Structuring and investing in Sukuk

Top 20 FREQUENT WORDS

islamic 106 sukuk 86 bonds 56 securities 29 overview 28 certificates 25 government 24 financial 21 investor 20 based 19 finance 19 ijarah 19 issuing 19 assets 18 development 18 salam 18 issued 17 contract 16 investing 16 shari 16

DOCUMENT KEY POINTS

• what this means in practice will hopefully become apparent to readers of this book but it is worth stressing here that the essential concepts are a c transparency and clarity of rights and obligations a c that income from securities must be related to the purpose for which the funding is used and not simply comprise interest and a c that securities should be backed by real underlying assets rather than being simply paper derivatives
• islamic bonds your guide to issuing structuring and investing in sukuk overview of the sukuk market professor rodney wilson institute for middle eastern and islamic studies university of durham united kingdom modern sukuk sometimes referred to as islamic bonds are better described as islamic investment certificates

• the legitimacy of sukuk although there is no compulsion to comply with the rulings of the fiqh academy of the organization of the islamic conference their rulings carry considerable weight with most islamic financial institutions and their shari a committees and advisers

• subject to proper legal documentation the fiqh academy under decision number of overview of the sukuk market ruled a c that any collection of assets can be represented in a written note or bond and a c that this bond or note can be sold at a market price provided that the composition of the group of assets represented by the security consists of a majority of physical assets and financial rights with only a minority being cash and interpersonal debts

• the buyers of the certificates are entitled to the commodities for which the original purchaser contracted at the end of the one or three months or what ever period was stipulated in the contract
• originally such contracts were used for the purchase of grains such as wheat barley and rice but salam contracts could also be used for commodities such as oil iron ore or copper or indeed even electricity supplies that can be measured in kilowatts

• in particular the duty to repair and maintain the property being leased remains with the lessor as owner as if the lessee was liable this would introduce an additional element of uncertainty with respect to the costs to the lessee as maintenance payments could be regarded as an extra rental element
• expenses related to the operation of a leased asset are however the responsibility of the lessee such as fuel in the case of a leased vehicle or aircraft or fertiliser and seeds in the case of leased land

• as an ijarah contract is for a predetermined period and as the rent provides a regular monthly quarterly or annual income it is clearly well suited to be covered by the issue of securities that have many of the characteristics of bonds
• it is important to note that ijarah certificates or securities represent a proportionate ownership claim over a leased asset and therefore those who hold the securities have ownership responsibilities that only terminate when the securities mature or if they are sold to another party who then assumes the responsibilities

• permission to transfer the debt contract from the financier to a supplier of goods and services must be sought from the original debtor the public authority or private company commissioning the project
• potential for mudaraba and musharaka bonds there is also scope for introducing mudaraba and musharaka bonds although arguably these should be designated as notes as the returns will be variable rather than fixed as is the case with salam ijarah and istisna a certificates

• conventional banks in egypt notably bank misr have also issued mudaraba certificates as one of their islamic products but there has been some concern about possible co mingling of funds and the guarantees of the bond principal which violate the shari a principle of no reward without risk or effort
• the first attempt to overcome the liquidity problem facing islamic banks was undertaken by bank negara malaysia the central bank in july after the first islamic bank in malaysia began operations as it was realised that bank islam malaysia could not hold government securities or treasury bills that paid interest

• the investor bank in the mii scheme does not know in advance what the actual profit will be as it depends on the gross profit of the investee bank
• following the decision in malaysia to allow conventional banks to accept islamic deposits and offer islamic financing facilities bank negara recognised that these developments would be helped if an inter bank money market could be established

• the establishment of the islamic money market in bahrain will it is hoped result in the emergence of markets in longer term islamic securities notably bonds with bahrain playing a similar role in the gulf and west asia to that of kuala lumpur in south east asia

• the joint lead managers for the issue were hsbc bank and the qatar international islamic bank with the co managers being the abu dhabi islamic bank gulf international bank kuwait finance house commerce international merchant bankers of malaysia the islamic development bank and the qatar islamic bank

• the bonds are linked to sama s repo facility with the banks allowed to raise liquidity up to the value of per cent of their gross bond holdings at the nominal value of the issues with repos running from overnight to days
• falling interest rates since have decreased bond yields although the gap has widened between bill yields that reflect short term interest rate movements and bond yields that respond to longer term expectations that influence bond prices

• the sukuk which was structured on an ijarah basis was approved by yasaar limited the provider of shari a advisory services and managed by volaw trust and corporate services a jersey based law firm with extensive contacts in the gulf
• rival citigroup s islamic finance subsidiary bahrain based citi islamic investment bank has already managed the sukuk offered by the jeddah based islamic development bank in that raised us million through a structure predominately based on ijarah assets but also including murabaha and istisna a contracts

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\sukuk islamic

KeyWords

sukuk islam asset finance issu certifi financi contract bankable bond ijarah leas structur profit holder rate developed purchase risk investor

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Number of Pages

15

Published Date

2004-08-27 12:21:12

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