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Friday, 15 April 2011

Sukuk - A great potential in transforming an asset's future cash flow into present cash flow

Sukuk: principles
Differences between Bonds and Sukuk:

Is an evidence of financial obligation from the issuer to the Sukuk certificate owner of underlying asset. It's an assets instrument, the issuer is to pay the value being evidenced by papers certificate called Suk or securities issued by the issuer. This paper certificates can be tradable on the secondary market. Sukuk is evidence of assets not debt, therefore, Sukuk is wider and have higher value than bonds.

Similarities between Bonds and Sukuk :
  • Marketability: Sukuk are monetized real assets that are liquid, easily transferred and traded in the financial markets.
  • Rate ability: Sukuk can be easily rated.
  • Enhance ability: Different Sukuk structures may allow for credit enhancements.
  • Versatility: the variety of Sukuk structures (as many as over 27 possibilities) allow for: structuring across legal and fiscal domains, fixed and variable income options…

Sukuk can be structured alongside different techniques. As said before while a conventional bond is a promise to repay a loan, Sukuk present partial ownership in a debt (Sukuk Murabaha), asset (Sukuk Al Ijarah), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or investment (Sukuk Al Istithmar).

Five typical Sukuk structures:

Sukuk Ijarah:
Transfer of the legal right to enjoy the asset to a funding company in exchange for a rental payment who also issues the Sukuk. In this method of financing, machinery, real estate, aircrafts, ships etc., can be leased by one party as the lessor to another party as the lessee for a specified period against a specific price. The benefits and costs of each party are to be clearly spelled out in the contracts as to avoid the element of Gharar.

Sukuk Mudarabah:
The establishment of a single and special purpose vehicle acting as the mudarib for project construction, who is also the issuer of the Sukuk.

Sukuk Musharaka:
Entry into a JV between the developer company and an issuer (typically, an SPV) to invest in a musharaka arrangement for the purpose of making money.

Sukuk Murabaha:
The word Murabaha is derived from the Arabic word Ribh that means profit. Originally, Murabaha was a contract of sale in which a commodity is sold on profit. The seller is obliged to tell the buyer his cost and the profit he is making. The contract has since been modified for application in the financial sector.

Sukuk Istisna :
Sukuk Istisna is a certificate of equal value issued with the aim of mobilizing the proceeds to be employed for the production of goods or projects. The capital provider who makes the order will become the project owner evidenced by the certificate.

Issuing of Sukuk involves a number of steps:
  • Preparing a detailed feasibility study (stating clear objectives to be achieved from the proposed Shariacompliant business) and setting up of general framework and organisational structure to support the issuance process.
  • Working out an appropriate Sharia structure to achieve the set objectives in compliance with Sharia.
  • Arranging lead manager (s) to underwrite the Sukuk issue.
  • Arranging legal documentation around the agreed Sharia structure (both from the Issuer’s as well as arranger’s perspective).
  • Setting up the SPV to represent the investors (Sukuk holders).
  • Putting the Sukuk into circulation.
Sukuk investors benefit from:
  • Better risk profile.
  • Tradable instrument in maturity and secondary market.
  • Short and long term investment.
  • Competitive prices in line with conventional bond issues.
  • Syariah-compliant income
Sukuk: Types
  • Sukuk Ijarah (rental).
  • Sukuk Intifa (operate and use).
  • Sukuk Musharakah (which can be classified into participation Sukuk (partnership company), Murabaha Sukuk (financing), and investment Sukuk).
  • Salaam Sukuk (future delivery).
  • Istisna Sukuk (manufacturing).
  • Sukuk Mudarabah (financing).
  • Sukuk Muzara'ha (sharecropping).
  • Sukuk Musaqah (Irrigation).
  • Sukuk Mugharasah (agriculture).
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