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Sukuks for Sukuks for AGRICULTUREAGRICULTURE

November 28 & 29, 2011November 28 & 29, 2011ISLAMABADISLAMABAD

Hamad Rasool Bhullar FCMA, FCIS, FPA, M.Com, DCMA

DefinationDefinationSukuk is the Arabic name for a financial certificate, Islamic alternative to conventional bonds, Sukuk is a Trust certificate in which investor returns are derived from legal or beneficial ownership of assets.Certificates of equal value representing proportionate ownership of tangible assets or usufructs or services or (of) the assets of a project or in an investment activity. (AAOIFI) This ownership comes in effect after the completion of subscription and with the investment of received funds.

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IntroductionIntroduction

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A Sukuk representsA Sukuk represents::

An undivided proportionate ownership interest in an asset, with the corresponding right to the Islamically acceptable income streams generated by the asset, as these current income streams are established and translated into tradable securities

Trust Notes or Certificates similar to Trust Certificates

and Unit Trusts

Issuer creates a trust over the leased Assets

Trustee issues Sukuk to the Primary Subscribers (the

beneficiaries under the trust) in the Primary Market

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A Sukuk represents: Contd….A Sukuk represents: Contd…. Sukuk-Holders have pro-rata undivided beneficial

ownership of the leased Assets / Portfolio held in trust – As the beneficial owners the Sukuk-Holders are entitled to the income streams from the Leased Assets / Portfolio

The Primary Subscribers can resell the Sukuk in the Secondary Market

The Secondary Buyer will become the new pro-rata beneficial owner of the Leased Assets held in trust with the same rights as the original was.

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Growth in SukuksGrowth in SukuksLiquidity Management of Islamic Financial Institutions. Islamic financial institutions are seeking to diversify

their portfolio and increase their portfolio size of tradable instruments with fixed income profile

The industry requires Sukuk funds for retail distribution.

Islamic Inter-Bank or Short term Islamic Finance market can be developed through sukuks.

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

Sukuks are usually issued through special purpose vehicle (‘SPV’)

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Growth in SukuksGrowth in Sukuks In Pakistan a Limited Liability Company has acted as

the issuer and is registered with and regulated by SECP

Short and long term 5 – 10 Years TenorLondon Stock Exchange has now 31 listed Sukuks

with a value of $19bn in 2011

There were record number of Sukuk Issues in 2007 Worldwide with a Total volume of US$32.65 Billion

119 New Issues of Sukuk in 2007 - 26% Sovergine and 74% Corporate (31: 88) with an average deal size of US$269.8 Million in 2007 from US$175 Million in 2006

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Growth in SukuksGrowth in Sukuks2007 was an extraordinary Sukuks year In GCC- Gulf Co-operation Council UAE 58 % Saudi Arabia 30 % Bahrain 06 % Kuwait 04 % Qatar 02 % Bloomberg , Zavya.com & Moody’s

Musharika Sukuks remained popular in 2007 in Amount but Ijarah Sukuks in Global Issues Number of Issues

In Asia Pecific, Malaysia is dominating with 95% share Pakistan stands second with only 3% Sukuks in Value

20-25% annual Growth was expected onwards

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Growth in Sukuk GloballyGrowth in Sukuk GloballyHistorically Sukuk rapidly rose from $1bn a year in 2002

to $34bn in 2007Recovery in the past two years, rising by 54% to a new

high of $50bn in 2010 from $33bn in 2009, which was itself 65% up on $20bn in 2008 after a drop from $34bn in 2007

In 2010, 71% of issues were by government or quasi government organizations while the financial sector contributed 10%.

Malaysia dominated the global market in 2010 by issuing total of $33bn (two thirds), $3bn each from Indonesia and Saudi Arabia, and $2bn from Qatar, while Pakistan and UAE each had issues of around $900m last year. 10

Advantages to Sukuk IssuerAdvantages to Sukuk Issuer

Diversification of funding sourcesCreating and enhancing profile in

international marketsSecondary liquiditySizeable financing.Ease of clearing and settlement

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Advantage of Sukuk InvestorAdvantage of Sukuk Investor

Diversification in InvestmentProvides Leveraging CapabilitiesSecondary Market LiquidityEase of clearing and SettlementInvestment available to Institutional and

Retail investorsAllows for many computation of Risk –

Credit /Mkt. /Duration etc

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Issuance of Sukuk- Factors to Issuance of Sukuk- Factors to be consideredbe considered

Identify the investorsRating – by a Credit Rating AgencyUnderlying AssetsSecondary Market ConsiderationsApplicable laws – SECP rulesCosts to the IssuersDrafting of Legal DocumentsRegularity Framework

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Parties InvolvedParties InvolvedOriginator : Initial OwnerSPV : Set up for the IssueInvestors: Subscribers.Servicer: Servicer to the assets.Collection and Paying Agent : BanksCredit Enhancement provider : hedges,

Guarantees, Takaful etc Need to be Explored

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Parties InvolvedParties InvolvedMerchant Banker (s) :Credit Rating Agency:Legal & Tax Counsel: a Challenging RoleAuditors

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Challenges for the MarketChallenges for the MarketLimited number of issues that constrains

active trading of these instruments in the secondary market

Buy and Hold Strategy by major investors of Sukuks

Limited quality of assets available for Ijarah securitization

Limited Corporate Focus - Changing

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Ideal models for structuring Sukuks

for Agriculture Sector

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Sukuk StructuresSukuk Structures

Sukuk Structuring may based on following modes of business

Mudarabah (Trust Financing/Trust Investment)Murabahah (Sale and Purchase)Muzaraat (Partnership in Agriculture Development)Musharaka (Partnership, Project Finance

Participation)Musaqah (Partnership with defined roles)Istishna (Purchase by Order or to Manufacture)Ijarah (Operating Lease Concept)

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Applications on AgricultureApplications on AgricultureAgricultural producers (farmers) are subject to

severe production and market risks, which are reflected in wide fluctuations in output and incomes

MuzaraatMuzaraatMuzaraat is derived from Musharakah as a

partnership based mode of business. It is a partnership applicable in farming whereby two or more individuals enter into a contract to invest in an agricultural enterprise or operation. Output or produce is shared by the partners in accordance with the agreement stipulated in the contract.

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Applications on AgricultureApplications on AgricultureMusaqaatMusaqaatMusaqah is an agreement between two individuals

wherein one provides the orchards or trees owned and the other the labour and arrangements for irrigation services and up keep and share the profit as per agreement.

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CASE STUDIESCASE STUDIES

Case studies on Sukuks WAPDA First Sukuk Issue for Mangla Dam

Raising Project - Jan 2006

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WAPDA SukukWAPDA SukukWAPDA’s financing requirement: PKR 8,000 million to

(partially) fund the Mangla Dam Raising Project Key objectives for WAPDA were:To raise financing in acost efficient mannerStrengthen its presence in the local financial

marketsDiversify and cultivate WAPDA’s investor baseUndertake a landmark transaction which will

catalyze the promotion of Islamic Financial instruments and lead the way for other public sector entities

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Transaction StructureTransaction Structure

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Transaction StructureTransaction Structure

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Sukuks for AgricultureSukuks for Agriculture

Thanks for the PatienceAny Questions ???

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