Islamic Bonds Sukuk

8/17/2019 Islamic Bonds Sukuk

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Topic III

Islamic Sukuk


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Outline

• 1. Overview

• 2. Types of Sukuk

•

3. Structuring Sukuk• 4. Issues and concerns related to

Sukuk structures


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Overview of Sukuk

• A Sukuk, eaning certicate, is an Islaic variant of aconventional !ond. It is structured to coply wit" S"ari#a.In opposition to conventional !ond "olders, sukuk "oldersare entitled to pro$ts as well as to losses.

• Sukuk are asset-backed, trada!le and S"ari%a"copati!le trust certi$cates. T"e priary condition ofissuance of Sukuk is t"e e&istence of assets on t"e!alance s"eet of t"e entity w"ic" wants to raise funds.

• T"e identi$cation of suita!le assets is t"e $rst, andargua!ly ost integral, step in t"e process of issuingSukuk certi$cates.


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Types of Sukuk

• 1. sukuk al'I(ara"

• 2. Sukuk al')us"araka

• 3. Sukuk al')udara!a"

• 4. Sukuk al'Istisna%a


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Sukuk al- Ijarah• Ijarah Sukuk : t"ese are certi$cates of e*ual denoination representing p"ysical

dura!le assets t"at are tied to an i(ara" contract as regulated !y S"aria%a.

• I(ara" sukuk represent t"e owners"ip of particular assets t"at are leased out. T"eassets can !e parcels of land or e*uipents to !e leased suc" as aircrafts ands"ips. T"e "olders of sukuk receive periodic rentals.

• I(ara" sukuk are su!(ect to risks related to t"e a!ility and willingness of t"e lessee

to pay t"e rental installents.

• T"e e&pected net return on i(ara" sukuk may not be perfectly known inadvance, as t"ere ig"t !e soe aintenance and insurance e&penses t"at arenot perfectly predicted in advance.

•

I(ara" sukuk are negotiable and can !e traded in t"e secondary arkets.

• I(ara" sukuk "olders as owners !ear full responsibility for w"at "appens to t"eirassets. T"ey are, t"us, re*uired to aintain t"e assets in suc" a good conditiont"at t"e lessee derives as uc" usufruct fro t"e as possi!le.


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Sukuk al- Ijarah (cont’d)• I(ara" Sukuk structure is t"e ost widely used in issuing

sukuk. It re*uires t"e o!ligor +!orrower to "ave non'"ypot"ecated assets t"e value of w"ic" e*uals to t"e aountof $nancing needed.

• I. t inception

Obligor

!"#

!ukukholders

$. %eclarationof trust andissue ofsukuk

&. Sukuk funding

'. "urchaseprice (. Transfers

title toassets

). *nilatera

l"urchase*ndertaking topurchasethe!"#+sinterestin theasset at,"urchas

e "riceonmaturityor eventofdefault

.lease

$. S- declares a trust in favorof investors and issues Sukuk.&. T"e investors fund t"e S-

for t"e aount of t"e issue+/-urc"ase -rice0.'. S- pays purc"ase price tot"e o!ligor(. T"e o!ligor transfers title oft"e underlying asset to t"e S-. T"e S- leases t"e asset

!ack to t"e o!ligor in e&c"angeof periodic lease rentals). T"e o!ligor issues anilateral -urc"ase ndertakingto purc"ase !ack S-%s interestin t"e asset on aturity at t"e-urc"ase -rice.


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Sukuk al- Ijarah (cont’d)

II. "eriodic "ayments III. t /aturity

Obligor

!"#

!ukukholders

$. "eriodiclease rentals

&. "eriodicpayments

T"e o!ligor pays periodic rentals to t"eS- t"at are used to ake regular

payents to t"e sukuk "olders.

Obligor

!"#

!ukukholders

$. "ays the"urchase "rice

&. "aysprincipal to

redeem thecapital

'. 0edeems

sukuk

(. !ells assetback

At aturity, t"e o!ligor !uys t"e S-%sinterest in t"e asset !ack at t"e -urc"ase

-rice and t"e sukuk are redeeed.


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Sukuk al-Musharakah

• T"e corporation and t"e Special -urpose e"icle +S- enterinto a )us"araka" Arrangeent for a $&ed period.

• T"ey agree on s"aring pro$t according to a speci$ed ratio.

•

T"e corporation ay !e appointed as an agent to develop andanage t"e !usiness !ased on us"araka".

• Any losses will !e !orne !y t"e two us"araka" parties t"ecorporation and t"e S- ' !ased on t"eir respective capitalcontri!utions.

• T"e corporation undertakes to purc"ase )us"araka" s"ares oft"e S- eit"er at t"e end of t"e agreed upon period or on aperiodic !asis +in case of diinis"ing us"araka".


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Sukuk al-Musharakah (cont’d)

I. t inception $. T"e S- +us"arik A issuessukuk in e&c"ange for cas".

&. T"e S- enters into aus"araka" agreeent wit"t"e corporation +us"arik .

'. T"e corporation contri!utes tot"e capital of t"e us"raka"'

!ased !usiness eit"er wit"cas" or wit" assets.

(. T"e S- pays its contri!utiont"e us"araka"'!ased!usiness.

. T"e us"araka" !ased!usiness invests t"eproceeds in s"aria%aperissi!le activities incopliance wit" t"e !usinessplan.

1orporation:

originator

/usharaka

!"#

Sukuk

holders

&. Issueproceeds

$. %eclaration oftrust and issueof sukuk

'. 1apitalcontribution

(. /usharakahshares

). /usharakahshares

. 1apitalcontribution


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Sukuk al-Musharakah (cont’d)

II. "eriodic "ayments

III. t /aturity

1orporation:

/usharik

/usharakah

!"#

!ukuk

holders

"eriodic Incentivefees"eriodic 23 of

prot

"eriodic 4$55-

263 of prot"eriodicprot

The prot generated by themusharakah-based business isdistributed periodically to the !"# andthe corporation as per the agreedprot sharing ratio

The !"# makes priodic protpayments to the sukuk holders.

1orporation:Obligor

!"#

!ukuk holders

$. "ays the"urchase "rice

&."urchasesthe/usharakah

shares

'. "ays principal toredeem capital

(. 0edeemssukuk

The corporation 4as obligor6purchases all of the !"#+smusharakah shares. 7e8t9 the !"#uses the purchase price to redeemthe sukuk. inally9 the !"# is

dissolved.


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Sukuk al-Mudarabah

• T"e S- issues sukuk to investors in e&c"ange for cas"

• T"e issuer enters into a udara!a agreeent wit" t"e originator +acting ast"e #udari!#

• Typical udara!a agreeent T"e udari! invests t"e proceeds inaccordance wit" t"e agreed !usiness plan.

• T"e pro$t generated !y t"e !usiness plan is s"ared !etween t"e issuer andt"e udari! according to a pre'agreed sc"edule

• If t"e issuer#s pro$t s"are e&ceeds t"e aount re*uired for t"e periodicdistri!ution, t"e udari! retains t"e di5erence.

• If t"e issuer#s pro$t s"are falls s"ort of t"e aount re*uired for t"e periodicdistri!ution, t"e udari! suppleents t"e di5erence.

• T"e udari! akes periodic payents to t"e issuer w"ic" are passed on to

t"e sukuk "olders.

• At t"e aturity date, t"e orginator +as o!ligor purc"ases all of t"e issuer#sowners"ip interest in t"e udara!a assets

• 6inally, t"e S- passes t"e proceeds on to t"e sukuk "olders and t"e S- isdissolved.


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Source7I68'Sukuk 9uide!ook"ttp::www.difc.ae:sites:default:

$les:attac"ed:;


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Sukuk al-Istisna’a

1ompany:obligor andproject manager

!"#

!ukuk holders

&. !ukukproceeds

$. !ukukissuance

'. "aymentmade by!"#

(. Transferownership ofassets to the!"#

;nd buyer orlessee

. Transfer of

ownership orusufruct). "eriodicpayments<sale proceeds


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Sukuk al-Istisna’a

• 1. S- issues Sukuk certi$cates to raise funds for t"e pro(ect.

• 2. Sukuk issue proceeds are used to pay t"econtractor:!uilder under t"e istisna% contract to !uild anddeliver t"e future pro(ect.

• 3. Title to assets is transferred to t"e S-

• 4. 8opleted property:pro(ect is leased or sold to t"e end

!uyer. T"e end !uyer pays periodic installents to t"e S-.•

• ;. T"e returns are distri!uted aong t"e Sukuk "olders.


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!*=*= /0=;T

!ukuk is the most

popular modern Islamic

nancial instruments.

Issuer types:

1orporate .

>overnment 0elated

;ntity.

!overeign.


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"0I/0? - >@OA@ !*=*=/0=;T

Total global sukuk issuance volume: %eclined *!%$$B.Cbln in &5$'9 D.B3 E &5$&.

"rimary market of issuances in &5$':

/alaysia as the largest issuances :

• 0educed market share of )D.D3 from

C(.53 in &5$&.

• Issuances were down $.&3 in &5$'.

=! with issuance volume of

*!%$(.Cbln 4(5.3 growth6.

*; issuance volume of *!%C.$bln

4$).D36.

Turkey growth with over )B.'3.

Ay sukuk structure during &5$':

/urabahah accounted for C.C3 of total

volume.

Ijarah accounted for ((.$3 of in the >11.


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>11 !*=*= /0=;T

>11 !ukuk issuances :

=! grew the most in &5$' to *!%$(.Cbln 4(5.36 .

The *; and Aahrain saw issuance volume increase by $).D3 and

$.'3.

The corporate sector accounted for just under half of all

issuances in the >11 in &5$'.

Guasi-sovereign issuance had a share of '$.&3.

Islamic Bonds Sukuk

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