Sukuks are served as a function of tradable securities for mobilizing resources from markets, and also to inject liquidity into the government or enterprise to provide the investors a stable source of income for them. The sukuk will carry all the financial risk, and it will be distinguished from conventional bonds and asset securitization in a few ways.
Most conventional investors, either in government or corporate, they usually hope to capitalize on favourable developments in interest rates. When the fixed-rate of bond prices increase, and the variable market indices fall, the capital gains will be accumulated. The sukuk structures' validity in the Shariah, usually lies where they do not take advantage of the movements of interest rates.
Sukuk and real sector activities -funding of trade or production of tangible assets- are directly linked between one and another. Therefore, this will not create any short-term speculative funds movement and also potential financial crises.
Sukuk investors have an essential rights for information about their investment usage, nature of the underlying assets, and other details that would be necessary or to be considered redundant in conventional investments. This will become very helpful in order to introduce discipline, especially in the market.
The Islamic capital market establishment in Brunei, where investment and financing activities and products are structured under the regulations of Shariah principles, will produce a final result of a natural progression in growth of the industry of Islamic financial services. The investors also expected that the Islamic form of product structuring, stock brokering, project financing, venture capital, and asset management will be increasingly become available in the future of Brunei Darussalam.
Table: Sukuk Issuance (US$ million)
Year
2000
2001
2002
2003
2004
2005
2006
Corporate Sukuk
336.3
530
179.9
4537.06
5731.19
11358.89
24526.32
Sovereign Sukuk
0
250
800
1180
1479.35
706.5
2271.6
Total Sukuk Issuance
336.3
780
979.9
5717.06
7120.54
12065.39
26797.92
Percentage Growth
131.94
25.63
483.43
26.12
67.33
122.11
The table above shows the Sukuk issuance growth starting from the year 2000, until 2004. In the year 2000, the total size of the sukuk issued was only US$ 336 million, without any sovereign sukuk in the market. Besides, we can also see from the table above that the total sukuk size issued in 2001 was only US$ US$ 336 million and just in the period of six years, the total size of sukuk has already crossed US$27 billion. The growth achievedin 2003 actually has been the most impressive one which was at 483% and in 2006, the total growth that is achieved by the whole sukuk is 122%.
PURE IJARAH SUKUK
Pure Ijarah Sukuk are usually issued on a stand-alone assets which can be identified on its balance sheet or the government, the monetary authority, the corporate body, or the banking and financial institutions. Stand-alone assets are assets that are independent and are able to function or operate without the need of any other services or devices. Examples of the stand-alone assets can be a parcel of land, airplane, or ship, which are to be leased. The first and basic step in issuing Sukuk certificates is to identify which assets are suitable in the balance sheet.
Other than that, Ijarah Sukuk represents ownership of equal shares in a rented real estate. The owners will have their rights either to own the real estate, receive the rent, or dispose their sukuk without affecting the lessee's rights ; which also means they are tradable. The sukuk holders will also carry the responsibility in bearing all the maintaining costs or if any damages happened to the real estate.
The Ijarah rental payments can be made at the beginning, during, or after the lease period, according to the decision of the parties. This serves as a flexibility to the parties which can be used in different contract forms and sukuk. The Ijarah securities also represents the ownership of known and well defined assets that are already exist, and are tied to lease contract rental which is the sukuk holders' return payable.
Besides, Ijarah Sukuk is also listed on the Labuan International Financial Exchange (LFX) as debt securities (Islamic notes).
Issuer : Malaysia Global Sukuk Inc.
Listing class : Secondary
Listing date : 18 September 2002
Features of Ijarah Sukuk
In Ijarah contract, the assets have to be leased and the amounts of rent have to be clearly stated to both parties. When these information are known, then the Ijarah can be contracted on an asset that will be constructed as long as it is described in the contract :
The lessor should be able acquire, construct, or buy the leased asset according to the set time for its delivery (AAOIFI, 2003: 140-157).
The lessor will have the rights to sell the asset that is leased, as long as it does not hold back the rights of the lessee to experience the benefits from the assets.
The new owner will have to carry the responsibility whereby he has to receive the rentals.
The terms of Ijarah rentals have to be stated very clearly in an agreement of all parties, especially for the first time of lease. It could be constant, decreasing, or increasing for the future renewable, either by benchmarking or relating to well-known variable.
According to the syari'ah rules, the expenses of the entire or basic characteristics of the assets are the responsibility of the owner, and the maintenance expenses for its operation is the responsibility of the lessee.
In the procedure of the issuance of sukuk, an SPV is then created in order to purchase assets which issues sukuk to investors. This will enable it to settle the payment for the purchase. Then, the asset will be lease to the third party for usage. The lessee will make the periodic rental payments to the SPV which in return, will distribute to the holders of sukuk.
The Ijarah Sukuk are treated as a negotiable instrument, and can be traded in the secondary market.
As discussed before, Ijarah Sukuk are very flexible in terms of their issuance management and marketability. Asset users, both private or public, like the central government, municipalities, or awqaf, can also issue this type of sukuk. They can also be issued by any financial intermediaries or by the users of the leased assets.
Steps involve in the structure
The obligator sells assets to the SPV at a price which both parties agree upon.
The SPV issues sukuk certificates with the amount which is equal to the purchase price, in order to raise financing.
This will then be passed to the obligator as the seller.
The SPV and the obligator will then sign the lease agreement for a fixed period of time, which is when the obligator, as the lessee will lease back the assets.
The SPV will receive the periodic rentals from the obligator.
The periodic rentals are then distributed among the investors ; the sukuk holders.
At maturity, the SPV will then sell back the assets to the seller at predetermined value, which it should be equal to any owed amounts under the terms of Ijarah Sukuk.
The practice of Ijarah Sukuk
Kumpulan Guthrie Berhad
Kumpulan Guthrie Berhad is one of the leading conglomerates in South East Asia. Their businesses are in the plantation sector (oil palm and rubber), property development, and also manufacturing. This company owns fifty five estates in ten states in Malaysia ; Twelve palm oil mills, and four rubber factories. They operate not only in Malaysia, but also in the United Kingdom, United States of America, Liberia and Thailand.
In December 2000, Kumpulan Guthrie Berhad was acknowledged by consortium of banks, with RM1.5 billion (US$ 400 million) of Al-Ijara Al-Muntahiyah Bit-Tamik. The facility is actually to re-finance Guthrie's achievement in palm oil plantation in the Republic of Indonesia. As for the Sukuk Transaction, the consortium has been invited to take part as the underwriter (primary subscriber).
The Sarawak Economic Development Corporation (SEDC) has raised its financing amounting US$350 million by issuing a series of trust certificate issued on Ijarah Sukuk principle. They will be issued with five years maturity and the issuer will be using the proceeds in order to purchase certain assets from the 1st Silicon (Malaysia) Sdn. Bhd. under the proposed structure. After that, the issuer will lease the assets from 1st Silicon to SEDC to discuss about the rental price for the agreed lease period of five years.
The Monetary Authority of Singapore
The Monetary Authority of Singapore (MAS) had been planning to sell the first Islamic debt securities in Singapore, with an expectation of the first deal will be on January. MAS also had invited a few financial institutions to approach it at the end of November, and they were also looking forward to sell Islamic bonds (sukuk), on a reverse enquiry basis.
According to Heng Swee Keat, "The facility is open to all financial institutions that plan to or are currently carrying on Shariah-compliant financial services in Singapore.We are issuing on a reverse enquiry basis, which means we can size and time the issuance according to the needs of financial institutions." It is believed that the first deal will make up a new asset class for Islamic investors in Singapore, and had been boosting its attempts to target Islamic money since the financial crisis.
The Islamic bonds, will for sure be based on an Al-Ijarah, or sale-and-leaseback structure. The central bank of Singapore had also been working in order to identify eligible, Shariah-compliant assets, serving as the underlying assets.
HYBRID/POOLED SUKUK
Hybrid generally means a combination or mixture of certain things. Applying the meaning of 'hybrid', Hybrid or Pooled Sukuk is a more diversified kind of sukuk. This is because of the fact that the issuance of sukuk and also trading, is an important means of investment, and also the increasing various demand by the investors for a more diversified sukuk - hybrid or mixed asset sukuk - emerging in the market.
For this type of sukuk - Hybrid/Pooled Sukuk - the assets underlying pool have to be comprised of Istisna', Murabaha, and as well as Ijara receivables. This is to make this sukuk more diversified because when we have a portfolio that consists of different classes of assets, it will allow greater mobilization in funding. However, in the secondary markets, Istisna' and Murabaha assets cannot be as securitized instruments, where at least 51% of the diversify pool in Hybrid Sukuk consists of sukuk that can be traded in the market. For example is the Ijarah receivables. The return of Murabaha and Istisna' certificates can only be pre-determined fixed rate of return. This is due to the fact that the Murabaha and Istisna' receivables are also part of the pool.
Usually, the aboved mention type of sukuk is is already enough to represent the partial of the strength of the issuer's balance sheet.
Steps involve in the structure
The originator of Islamic finance will transfer the assets that are tangible, as well as Murabaha deals to the SPV.
The certificates of participation will be issued to the Sukuk holders by SPV, and also will receive funds. The Islamic finance originator will have the full rights to use the funds received.
These assets will be purchased by the Islamic finance originator, from the SPV, over an arranged period of time.
A fixed payment of return on the assets will be received by the investors.
The practice of Hybrid Sukuk
In practical, the Islamic Development Bank issued the first hybrid Sukuk of assets comprising 65.8% Sukuk al-Ijara, 30.73% of Murabaha receivables, and 3.4% of Sukuk al-Istisna. The issuance required the IDB's guarantee to ensure the rating and international marketability.
VARIABLE RATE REDEEMABLE SUKUK
A variable rate redeemable sukuk is a type of investment that represents an ownership of a Musharaka equity, which it is also an Islamic term used by several corporate entities - Musharaka Term Finance Certificates (MTFCs).
MTFCs has a few advantages :
Musharaka returns are preferred by the jurists as the arrangement can strengthen the Islamic banking.
The floating rate of return does not depend on Market references (LIBOR) but is contingent on the firm's balance sheet actualities.
Actually, this type of sukuk does not really differ with the Mudaraba sukuk except in the organization of relationship between the holders of these sukuk and the party that issues these sukuk. The party that issues these sukuk will then form a group of committee from the sukuk holders who then can be referred to in any investment decisions (AAOIFI).
Usage of Musharaka sukuk :
Use to mobilize funds in order to establish new projects, develop the existing ones, or finance business activities on the basis of partnership contract. The holders will then become the owners of the projects according to their respective shares.
ZERO-COUPON NON-TRADABLE SUKUK
This is another sukuk structure that is possible and can be created where there are no existence of assets that are to be mobilized yet. Apparently, the objective of the mobilization of funds is to create more assets through Istisna restrictions. The pools of the primary assets are to be generated would be of a nature warranted by Istisna and instalment purchase or sale contracts that are possible to lead to devt obligations. The rate of return of this sukuk can be termed as fixed-rate zero-coupon sukuk.
In general, zero-coupon sukuk brings the meaning that the securities are bought when the price is lower than its face value, and the face value will be repaid at the time of its maturity. Why it is called as a zero-coupon bond is because it does not have any periodic interest payments. Some examples of zero-coupon sukuks are U.S. Treasury Bills, and also U.S. saving bonds.
Zero-coupon sukuk is divided into two, which is in the long-term and also in the short-term. In the long-term of the zero-coupon sukuk, the maturity dates are normally between 10 to 15 years. It can either be held until the maturity date, or sold in the secondary markets.
While in the short-term of zero-coupon sukuk, they usually have the maturity dates less than one year. This is where they are called as 'bills'. However, these certificates are not readily tradable because of certain Shariah restrictions.
