Understanding Sakuk and Sukuk in Islamic Finance: Securitization & Secondary Market, Slides of Islamic Finance and Banking Systems

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Securitization /

Secondary Market

Instruments

Lecture # 17

 It involves transformation of non traded

financial instrument into a traded security.

Mechanism:

 A bank pools illiquid receivables and

submit the pool of assets to an agency.

 The agency converts the pool into

marketable securities.

 These securities are then sold to the

investors (depositors).

 Each certificate represent 1/100 share in the asset of the project.

 Shariah allows to trade these shares in the market

 They can be sold at price higher than the face value (Capital gain) or lower price resulting in (Capital Loss).

 Now suppose money not spent on the project.

 Each share now worth rupee 1 million only and cannot sold at different price.

Mixture of Liquid and non-Liquid Assets

 Then each share can be traded at a price

higher than the amount of liquid asset in which case money will be taken as sold at an equal amount an excess will be taken as price of non-liquid asset.

Generic Structure of Sakuk-al-

ijarah

Funds Taker SPV^

Sakuk Holders US $ (^) US $

Issue Sukuk Transfer of sukukpool Securities

Asset Sale Arrangement

Day 1

Funds Taker SPV^

Sakuk Holders

Lease rentals^ Lease rentals

Ijarah (Lease agreement)

Periodic Payment

Benefits of Securitization

1. IB, institutional / individual investors

invest their idle surplus cash and earn revenue

2. Easy cash
3. Diversify risk

Secondary Market Instruments

SUKUK

 Is plural of sakk meaning cheque or promissory note.

 They provide alternative to a conventional bonds

 They are basically certificate leased on ownership of certain assets

 Negotiable in secondary markets

 Represent ownership of assets underlying the issue

 Those with variable returns can leased on Musharaka / Modaraba

 More useful for those with predetermined fixed interest

 SPV acts as Modarib and investor (Sukuk

holders) as Rab-ul-mal

 Sukuk are traded and on basis of

expected return Sukuk holders can get capital gain or even suffer capital loss

 As a Modarib SPV / Corporation gets a

share in the profit but share no loss.

Ijarah Sukuk

 GOP wants to mobilize resources from the market  SPV is created  Sells motorway to SPV for a certain period  SPV floats shares  People buys leasing shares / Sukuk being co-owner in Motorway  They are entitled to a fixed return against the usufruct of those assets.  At the end of period, SPV redeem sukuk and assets is passed on to Gop again.

Salam Sukuk

 Based on Salam principle an Islamically acceptable alternative to treasury notes has been issued by BMA.

 BMA as SPV introduced a special restricted Modaraba

 Islamic banks purchase participation Sukuk as capital provider when BMA is Mudarib

 The Modaraba will buy crude oil on Salam basis by paying full price upfront and oil will be delivered later

 Subsequently to Salam contract there will be promise but the refinery to buy oil on the due date

 These Salam Sakuk cannot be traded and listed because this will tantamount to trading in debt.

 Therefore they must be held to maturity and as such can only be issued for short term duration of one to six months