Sukuk

Concept & Applications

 IslamicPresen
Capital Market

Shariah Compliant Stocks

Islamic
Islamic Funds
Capital Market

Sukuk
 Islamic Capital Market products and services
versus conventional market
Conventional Islamic
Money Market Instruments Commodity Murabaha

Fixed income bonds Sukuk

Equities Shariah compatible equities

Unit Trust/Mutual Funds Same as conventional

Real Estate through Investment Real Estate with Shariah
Funds (un-restricted leverage ) acceptable leverage

Stock broking Islamically acceptable broking

 Shari’a Perspective
Presen
• Securities representing a loan or debt (such as bonds) cannot be sold or
purchased.

• If they are sold at a price higher or lower than their face value, it is considered
as “Riba”

• If they are purchased at their face value (Bai al Dayn), this involves “Gharar”
and hence prohibited.

• However, securities may be assigned to a third party at par value.The

difference between sale and assignment (HAWALA) is that transfer in HAWALA
is with recourse while transfer in Sales in without recourse.
 Sukuk versus Conventional Bonds
Sukuk Conventional Bonds
1. Income is generated 1. Income is derived
from assets from debt
instrument.
2. Return is expected 2. Return is interest and
pre-determined.
3. Negotiability is
restricted to specific 3. Negotiable financial
types of Sukuk paper
 Sukuk versus Conventional Bonds
Sukuk Conventional Bonds
4. Sukuk issue is a seller of 4. Bond issuer is a borrower
assets

5. Sukuk holder is an owner 5. Bond holder is a lender

of assets

6. Seller-Buyer relationship 6. Lender-borrower

relationship
7. Business risk-return 7. 7. Issuer guarantees the
relationship payment of face value and
periodic interest
 Sukuk versus Conventional Bonds
Sukuk Conventional Bonds
8. Major risk lays with 8. Major risk is with
underlying assets issuer – credit risk

9. Return is expected 9. Interest payment is an

from the underlying obligation
assets

10. Return of investor’s 10. Issuer is obligated to

capital cannot be return investor’s
guaranteed capital (face value)
 ABC
Ltd.
(Corporate)

ABC Ltd. wishes to purchase a new asset and plan to raise finance
through issuance of Islamic Sukuk.
Supplier

Supplier of the Asset is

identified and negotiations
is finalized by ABC Ltd.

ABC
Ltd.
 Supplier
Issuer
SPV
(LLC
100%
owned
ABC Ltd.)
ABC
Ltd.

SPV is created by ABC Ltd. as a limited liability Company.

 Supplier
Issuer
Payment made to
Supplier SPV Sukuks
Title is (LLC
transferred to 100%
SPV Investors
owned
ABC Ltd.)
ABC
Ltd.
Proceeds

SPV issues certificates and receives proceeds which are used

to purchase asset from the supplier
 SPV holds Asset as
Trustee and leases the
plant to ABC Ltd. as per
rules of Ijarah SPV holds
Plant/ Asset
as Trustee
Issuer
SPV Investor

ABC
SPV leases
Ltd. Plant to ABC
Ltd. on
Ijarah
ABC Ltd. Issuer Investors
(Lessee) SPV

Periodic Lease Rentals Semi-annual coupon

distribution amounts

ABC Ltd. (Lessee) pays periodic rentals to SPV for tenors &
amounts matching the coupon & tenor of the Sukuks
 Exercises the purchase
undertaking. Asset transferred
to ABC Ltd.
ABC Ltd. Issuer Investors
(Lessee) SPV

Pays the exercise Redeems the Trust

price at dissolution Certificates at
dissolution
•ABC Ltd (Lessee) give the SPV an irrevocable purchase undertaking to
purchase the Asset at maturity.
•Exercise Price = Initial Purchase Price of Asset + service costs.
•Asset is transferred back on maturity, upon payment of the Exercise Price
to the SPV / Sukuk Holders.