Murābahah Sukūk

Ali SaeediMember of the board

Securities & Exchange Organization

Presented by:

1. Islamic Instruments and Contracts,

2. Murābahah Contract,

3. Murābahah Sukūk,

4. Different Types of Murābahah Sukūk,

5. Comparison of Murābahah & Ijārah Sukūk,

6. Shari'ah Considerations,

7. Regulations Considerations,

Contents

Islamic Instruments

and Contracts

Capital market: A market in which debt or equity securities are traded.

Capital Market: A place for Contracts.

Financial Instruments: Designed on the basis of different contracts,

e.g. Murābahah Sukūk based on Murābahah contract, …

Behind Financial Instruments

Sale of goods with an agreed upon profit mark up on the cost. Murābahah

sale is in two types:

1- In the first type, the Islamic bank purchases the goods and makes it

available for sale without any prior promise by a customer to purchase it.

2- In the second type, the Islamic bank purchases the goods ordered by a

customer from a third party and then sells these goods to the same

customer. In the latter case, the Islamic bank purchases the goods only

after a customer has made a promise to purchase them from the bank.

Source: The Accounting and Auditing Organization for Islamic Financial Institutions

(AAOIFI)

Murābahah Contract Definition

Murābahah Sukūk

• Murābahah Sukūk is securities in which the holders of

which are the common owners of a financial asset (a

debt) based on the Murābahah Contract.

• These securities have a fixed yield and available for sale

in the secondary markets.

• Originator (or any other part) should be able to pay the

installments via its own activities

• Rate of profit and maturity date should be clarified in the

contract.

Murābahah Sukūk

Sukūk

Originator

Rating Agency

Investment bank

SPV

The Elements of Murābahah Sukūk

SPV is a legal entity which is authorized to raise funds by issuing securities through the conduct of transactions under the category of Islamic contracts. Base on Iranian regulations, SPV is a financial institution.

SPV and originator should be independent and should not be affiliated by originator:

1- In order to prevent the conflict of interests, (SPV should be the agent of Sukūk holders and act on behalf of them),

2- In case of bankruptcy, all assets of the originator including, SPV would be at risk (if SPV would be affiliated by originator),

3- To execute transactions correctly (true sale) from the Shari'ah point of view.

Special Purpose Vehicle (SPV, SPE, SPC)

Capital Asset Management Co.

SPV1 SPV2 SPVn

Tehran Stock Exchange

CDSAn Affiliated Co. of SEO

Farabourse

..……………………

SPVs structure in Iran

SPVs Should be Independent

from Originators

Different Types of

Murābahah Sukūk

1. Murābahah Sukūk for Buyers

Financing,

2. Murābahah Sukūk for Sellers

Financing,

3. Mortgage Murābahah Sukūk,

4. Liquidity Murābahah Sukūk.

Various Types of Murābahah Sukūk

2 Common types of Murābahah Sukūk

Adopted by all Islamic schools of

thought

• SPV (as issuer) issues the Murābahah Sukūk,

collects the funds of the investors by investment

banks services (the “Principal Amount”), and on

behalf of investors buys the commodity needed by

the originator from a commodity supplier in cash

and sells it to the originator in form of a Murābahah

contract over an agreed period of time and agreed

rate of profit.

• Originator undertakes to pay to the SPV the price

of the commodity (Principal + Profit) on due dates.

Murābahah Sukūk for Buyers Financing

Murābahah Sukūk for Buyers Financing

Regulator, Investment Banks, Rating Agencies, Auditors

6. Sukūk Proceeds (Deferred Price)1 .Issuing

Sukūk

2 .Sukūk Subscription

3 .Spot Payment

4. Spot Delivery

5. Selling Asset with Credit Payment (Spot Delivery)

SPV InvestorsCommodity Supplier

Originator

(Buyer)

• SPV (as issuer) issues the Murābahah Sukūk,

collects the funds of the investors by investment

banks services (the “Principal Amount”), and on

behalf of investors buys the commodity of the

originator and sell it to buyer in form of a

Murābahah contract over an agreed period of time

and agreed rate of profit.

• Buyer undertakes to pay to the SPV the price of the

commodity (Principal + Profit) on due dates.

Murābahah Sukūk for Sellers Financing

Murābahah Sukūk for Sellers Financing

1 .Issuing Sukūk

2 .Sukūk Subscription

3 .Spot Payment

4. Spot Delivery

SPV InvestorsOriginator

(Seller)

Buyer

(Leasing Co.)

5. Selling Asset with Credit Payment (Spot Delivery) 6. Sukūk

Proceeds (Deferred Price)

2 other types of Murābahah Sukūk

Are not adopted by all Islamic schools

of thought

• SPV issues the Sukūk, collects the funds of the investors

then acts on their behalf and buys from the bank

(originator) mortgage facilities arising from the Murābahah

Contracts.

• The originator undertakes to collect on the due dates the

mortgage facilities assigned by the debtors and deliver

them to the SPV. The SPV will give to the holders of the

Sukūk the funds received from the Bank through the

customer.

• The investors may wait until maturity dates and enjoy the

interest arising on the Murābahah or otherwise sell the

Securities in the secondary markets before the due dates.

Mortgage Murābahah Sukūk

1 .Issuing Sukūk

2 .Sukūk Subscription

3. Spot Payment for Bank’s Receivables/Debt

4 .Selling Debts

SPVInvestors

Bank

Financial Facilities Receivers

(Murābahah Based) 6. Paying Installments

Mortgage Murābahah Sukūk (Cont…)

If Bai al Dayn is accepted

• SPV collects the funds of the investors, then acts on their

behalf and buys in cash one of the Originators’ physical assets

then sells the same asset at a higher price to the originator

itself on credit terms.

• The originator undertakes to give the credit price of the assets

to the SPV on due dates.

• The purchase and sale on credit terms (Bay al-inah) is

prohibited by most of Shiite and Sunni scholars.

Liquidity Murābahah Sukūk

1. Issuing Sukūk

2. Sukūk Subscription

3. Spot Payment

4. Spot Delivery

SPV InvestorsOriginator

5 .Selling Asset as Credit Payment

6. Paying Profit

Liquidity Murābahah Sukūk (Cont…)

SPV InvestorsOriginator

7. Sukūk Proceeds (Deferred Price)

Comparison of

Murābahah & Ijārah

Sukūk

• Ijārah Sukūk is most widely used among other

Islamic financial instruments; however, after

global downturn in Sukūk issuance in 2008,

issuance based on Murābahah Sukūk increased

by nearly 60.4%.

• Since, Murābahah Sukūk can be used for

working capital financing, and also it is fixed

income Sukūk, so it has some advantages in

comparison with the other types of Sukūk such

as Ijārah and Mudārabah.

Murābahah Sukūk & Ijārah Sukūk

• Asset Backed & Asset BasedMurābahah Sukūk is asset based, but Ijārah Sukūk is asset backed. In asset-backed Sukūk, investors are legal owners of the asset but in asset-based, investors has beneficial owners or owners of cash flow generated by asset.

• Debt or Equity InstrumentMurābahah Sukūk can be considered as a debt instrument, but Ijārah Sukūk is none of them and both of them. Investors in Ijārah Sukūk are owners of the asset and also based on the nature of Ijārah contract which is binding, it is similar to debt instrument. But in fact, Ijārah Sukūk can not be classified in none of the two groups.

Comparison

• Risk ProfileMurābahah Sukūk is a debt instruments and risk of Sukūk does not focus on asset risk, but rather on credit risk of the originator & Ijārah Sukūk

• Underlying AssetIn Murābahah Sukūk, the underlying asset can be a consuming asset such as materials and spare parts, or long term asset such as real estate and machineries. In Ijārah Sukūk, the underlying asset should have long term life cycle to be qualified for leasing.

Comparison (Cont…)

• MarketabilityBased on different jurisdictions, Murābahah Sukūk can have secondary market or not. Based on Shi'a and Shafei schools of thought, debt sale is accepted, so secondary market is available but scholars of other jurisdictions do not accept it.If debt sale is accepted, marketability will exist, unless it will not be a liquid security.

Comparison (Cont…)

Shari'ah

Considerations

• From a Shari'ah angle, agency agreements

(Wukālah) [between SPV and investors], cash

transaction and credit transaction of a tangible

asset [between SPV and originator] is accepted by

all schools.

• But, there is a divergence of views on contracts

for purchase of debt (Bai al Dayn) [between

investors].

• According to opinions of renowned Shi'a and

Shafei scholars it is permissible and according to

opinions of Sunnite scholars it is rejected.

Shari'ah Considerations

• If debt is discounted in a deferred payment [Bai al Dayn bi addayn], it will be rejected by all schools.

• If debt is discounted spot by third party, it will be very controversial:

– Hanafiyah, Hanabelah, some of Shafe’iyah and some of Shi'a scholars do not validate it,

– Most Shi’it scholars, some other of Shafe’iyah, Ibn Taymiyah and Ibn Qayyem have validate it,

– The rest of Shafe’iyah validate it provided that:

a. Debtor is wealthy and confess to have such a debt or his debt is proved by evidence.b. Debt is confirmed (Mustaqar)c. The substitute is delivered at the session of contract.

Shari'ah Considerations (Cont…)

• Why is it accepted by some schools?• If investor A can discount debt, investor B can take his place in secondary market, and if it is not permissible, both primary and secondary transactions are not permissible.

• Why isn’t it accepted by other schools?• They believe that discounting has the same

nature of Riba, any increase and decrease of debt [Qardh] is not permissible. Murābahah is an exception.

Shari'ah Considerations (Cont…)

Regulations

Considerations

1. Based on IFSB definition, “Sukūk are certificates with each sakk representing a proportional undivided ownership right in tangible and intangible assets, monetary assets, usufructs, services, debt or a pool of predominantly tangible assets, or business venture”,

2. In asset-based instrument, originator typically transfers only the beneficial ownership of asset, so investors have no recourse to the assets.

3. Based on IFSB standards, asset-based Sukūk should have credit rate,

4. Credit enhancement is needed (such as third party guarantee, over- collateralization, excess spread, cash collateral),

Regulations Considerations

4. Tax regulation is very crucial, each transaction has its tax expenses and if transaction would be taxable, cost of financing will increase and instrument can not be used in practice.

5. Underling asset must be clearly identifiable (may be in a specific project or investment activity) and Shari'ah complied.

6. The asset should be available when issuing the certificates or the conditions for its delivery should prevail at the periods of time fixed by the originator (unless it becomes Bay al-kali).

7. Types of acceptable assets: land; buildings and installations; machinery and equipment; means of transport; materials and goods.

.

Regulations Considerations (Cont…)

8. In the event that asset is in the form of materials, Murābahah Sukūk is short term instrument, but if asset is in the form of long term asset, Murābahah Sukūk is long term instrument.

9. Providing other documents and deeds relating to the asset should be mentioned in regulations (such as: commodity standard certificate, proforma invoice, warehouse receipt, …)

Regulations Considerations (Cont…)

8. In the event that asset is in the form of materials, distribution of specific series of Murābahah Sukūk in a step by step method should be allowed in regulation, but intervals should be determined in prospectus and should not be too long. Anyway, total contract price should be mentioned and registered.

9. Iranian capital market rules and regulations are available in the following website (English Version):http://rdis.ir/Rules.asp

Regulations Considerations (Cont…)

Thanks For Your Attention