SUKUK ; THE MALAYSIAN EXPERIENCE Asst Prof Dr Rusni Hassan Islamic Law Department Ahmad Ibrahim...

SUKUK ; THE MALAYSIAN

EXPERIENCE

Asst Prof Dr Rusni Hassan Asst Prof Dr Rusni Hassan

Islamic Law DepartmentIslamic Law Department

Ahmad Ibrahim Kulliyyah of LawsAhmad Ibrahim Kulliyyah of Laws

IIUM IIUM

Presentation Outline

Introduction– What is Sukuk?– Sukuk/Securitisation Process– Features/Criteria of Sukuk

Sukuk : The Malaysian Perspective– Malaysian Sukuk market– Malaysia’s strength in sukuk market

Conclusion

2Asst. Prof. Dr Rusni Hassan ©

Asst. Prof. Dr. Rusni Hassan (c) 3

What is Sukuk ?

• Sukuk is a certificate evidencing ownership of an asset or its usufruct

• The Sukuk structures rely on the creation of a Special Purpose Vehicle (SPV)

• SPV would issue Sukuk certificates which represent either ownership of an asset, entitlement to a debt or to rental incomes or even accumulation of returns from various Sukuk (a hybrid Sukuk)

• The return provided to a Sukuk holders come in the form of profit from a sale, rental or combination of both


How Sukuk is created …..

• Sukuk is created via ‘securitisation’ process i.e. a process of converting something into cash or equivalent in the form of papers that are tradable in the secondary market

• “The process of packaging financial promises and transforming them into a form whereby they can be freely transferred among the multitude of investors”

(Davidson, Andrew, et.al. in Securitization : Structuring and Investment Analysis)


Sukuk : The Islamic Perspective

• Equivalent term is al-tawriq/al-tasnid/al-taskik :

“ transforming a deferred debt, for the period between the establishment of the debt and the maturity period, into papers which can be traded in the secondary market ”

(Nazih Hammad in Majallah Majma’ al-Fiqh)


Securitisation /Sukuk Process

ASSETS(Equity/Debt)

SECURITIZATIONSecuritization of assets/indebtedness into papers

& tradable units• issuance of notes

• debt papers• bond

TRADING ACTIVITIES(secondary market)

evidence of the obligation to pay


The Shariah equivalent contracts …..

Commercial practices in the early & medieval Muslim community – a number of practices

that resembled securitization/sukuk process:

– Suftajah & sakk : letter of credit / negotiable papers such as bill of exchange

– Sukuk al-badai’ : a form of negotiable papers representing food cum wage-payment voucher

– Bay’ al-salam : forward sale– Hiwalah : transfer of debt– Bay’ al-dayn : sale of debt– Bay’ al-inah : sale & buy back arrangement– Tawarruq : tri-partite sale for purpose of

providing liquidity to second party– Mursad : long term financing for purpose of

development of waqf properties (where the lender can liquidate his financial rights by way of transfer)


Criteria of Sukuk

• To be Islamic, the structuring of securities/sukuk must have the following criteria:

(i) Contract creating the indebtedness/financial obligation at the primary level must be Shariah compliant

(ii) After the securitization process – mode of trading of the bonds/sukuk at the secondary level must also be Shariah compliant


How to ensure Shariah compliance ?

• Observe the requirement of Islamic contract – general principles of fiqh muamalat

• Avoid prohibitions in Shariah (riba, gharar, maysir etc)

• Rule: all contracts are deemed permissible except when it contravene the established principles of Shariah:

األصل فى العقود اإلباحة“The original rule in contract is permissibility”


Essential Features of Sukuk

• Transparency & clarity of rights and obligations

• Income from securities must be related to the purpose for which the funding is used, and not simply comprise of interest

• Securities must be backed by real underlying assets – rather than being simply paper derivatives


SUKUK :

THE MALAYSIAN PERSPECTIVE

Asst. Prof. Dr. Rusni Hassan © 12

MALAYSIAN ISLAMIC FINANCIAL SYSTEM

Islamic Capital Market

Islamic Banking

Takaful

Retail

Deposit & Investment

Equity Market

Bond Market Bank Negara•IBA 1983 – Islamic Bank•BAFIA – SPTF•SPTF guidelines 1993•etc

Securities Commission•Securities Commission Act 1993•Capital Market and Services Act 2007•Companies Act1965•Guidelines for IS 2004•etc

Bank NegaraTakaful Act 1984

The Malaysian Sukuk Market

• Malaysia’s track record in sukuk origination and issuances has been notable for its pioneering efforts since 1990 when the first sukuk issued by Shell MDS

• As of the year 2007 - Malaysia is the largest sukuk market in the world

• Achieving 68.9% or USD62 billion of the global outstanding sukuk

• Malaysian corporation issued the largest sukuk offering in the world amounting to USD4.7 billion

Asst. Prof. Dr Rusni Hassan © 13

Notable Malaysian Sukuk Issuance

Issuer Amount Year Transaction Highlights

Shell MDS RM125 million (USD33 m) 1990 World’s first ringgit sukuk issuance by foreign-owned, non-Islamic company

Kumpulan Guthrie Bhd USD 150 million 2001 World’s first global corporate sukuk

Government of Malaysia USD 600 million 2002 World’s first global sovereign sukuk

International Finance Corporation (World Bank)

RM500 million (USD 132 m) 20020054 First ringgit sukuk issuance by suprational agency

Cagamas MBS Bhd RM2.05 billion (USD 540 million) 2006 World’s first residential mortgage-backed securities

PLUS RM9.17 billion (USD 2.86 billion) 2006 Complex and innovative structure – conversion of existing debts of PLUS into Islamic financing

Khazanah Nasional (Rafflesia Capital Limited)

USD 750 million 2006 World’s first exchangeable sukuk

AEON Credit Services RM 400 million (USD 125 million) 2007 First Japanese-owned company issuing sukuk

Nucleus Avenue (Malakoff Corporation)

RM 8 billion (USD 2.5 billion) 2007 First hybrid sukuk in the world

Khazanah Nasional (Cherating Capital)

USD 850 million) 2007 Largest equity-linked sukuk issuance and record highest over-subscription

Maybank Berhad USD 300 million 2007 World’s first international subordinated sukuk

Binariang GSM RM 15.35 billion (USD4.8 billion) 2007 Largest-ever sukuk in the world

Asst. Prof. Dr Rusni Hassan ©14

Size of Sukuk approved by Shariah principle


Malaysia’s strength in sukuk market

• Malaysia provides comprehensive solution for sukuk activities by providing a complete sukuk issuance and trading platform:1. Wide range of Islamic instruments2. Strong legal & regulatory

infrastructure3. Sound Shariah governance framework4. Talent supply (human resources)


Wide range of Islamic instruments

• Malaysia has a broad base of Islamic financial instruments that support sukuk market

• Varieties of sukuk offerings• Good hedging & risk management

instruments•Currency swaps• Islamic forward contracts


Different types of Sukuk provides options to investors ….

Type Features Tradebility

Murabahah

Sakk represents assets purchased & intended for sale. Once sale is made, the sakk represents a debt. In M’sia – this is short term debt security

Sukuk are only tradable under Malaysian rules

Ijarah Sakk must lay title claim to asset. The claim may be direct or beneficial.

Sukuk are universally tradable

Musharakah

Sakk must lay title claim to asset, but this may include participation in business ownership or operations. Frequently, an undertaking is added to make musharakah operation more debt like.

Depending on the underlying asset, these sukuk are tradable. In M’sia, the underlying asset may be a permissible debt form such as a murabahah receivable.

BBA Sakk represents assets purchased and intended for sale. Once the sale is made, the sakk represents a debt. In M’sia – this is a long term debt security

Sukuk are only tradable under Malaysian rules.

Wakalah Sukuk holders appoint the beneficiary of funds as their agent to perform certain business operations.

Depending on the underlying asset, these sukuk are tradable. In M’sia, the underlying asset may be a permissible debt form such as a murabahah receivable.


Active experimentations with the forms of sukuk issuance …..

• Originally most of the Malaysian sukuk are BBA or Murabahah based

• Due to its controversial nature (according to the global standards) - recent development of sukuk issuance shows the decline of BBA sukuk

• In fact, all notable of sukuk approved in the first quarter of 2008 are based on other concept


Malaysia’s fully developed Islamic Financial system

• Malaysia has strong & comprehensive Islamic Financial system (Islamic banking, takaful, Islamic money market & Islamic capital market)

• Different parts of the Islamic financial system– facilitates the issuance & distribution of the sukuk

papers– Creates a strong demand for sukuk by providing a

broad investor base


Strong Legal & Regulatory Infrastructure

• Malaysian sukuk market is supported by facilitative rules & regulations that provide an efficient platform for sukuk market

• the main regulator is Securities Commission (SC) – that regulates both conventional & ICM – legislation governing Islamic Securities is

similar with conventional with distinguished additional instruments/guidelines to ensure shariah compliance



Guidelines to facilitate sukuk …

• Guidelines on the Offering of Private Debt Securities (PDS Guidelines) 2000 – includes guidelines on IPDS

• Guidelines on the Offering of Asset-Backed Debt Securities - includes IABS

• Guidelines on the Minimum Contents Requirements for Trust Deeds

• Guidelines on Contents of Prospectus for Debentures

• Guidelines on Islamic Securities 2004


Regulations for Malaysian Sukuk

• Capital Market and Services Act 2007 (CMSA)

• Securities Commission Act 1993 (SCA)• Securities Industry (Central Depository)

Act 1991 (SICDA)• Companies Act 1965 (CA)• Other rules Guidelines:

• Regulations• Ministerial orders• Orders & directives by SC• Guidelines

Facilitative infrastructure

• Malaysia has in place the financial infrastructure & facilitative rules on sukuk

• Establishment of MIFC as one-stop centre• Facilitative environment & approval process

– Real-time Electronic Transfer of Funds & Securities (RENTAS)

– Fully Automated System for Issuance/Tendering (FAST)– Bond Information and Dissemination System (BIDS)

• Tax incentives– Profits & dividends of islamic instruments received by

non-resident investors are exempted from tax– SPV are not subject to administrative procedures under

Income Tax Act



Shariah Governance Framework

• Through the supervision of SC’s Shariah Advisory Council

• The SAC’s function:•Advise on operation & development•Advise on compliance criteria & guideline•Review proposals & inquiries and give

legal opinions•Promote harmonisation & convergence of

shariah principles•Provide general guideline on matters

related to Islamic investment & transactions


Guidelines in The Sukuk Issuance Procedure

• Financial centre offering sukuk must appoint independent Shariah advisor/consultant

• Shariah advisor/consultant must be approved & registered by SC

• Ensure sukuk is structured according to Shariah principles approved by SAC of SC

• Any new principles not listed in the Guidelines - must consult SC’s SAC

• Ensure harmonisation of Shariah principles & practices


Approved Shariah principles for issuance of Sukuk

PRIMARY•BBA•Murabahah•Istisna’•Bay’ al-Inah•Bay’ al-Salam•Ijarah•Ijarah Thumma al-Bay’•Mudarabah•Musharakah•Qard al-Hasan

SUPPLEMENTARY•Bay’ al-Dayn•Bay’ al-Muzayadah•Dhaman•Kafalah•Haq Tamalluk•Hibah•Hiwalah•Wakalah•Ujrah•Ibra’•Rahn

Asst. Prof. Dr. Rusni Hassan © 29

Information Disclosure of Islamic Securities

• Material information that must be disclosed in the issuance of IS

•Details of utilisation of proceeds•Underlying/ identified assets•Shariah principles used•Name of Shariah advisor•Declaration statement from Shariah

advisor•Description of facility / structure•Prices i.e. sale & purchase price•Details on primary & secondary bonds

Conclusion

• While much has been achieved, much remain to be done

• To overcome challenges & to identify the way forward


The way forward …..

• Creation of better secondary trading platform

• Continuous supply of Islamic papers• Greater diversity in type and maturity

of sukuks in the market • Pool of Shariah experts that fully

understand the mechanics of sukuk• Convergence of shariah principles &

harmonisation of standards


THANK YOU

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SUKUK ; THE MALAYSIAN EXPERIENCE Asst Prof Dr Rusni Hassan Islamic Law Department Ahmad Ibrahim...

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