awaiting its fi rst benchmark issue, however, is in the realm of securitization. Two small transactions in Saudi Arabia have led the way for others to follow, and the Saudi market is one of the focal points for further securitization transactions during 2007, along with the UAE, where Tamweel made its debut US$220 million 25-year securitization issue in July 2007.

However, there are one or two myths and misinterpretations prevalentin the current market that need to be dispelled in order for a greater degree of clarity and understanding to prevail and to assist market development.

As for all Islamic fi nance products, the structure of a Sukuk issue must be asset-based. This has led to a certain amount of confusion of terminology, as many commentators have leapt to the assumption that every Sukuk issue is a form of asset securitization. This is a long way from reality.

To date, only a very small handful of issues can be seen as resembling the US and European securitization model (which has, as its core features, the concepts of true sale, bankruptcy remoteness, overcollateralization etc.).

Each and every other Sukuk issue has been asset-based, but in fact very few have even been capable of being described as asset-secured. The vast majority of issues revolve around an asset, or a pool of assets, but are usually structured to ensure investors have recourse to the full faith and credit of the issuer, rather than restricting their rights to the asset or assets incorporated in the structure of the issue.

This is not to say that asset-backed issues or true securitizations are not possible in a Sukuk format. Far from it — Islamic fi nance is a prime candidate for such structures (and this is discussed in greater detail below). However, in particular in the GCC, the market is still some way from seeing such issues.

Development is in many cases hampered by the lack of the necessary legislative framework in the relevant jurisdiction, although it is widely expected that further mortgage-backed securitization deals will be seen from the region in the near future.

One particularly interesting sector is the housing market in Saudi Arabia, where a long-term shortfall in the housing supply is being addressed by an expansion in residential real estate development and a corresponding need for an increase in residential mortgages.

The Saudi government has responded by announcing amendments to domestic legislation to further the home loan sector and, in parallel, to initiate the steps needed to develop securitization laws. It is foreseeable that in the relatively short-term, fi nancial institutions in Saudi Arabia will need to resort to the securitization market to meet local demands.

Elsewhere in the GCC, the massive expansion in the real-estate sector in the UAE, and Dubai in particular, has led to a different kind of pressure. Huge real-estate requirements are regularly estimated to exceed US$500 billion and credit-enhanced structures are required

to ensure the requisite support from the international fi nancial community, which to date has not fi nanced the UAE real-estate sector in the volumes required for future projects.

Again, the securitization market is one possible tool that could be used to enable the required developments. Islamic mortgage providers are leading the market and it is in all likelihood the Islamic securitization market which will provide the solution.

Issuers will, however, also have to be aware of the challenges that are facing the Islamic sector. At the top of the list of concerns is the fragmentation of Shariah interpretation across the GCC and within each jurisdiction as well. At the heart of the matter is the fact that each Islamic institution has its own Shariah supervisory board that is required to review all activities of that institution, including investments.

However, there is more than one mitigating factor at play. The lack of standardization is at the top of the agenda of almost every multinational supervisory organization operating in the Islamic fi nance sector, led by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board.

Harmonization is also one of the key considerations for the leading indices and regulatory bodies in the region, in particular the Central Bank of Bahrain. An increasingly important factor is the fact that a very small number of leading Islamic scholars are attached to an increasing number of Shariah supervisory boards.

De facto, this is leading to a greater uniformity of interpretation across the GCC (perhaps with the exception of Saudi Arabia, where it is generally acknowledged that a more conservative" school of Islamic interpretation applies).

Another prime consideration is not to leave the Islamic investors behind. The project fi nance sector has already seen the phenomenon of carefully structured Islamic tranches that nevertheless fail to attract any support from Islamic banks (e.g. the only Islamic players in the Dolphin Energy tranche illustrated above were Islamic "windows" of conventional banks).

In an era of double-digit returns for investors in the private equity and real-estate sectors, it cannot be ignored that investors in the GCC — whether Islamic or conventional — are able to pick and choose their investments, with return at the top of their list of deciding factors.

This ties in to one of the other main current criticisms of the Islamic Sukuk market, namely that there is very limited secondary market activity, which means it is diffi cult for issuers to get a clear view on how its risk is seen — and priced — in the market. The Sukuk investor base is characterized as a take and hold market and this is due mainly to the fact that the level of primary issuance has yet to achieve critical mass.

Investors are reluctant to trade the assets they have simply because there is no established pipeline of issuance. Equally, however, there can be little doubt this will change in the future, given the expected growth in issuance volumes in the short to medium term.

And last but far from least, a prospective issuer must investigate the tax consequences likely to arise from a proposed issue. This is essential, given the asset-based nature of Islamic financing and the changes of ownership entailed in the various modes of Shariah compliant fundraising .

The GCC is hardly known for its excessive taxation (although zakat and withholding tax must always be taken into account) and, in addition, the principles of Shariah are — to a greater or lesser extent — recognized by or incorporated in the local jurisprudence.

In Southeast Asia, Malaysia has led the way in introducing specific legislation designed to ensure that Shariah compliant issues are treated on an equal footing from a taxation perspective with conventional debt issues (indeed, the authorities have quite clearly enacted legislation designed to stimulate the sector, with the result that more than 80% ofMalaysian capital market issues are Shariah compliant).

Outside the GCC and Southeast Asia, tax and regulatory hurdles will have to be jumped in each jurisdiction in order to ensure issuers obtain the optimal tax treatment for a particular issue. It is crucial for a transaction be treated as a debt-raising and not a transfer of ownership in the relevant asset(s), which could otherwise trigger capital gains (or losses) or other property-related taxes and duties.

In certain jurisdictions, such as the US, is possible to seek relief from the relevant authorities on a case-by-case basis. In terms of the most advanced legislative framework, it is the UK that has most explicitly embraced Shariah compliant structures in order to facilitate fi nancial services to be offered to the signifi cant Muslim community in that country.

The then Chancellor of the Exchequer went on record in 2006 in announcing the Labour Government's "long-term ambition to make Britain the gateway to Islamic fi nance and trade". This ambition was stimulated by the recognition that "Islam is Britain's second-largest faith, and Muslims are involved in every walk of British life", evidenced by the healthy growth rate in the Islamic mortgage market in the UK and the fl exible and supportive approach adopted by the Financial Services Authority in its licensing of the Islamic Bank of Britain and the European Islamic Investment Bank.

More recently, the UK government has enacted legislation to facilitate not only Islamic retail products, but also commercial and wholesale banking products with its development of the concept of "alternative fi nancing arrangements". For example, the Finance Act 2005 permitted Ijarah structures to be extended to commercial property, while the Finance Act 2006 widened the ambit even further to Wakalah and "diminishing Musharakah".

Legislation has also been passed (in the Finance Act 2007) allowing Sukuk issues to be treated for the tax purposes of both issuers and investors in the same manner as conventional bond issues.

Sukuk akan Dikenakan Pajak

Republika: Sabtu, 10 Maret 2007

JAKARTA -- Pemerintah berniat mengenakan pungutan pajak atas setiap transaksi obligasi syariah (sukuk) yang dilakukan di Indonesia. Aturan mengenai pungutan pajak itu akan dimasukkan dalam paket UU Perpajakan yang amandemennya diharapkan selesai satu atau dua bulan mendatang.

Rencana pengenaan pajak sukuk itu kemarin (9/3) diungkap oleh Wakil Presiden Jusuf Kalla ketika menerima rombongan Kadin Malaysia di kantornya di Jakarta. Dalam pertemuan sekitar satu jam itu, Wapres menyempatkan diri berdialog dengan para pengusaha dari negeri jiran itu. ''Sukuk akan diselesaikan dengan UU Pajak yang baru,'' ungkapnya ketika menjawab pertanyaan peserta.

Wapres mengakui pengenaan pajak atas sukuk itu lantaran obligasi yang berlandaskan syariah Islam itu dianggap sebagai bagian dari transaksi. Secara pisik seakan-akan terjadi transaksi yang di Indonesia selalu dikenakan pajak. ''Itu hanya formulated transaction,'' ujarnya.

Sesuai dengan hukum perpajakan di Indonesia, setiap transaksi dikenakan pajak. Ia memperkirakan hasil amandemen UU Pajak itu akan diselesaikan pembahasannya di DPR satu atau dua bulan ke depan. Dengan adanya kejelasan status hukum sukuk itu diharapkannya investasi portofolio di tanah air bisa berkembang lebih pesat lagi. ''Kita kan kemarin belum ada transaksi sukuk, tapi (Ditjen) pajak bilang itu harus bayar pajak,'' tegasnya.

Sementara bagi investor, selama ini sukuk dipandang tidak layak dikenakan pajak lantaran dianggap sebagai pay on paper transaction. Wapres memandang pendapat seperti itu bisa saja diutarakan. Namun untuk kepastian hukum, ia berpendapat transaksi sukuk ini memang sebaiknya diatur dalam UU Perpajakan. Kebijakan ini, lanjutnya, juga dimaksudkan sebagai inovasi baru dalam sistem keuangan. ''Karena kalau kita tidak ikuti, kita akan ketinggalan banyak,'' jelasnya.

Dalam pertemuan itu, Wapres juga mengungkapkan penuntasan amandemen UU Penanaman Modal. Ia memperkirakan amandemen UU itu selesai bersamaan dengan paket UU Perpajakan, yaitu satu atau dua bulan lagi. Amandemen UU itu dilakukan untuk membuat iklim investasi di Indonesia semakin kompetitif dibanding dengan negara lain. ''Kalau Indonesia berbeda jauh dengan Malaysia, tentu menyulitkan,'' katanya.

Sukuk dan Obligasi Konvensional Sama-sama Diminati

Republika: Rabu, 05 Desember 2007

Menjadi negara berpenduduk mayoritas Muslim tak menjamin sektor ekonomi yang tumbuh hanya sektor keuangan syariah. Fakta ini terlihat di berbagai negara Timur Tengah yang berpenduduk mayoritas Muslim.

Berdasarkan data hasil pengkajian firma hukum internasional, Trowers & Hamlins, di wilayah tersebut, nilai obligasi konvensional hingga Juni lalu tercatat meningkat dua kali lipat menjadi 11,1 miliar dolar AS dibandingkan tahun lalu 5,1 miliar dolar AS. Sedangkan, dalam tiga tahun terakhir, penerbitan obligasi konvensional di Timur Tengah telah meningkat signifikan dari hanya 964 juta dolar AS. Fakta tersebut menunjukkan tidak hanya sukuk yang tumbuh pesat di Timur Tengah, tapi juga obligasi konvensional.

Menurut Adrian Creed dari Trowers & Hamlins sebagaimana dilansir situs berita www.ameinfo.com, Selasa, (12/4), salah satu pemicu meningkatnya pertumbuhan obligasi konvensional di Timur Tengah karena dilatarbelakangi pertumbuhan sukuk di wilayah tersebut. Hingga akhir Juni lalu, sukuk yang diterbitkan di Timur Tengah meningkat dua kali lipat lebih menjadi 14,5 miliar dolar AS dari penerbitan periode serupa tahun lalu, 5,1 miliar dolar AS.

Hingga akhir tahun lalu, penggunaan sukuk sebagai instrumen penjaring dana investasi bagi berbagai perusahaan di Timur Tengah mengkomposisi sekitar 57 persen penerbitan obligasi. Meski demikian, hingga Juni lalu, sukuk masih mendominasi penerbitan pasar obligasi di Timur Tengah.

Adrian menyebutkan, cukup banyaknya obligasi konvensional yang diterbitkan di Timur Tengah menunjukkan bahwa investor Timur Tengah cukup rasional dalam menginvestasikan dana mereka. Bagi mereka, salah satu hal penting yang menjadi pertimbangan dalam menempatkan dana adalah tingkat kompetitif dari return yang dimiliki suatu instrumen investasi. Sehingga mendorong perusahaan di Timur Tengah tidak hanya menggunakan sukuk untuk menjaring dana investasi, tapi juga obligasi konvensional. `'Perusahaan Teluk tidak hanya berkomitmen pada sukuk. Mereka akan menggunakan obligasi konvensional atau melakukan right issue bila dipandang sesuai dan menguntungkan. Contohnya, penjaringan dana investasi baru-baru ini oleh DP World dengan menerbitkan sukuk senilai 1,5 miliar dolar AS bertenor 10 tahun dan obligasi konvensional 1,75 miliar dolar AS bertenor 30 tahun,'' katanya.

Mengenai sukuk, Adrian memprediksi, sukuk di Timur Tengah akan terus berkembang pesat dalam beberapa tahun mendatang. Hal tersebut dipicu oleh tingginya harga minyak dunia. Hal tersebut karena tingginya harga minyak mendorong wilah Timur Tengah mengalami kelebihan dana investasi. Kondisi ini akan terjadi sepanjang minyak masih menjadi bahan bakar utama berbagai sektor transportasi dan industri di dunia. `'Pendorong utama pertumbuhan sukuk tahun ini adalah karena lonjakan harga minyak yang mendorong terjadinya overlikuiditas. Banyak dari dana itu yang diinvestasikan di instrumen investasi syariah,'' katanya.

Adrian menyebutkan, di Timur Tengah, minat untuk menjaring dana investasi melalui sukuk tetap cukup tinggi. Hal tersebut ditunjukkan penerbitan sukuk oleh beberapa perusahaan di Timur Tengah. Salah satunya adalah penerbitan sukuk senilai 875 juta dolar AS oleh Dana Gas dari Uni Emirat Arab (UEA), Oktober lalu. Selain itu, perusahaan properti RAK asal UEA dan Abyaar asal Kuwait juga telah berencana untuk menerbitkan sukuk awal tahun depan dengan nilai masing-masing dua miliar dolar AS dan 700 juta dolar AS.

Sebelumnya, berdasarkan hasil pengkajian Middle East Economic Digest (MEED), nilai transaksi keuangan syariah pada 2012 diproyeksi mencapai 30 miliar dolar AS. Jumlah tersebut mengkomposisi sekitar 30 persen dari total transaksi keuangan di wilayah Timur Tengah saat ini.

ISLAMIC BONDS (SUKUK): ITS INTRODUCTION AND APPLICATION

Recent innovations in Islamic finance have changed the dynamics of the Islamic finance industry. Specially in the area of bonds and securities the use of Sukuk or Islamic securities have become increasingly popular in the last few years, both as a means of raising government finance through sovereign issues, and as a way of companies obtaining funding through the offer of corporate sukuk. Beginning modestly in 2000 with total three sukuk worth $336 millions the total number sukuk by the end of 2006 has reached to 77 with over US$ 27 billion funds under management. By the end of 2007 the total figure is expected to exceed US$35 billion.

Sukuk has developed as 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.

What are sukuk? how are they structured? and how they are different from the conventional bond and the conventional securitization processes is discussed in this paper in some detail.

What is Sukuk

Sukuk in general may be understood as a shariah compliant ‘Bond’. In its simplest form sukuk represents ownership of an asset or its usufruct. The claim embodied in sukuk is not simply a claim to cash flow but an ownership claim. This also differentiates sukuk from conventional bonds as the latter proceed over interest bearing securities, whereas sukuk are basically investment certificates consisting of ownership claims in a pool of assets.

Sukuk (plural of word sak) were extensively used by Muslims in the Middle Ages as papers representing financial obligations originating from trade and other commercial activities. However, the present structure of sukuk are different from the sukuk originally used and are akin to the conventional concept of securitization, a process in which ownership of the underlying assets is transferred to a large number of investors through certificates representing proportionate value of the relevant assets.

Sukuk and Bond

• A bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal, whereas, the sukuk holders claims 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.
• 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 is held until maturity or sold at par.

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines 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”.

Table: Sukuk Issuance (US$ million)

Year	2000	2001	2002	2003	2004	2005	2006
Corporate Sukuk	336.3	530	179.9	4537.06	5731.19	11358.89	24526.32
Sovereign Sukuk	0	250	800	1180	1479.35	706.5	2271.6
Total Sukuk issuance	336.3	780	979.9	5717.06	7210.54	12065.39	26797.92
Percentage Growth		131.94	25.63	483.43	26.12	67.33	122.11

Source: IFIS.

Above table shows growth in sukuk issuance from year 2000 till now. In 2000 total size of the sukuk was only US$ 336 million with no sovereign sukuk in the market. We can see from the above table that the size of total sukuk issued in 2001 was only US$ 336 million and in a short span of just six year the total size of sukuk has crossed US$ 27 billion. The growth achieved in 2003 has been most impressive at 483%. In 2006 also total growth achieved by sukuk is 122%.

Benefits and Features

• Tradable shariah-compliant capital market product providing medium to long-term fixed or variable rates of return. Assessed and rated by international rating agencies, which investors use as a guideline to assess risk/return parameters of a sukuk issue.
• 
  
• Regular periodic income streams during the investment period with easy and efficient settlement and a possibility of capital appreciation of the sukuk.
• Liquid instruments, tradable in secondary market.

Uses of Sukuk Funds

The most common uses of sukuk can be named as project specific, asset-specific, and balance sheet specific.

a. Project-specific Sukuk

Under this category money is raised through sukuk for specific project. For example, Qatar Global sukuk issued by the Government of Qatar in 2003 to mobilize resources for the construction of Hamad Medical City (HMC) in Doha. In this case 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. The annual floating rate of return was agreed at LIBOR plus 0.45 per cent.

b. Assets-specific Sukuk

Under this arrangement, the resources are mobilise by selling the beneficiary right of the assets to the investors. For example, the Government of Malaysia raised US$ 600 million through Ijara sukuk Trust Certificates (TCs) in 2002. Under this arrangement, the beneficiary right of the land parcels has 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.

Another example of Asset-specific sukuk is US$250 million five-year Ijara sukuk issued to fund the extension of the airport in Bahrain. In this case the underlying asset was the airport land sold to an SPV.

c. Balance Sheet-specific Sukuk

An example of the balance sheet specific use of sukuk funds is the Islamic Development Bank (IDB) sukuk issued in August 2003. The IDB mobilised these funds to finance various projects 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.

Types of Sukuk

Sukuk can be of many types depending upon the type of Islamic modes of financing and trades used in its structuring. However, the most important and common among those are ijarah, shirkah, salam and istisna. Among the fourteen eligible sukuks identified by the AAOIFI, following are more common:

1. Mudaraba Sukuk

These are investment sukuk that represent ownership of units of equal value in the Mudaraba equity and are registered in the names of holders on the basis of undivided ownership of shares in the Mudaraba equity and its returns according to the percentage of ownership of share. The owners of such sukuk are the rabbul-mal. (AAOIFI). Mudarba sukuk are used for enhancing public participation in big investment projects.

Salient Features:

Following are the salient features of mudarba sukuk:

I. Mudarba sukuk (MS) represent common ownership and entitle their holders share in the specific projects against which the MS has been issued.

II. The MS contract is based on the official notice of the issue of the prospectus which must provide all information required by shariah for the Qirad contract such as the nature of capital, the ratio for profit distribution and other conditions related to the issue, which must be compatible with shariah.

III. The MS holder is given the right to transfer the ownership by selling the deeds in the securities market at his discretion. The sale of MS must follow the rules listed below:

a. If the mudarba capital, before the operations of the project, is still in the form of money, the trading of MS would be like exchange of money for money. In that case the rules of bay al-sarf would be applied.

b. If muqarda capital is in the form of debt then it must satisfy the principles of debt trading in Islam.

c. If capital is in the form of combination of cash, receivables, goods, real assets and benefits, trade must be based on market price evolved by mutual consent.

IV. The Manager/SPV who receives the fund collected from the subscribers to MS can also invest his own fund. He will get profit for his capital contribution in addition to his share in the profit as mudarib.

V. Neither prospectus nor MS should contain a guarantee, from the issuer or the manager for the fund, for the capital or a fixed profit, or a profit based on any percentage of the capital. Accordingly;

a. The prospectus or the MS issued pursuant to it, may not stipulate payment of a specific amount to the MS holder,

b. The profit is to be divided, as determined by applying rules of shariah; that is, an amount access of the capital, and not the revenue or the yield; and

c. Profit and Loss account of the project must be published and disseminated to MS holders.

VI. It is permissible to create reserves for contingencies, such as loss of capital, by deducting from the profit.

VII. The prospectus can also contain a promise made by a third party, totally un-related to the parties to the contract, in terms of legal entity or financial status, to donate a specific sum, without any counter benefit, to meet losses in the give project, provided such commitment is independent of the mudarba contract.

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.

Steps involved in the structure:

q Mudarib enters into an agreement with project owner for construction/commissioning of project.

q SPV issues sukuk to raise funds.

q Mudarib collects regular profit payments and final capital proceeds from project activity for onward distribution to investors.

q Upon completion, Mudarib hands over the finished project to the owner.

Mudaraba Sukuk in practice

Shamil Bank of Bahrain 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.

2. Musharaka Sukuk

These are investment sukuk that represent ownership of Musharaka equity. It does not differ from the Mudaraba sukuk except in the organization of the relationship between the party issuing such sukuk and holders of these sukuk, whereby the party issuing sukuk forms a committee from the holders of the sukuk who can be referred to in investment decisions (AAOIFI).

Musharaka Sukuk are used for mobilizing the funds for establishing a new project or developing an existing one or financing a business activity on the basis 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.

“These are certificates of equal value issued with the aim of using the mobilized funds for establishing a new project, developing an existing project or financing a business activity on the basis of any partnership contracts so that the certificate holders become the owners of the project or assets of the activity as per their respective shares, with the Musharaka certificates being managed on the basis of participation or Mudaraba or an investment agency.” (AAOIFI Standard 17, 3/6)

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.

q Corporate (as Musharik) contributes land or other physical assets to the Musharaka

q a & b. SPV (as Musharik) contributes cash i.e. the issue Proceeds received from the investors to the Musharaka

q 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.

q In return, the agent (i.e. the Corporate) will get a fixed agency fee plus a variable incentive fee payable.

q The profits are distributed to the sukuk holders.

q 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.

Musharaka Sukuk in Practice

US$550 million sukuk transaction for Emirates 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 rentals, generated from the Musharaka venture will be used to pay the periodic distribution on the trust certificates.

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 in 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.

Kuwait Finance House (KFH), Liquidity Management Center (LMC) and Al Muthanna Investment Company (MIC), the mandated lead arrangers launched US$ 125 million Lagoon City Musharaka sukuk to support the Lagoon City residential and commercial real estate development as part of Kheiran Pearl City project.

3. Ijara Sukuk

These are sukuk that represent ownership of equal shares in a rented real estate or the usufruct of the real estate. These sukuk give their owners the right to own the real estate, receive the rent and dispose of their sukuk in a manner that does not affect the right of the lessee, i.e. they are tradable. The holders of such sukuk bear all cost of maintenance of and damage to the real estate. (AAOIFI)

Ijarah sukuk are the securities representing ownership of well defined existing and known assets tied up to a lease contract, rental of which is the return payable to sukuk holders. Payment of ijarah rentals can be unrelated to the period of taking usufruct by the lessee. It can be made before beginning of the lease period, during the period or after the period as the parties may mutually decide. This flexibility can be used to evolve different forms of contract and sukuk that may serve different purposes of issuers and the holders.

Features of Ijarah sukuk

1. It is necessary for an ijarah contract that the assets being leased and the amount of rent both are clearly known to the parties at the time of the contract and if both of these are known, ijarah can be contracted on an asset or a building that is yet to be constructed, as long as it is fully described in the contract provided that the lessor should normally be able to acquire, construct or buy the asset being leased by the time set for its delivery to the lessee (AAOIFI, 2003: 140-157). The lessor can sell the leased asset provided it does not hinder the lessee to take benefit from the asset. The new owner would be entitled to receive the rentals.

2. Rental in ijarah must be stipulated in clear terms for the firs term of lease, and for future renewable terms, it could be constant, increasing or decreasing by benchmarking or relating it to any well-known variable.

3. As per shariah rules, expenses related to the corpus or basic characteristics of the assets are the responsibility of the owner, while maintenance expenses related to its operation are to be borne by the lessee.

4. As regards procedure for issuance of ijarah sukuk, an SPV is created to purchase the asset(s) that issues sukuk to the investor, enabling it to make payment for purchasing the asset. The asset is then leased to third party for its use. The lessee makes periodic rental payments t the SPV that in turn distributes the same to the sukuk holders.

5. Ijara sukuk are completely negotiable and can be traded in the secondary markets.

6. Ijara sukuk 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.

Steps involved in the structure

q The obligator sells certain assets to the SPV at an agreed pre-determined purchase price.

q The SPV raises financing by issuing sukuk certificates in an amount equal to the purchase price.

q This is passed on to the obligator (as seller).

q 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.

q SPV receives periodic rentals from the obligator;

q These are distributed among the investors i.e. the sukuk holders.

q 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.

Ijara Sukuk in Practice

In December 2000, Kumpulan Guthrie Berhad (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.

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 Ijara sukuk. 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.

4. Murabaha Sukuk

In this case 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 shariah, 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 are 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.

Steps involved in the structure:

q A master agreement is signed between the SPV and the borrower

q SPV issues sukuk to the investors and receive sukuk proceeds.

q SPV buys commodity on spot basis from the commodity supplier.

q SPV sells the commodity to the borrower at the spot price plus a profit margin, payable on installments over an agreed period of time

q The borrower sells the commodity to the Commodity buyer on spot basis.

q The investors receive the final sale price and profits.

Murabaha Sukuk 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.

5. Salam Sukuk

Salam sukuk 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 realized 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 shariah requirements that apply to Salam also apply to Salam sukuk, 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 Shariah conditions relating to Salam, as well as for creation of Salam sukuk, 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.

Steps involved in the transaction:

q 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.

q Salam certificates are issued to investors and SPV receives Sukuk proceeds.

q The Salam proceeds are passed onto the obligator who sells commodity on forward basis

q SPV receives the commodities from the obligator

q Obligator, on behalf of Sukuk holders, sells the commodities for a profit.

q Sukuk holders receive the commodity sale proceeds.

Salam Sukuk in Practice

Aluminum has been designated as the underlying asset of the Bahrain Government al Salam contract, where by it promises to sell aluminum to the buyer at a specified future date in return of a full price payment in advance. 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 aluminum 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.

6. Istisna Sukuk

Istisna sukuk 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.

Shariah prohibits the sale of these debt certificates to a third party at any price other than their face value. Clearly such certificates cannot be traded in the secondary market.

Steps involved in the structure:

q SPV issues Sukuk certificates to raise funds for the project.

q Sukuk issue proceeds are used to pay the contractor/builder to build and deliver the future project.

q Title to assets is transferred to the SPV

q Property/project is leased or sold to the end buyer. The end buyer pays monthly installments to the SPV.

q The returns are distributed among the Sukuk holders.

Istisna Sukuk in Practice

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.

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.

7. 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.

Steps involved in the structure:

q Islamic finance originator transfers tangible assets as well as Murabaha deals to the SPV.

q SPV issues certificates of participation to the Sukuk holders and receive funds. The funds are used by the Islamic finance originator.

q Islamic finance originator purchase these assets from the SPV over an agreed period of time.

q Investors receive fixed payment of return on the assets.

Hybrid Sukuk in practice

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.

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.

Different sukuk structures have been emerging over the years but most of the sukuk issuance to date have been ijara sukuk, 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 Ijara sukuk, 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.