Sukuk - Zubair Mughall

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Sukuk

(Islamic Bond)

Zubair MughalAlHuda :Centre of Islamic Banking and Economics

info@alhudacibe.com, www.alhudacibe.com

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Defination

Sukuk is the Arabic name for a

financial certificate, Islamic alternativeto conventional bonds, Sukuk is aTrust certificate in which investor returns are derived from legal or 

beneficial ownership of assets.

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Introduction

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Growing Sukuk

Liquidity Management of Islamic Banking.

Islamic financial institutions are seeking to diversify their portfolio

and increase their portfolio size of tradable instruments with fixedincome profile

The industry requires Sukuk funds for retail distribution

Sukuk a Money Market instrument.

Islamic Inter-Bank or Short term Islamic Finance market can bedeveloped through sukuks

The underlying assets are purely used as a means of transactingand do not constitute a Transaction specific pool of security

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Growing Sukuk

Sukuk are usually issued through special purpose vehicle (µSPV¶)

In Pakistan aLimited

Liability Company has acted as the issuer and isregistered with and regulated by SECP

It is estimated that by 2006, close to US$ 25 billion of Sukuk would beoutstanding and by 2008,approximately US$ 50 billion Sukuk will beoutstanding. Bahrain Issues near about 24 Sukuk in a year 

Short and long term 5 ± 10 Years Periods

There are 77 Sukuk has been issued with the volume of USD17,977.11 Millions

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 Advantage of Sukuk Issuance Diversify funding source

Create and enhance profile in international

market Pricing benchmark

Secondary liquidity

Sizeable financing. Ease of clearing and settlement

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 Advantage of Sukuk Investor 

Diversify Investment

Provides Leveraging Capabilities Secondary Market Liquidity Ease of clearing and Settlement Investment available to Institutional and Retail

investors  Allows for many computation of Risk ±Credit

/Mkt. /Duration etc

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Issuance of Sukuk- Factor to be

considered

Identify investors

Rating ± by a Credit Rating Agency

Underlying Assets

Secondary Market Considerations

 Applicable laws ± SECP rules Cost to the Issuers

Drafting of Legal Documents

Regularity Frame work

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Parties Involved Originator : Initial Owner 

SPV : Set up for Special Purpose

Investors: Subscribers.

Servicer: Servicer the assets.

Receiving and Paying Agent : Banks

Credit Enhancement provider : hedges,Guarantees, Takaful etc

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Parties Involved Merchant Banker :

Credit Rating Agency:

Legal & Tax Counsel:

 Auditor 

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Challenges of Market Limited number of issuance that

constrains active trading of these

instruments in the secondary market

Buy and Hold Strategy by major investorsof sukuks

Limited quality assets available for Ijarahsecuritization

Limited Corporate Focus - Changing

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Ideal models for structuring of Sukuk Especially focused onConstruction Industry.

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Sukuk StructureSukuk Structuring may based on followingmodes

Mudarabah (Trust Financing/Trust Investment )

Murabahah (S ale And Purchase)

Musharaka (Partnership, Project Financing Participation)

Istishna (Purchase by Order or Manufacture)

Salam (In-front Payment S ale)

Ijarah (Operating Lease Concept )

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Sukuk Al-Ijara based Model

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Sukuk al Istismar (51% Ijarah structuring)

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Global Sukuk Issues

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Global Sukuk Cumulative

Issuance

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Global Sukuk Issuance

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Sukuk Issuing in Construction Industry

Name Country Volum Date Tenor  

Emaar UAE $65 m July 2004 5 years

  Amlak UAE $200 m July 2005 5 years

UEM Builders Malasiya $82 m Jan-2006 7 years

 Aldar Behrain $100 m Oct ± 2005 5 years

Com. RE Kuwait $100 m May 2005 5 years

Motorway Pak $600 m Jan-2005 5 years

WAPDA, Penang Port and bridge , Sanctuary Building-U k, Sukuk, Zam

Zam tower KSA etc also has been issued sukuk related to constructionIndustry list attached for further consideration)

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CASE STUD

IES

Case study of Sukuk Relatively with

Construction industry.

WAPDA Sukuk for upraising Mangla Dam

Motorway Sukuk

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WAPD

A Sukuk WAPDA¶s financing requirement: PKR 8,000 million to

(partially) fund the Mangla Dam Raising Project

Key objectives for WAPDA were:

To raise financing in a

cost efficient manner 

Strengthen its presence in the local financial markets

Diversify and cultivate WAPDA¶s investor base

Undertake a landmark transaction which will catalyze thepromotion of Islamic Financial instruments and lead the wayfor other public sector entities

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Transaction Structure

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Transaction Structure

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O

ffering Summery

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Motorway Sukuk

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Our Credible Advisory Services Formulation of complete Structure

including

Sharia Structuring Regularity framework

Setting up SPV (Special Purpose Vehicle)

 Accounting and Reporting Principles

Issuing, Listing and Rating

Secondary market required infrastructurefor payment and settlement procedures.

 Awareness and Marketing Making.

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Glossary