THIS ASSIGNMENT IS A PARTIAL FULFILLMENT FOR IB1006 Islamic Capital Mark t C!

art r " Islamic Fi#a#c Pr$% ssi$#al &CIFP' INCEIF ()# S m st r *01* Lecturer: Abdul Rashid Abdul Kadir

Student Name: FASHOLA OLA+IN,A NURU-EEN Student ID: 1100*./

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0) sti$# i1 Outline basic requirements, necessary steps to be taken, e pected time line and all the important parties in!ol!ed in the process o" issuance o" a sukuk#

Basic R 2)ir m #ts3 $ust like any other Islamic %inancial product & Sukuk must ha!e the "ollo'in( basic requirements )he issuance o" the sukuk must be de!oid o" riba, gharar, rishwah, masyir and jahl All "unds raised throu(h the sukuk issuance must only be used "or halal or Shariah compliant acti!ities# *here the "unds raised are used to "inance needed tan(ible assets, speci"icity o" assets is important# )hat is, the asset+s, bein( "inanced should be clearly identi"ied# )his is because, sukuk, unlike bonds, cannot be used to "und (eneral "inancial needs o" the issuer# Income recei!ed by sukuk holders +in!estors, must be deri!ed "rom the cash "lo's (enerated by the underlyin( asset, not "rom other sources e ternal to the asset# Sukuk holders ha!e a ri(ht to the o'nership o" the underlyin( asset and its cash "lo's# +-ie'ed "rom this perspecti!e, a sukuk is essentially hybrid equity#, )here should be clear and transparent speci"ication o" ri(hts and obli(ations o" all parties to the transaction, in particular the ori(inator +mudarib, and sukuk holders# As 'ith all other Islamic "inance instruments, there should be no "i ity o" returns#

St ps t$ 4 tak # Outlined belo' are the steps to be taken "or the issuance o" a sukuk# .ompany, that is, the ori(inator seeks ad!ice "rom In!estment /ank re(ardin( sukuk0 assets are identi"ied and pooled to(ether# .ompany creates S1- & Special 1urpose -ehicle 'ith a le(al entity, the S1- is le(ally separate and is bankruptcy remote, in that it has no part in the ori(inator2s liabilities#
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)he company then in3ects or trans"ers the asset 'hich 'ill become the underlyin( asset o" the sukuk, to the ne'ly established S1-# )he S1- issues sukuk to in!estors a(ainst these assets0 S1- collects "unds "rom in!estors0 S1- pays to .ompany the sale price o" Assets0 .ompany buys back Assets on de"erred payment basis, it could also be leased this is dependent on the underlinin( contract# S1- recei!es payments by company in "uture0 S1- passes on payments by company to in!estors2 base on the underlinin( contract#

T! parti s3 Outlined belo' are the parties in!ol!ed in the issuance o" sukuk Originator/Mudarib: o )his could be (o!ernment4so!erei(n or corporate Regulator o )his is the Securities .ommission Special Purpose Vehicle o A le(al entity "or a common representation o" the subscribers Credit Enhancer o 5o!ernment "or 5L.s, third party "or others Trustee & o )hese set o" indi!iduals mana(e and administer the S1Vendor/Manufacturer o )he makers o" asset6machinery that is the ob3ect o" "inancin( Rating Agency o A(ency that rates and monitor the sukuk per"ormance n!est"ent ban# &
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o )hey structure the sukuk, ensure compliance, produce the prospectus and brin( the o""er to the market# Shariah Ad!isors o )hey ensures that the o""er is Shariah compliant Su#u# n!estor o )he (eneral public 'ho subscribers to the in!estment#

0) sti$# ii3 1roposed structure o" sukuk "or the abo!e pro3ects# Discuss on shariah principles to be applied in the structure, dra'4up the illustration on the process "lo' o" the sukuk and hi(hli(ht the main concern o" the ori(inator, issuer and in!estors

Pr$p$s " Str)ct)r a#" S!aria! pri#cipl s3 %or the case in question I$arah Sukuk structure 'ould be used to "acilitate6 the underlinin( contract o" the sukuk, belo' are the Shariah principles as it relates to I3arah Sukuk "or the case in question# Sukuk4al4ijara are sukuk that represent o'nership o" equal shares in a rented real estate or the usu"ruct o" the real estate# )hese sukuk (i!e their o'ners the ri(ht to o'n the real estate, recei!e the rent and dispose o" their sukuk in a manner that does not a""ect the ri(ht o" the lessee, i#e# they are tradable# )he holders o" such sukuk bear all cost o" maintenance o" and dama(e to the real estate# Ijara sukuk are the securities representin( o'nership o" 'ell de"ined e istin( and kno'n assets tied up to a lease contract, rental o" 'hich is the return payable to sukuk holders# )he rental rates o" returns on these sukuk can be both "i ed and "loatin( dependin( on the particular ori(inator#

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)he S1--mudharaba issues sukuk-al-ijara to in!estors0 raises "und and utili7es it "or purchase o" the assets +required "or use by the company,# )he assets are then (i!en on lease to the company in e chan(e "or periodic rentals# It is necessary "or an ijara contract that both the assets bein( leased and the amount o" rent are clearly kno'n to the parties at the time o" the contract# I" both o" these are kno'n, ijara can be contracted on an asset or a buildin( that is yet to be constructed, as lon( as it is "ully described in the contract, pro!ided that the lessor should normally be able to acquire, construct or buy the asset bein( leased by the time set "or its deli!ery to the lessee#

)he ijara rentals 'hen recei!ed by S1--mudharaba "rom the company +as per the terms, are passed throu(h to the holders o" the sukuk# 8nlike murabaha, the ijara instrument is not e!idence o" debt, but o" a pro4rata +in proportion, o'nership o" the asset+s, that is on ijara#

Ijara sukuk are completely ne(otiable and can be traded in the secondary markets# Sukuk4al4ijara, ho'e!er, "unctions like any other debt instrument, since the periodic ijara rentals can be predicted 'ith a reasonable de(ree o" certainty# 9o'e!er, the yield on some "orms o" ijara instruments may not be predetermined, since there mi(ht be some maintenance and insurance e penses that are not per"ectly predictable in ad!ance# .onsequently, in such cases, the amount o" rent (i!en in the contractual relationship represented by the instrument represents a ma imum return sub3ect to deduction o" this kind o" maintenance and insurance e penditure#

I" an asset has totally lost the "unction "or 'hich it 'as leased, and no repair is possible, the i3ara shall terminate on the day on 'hich such loss +a :)otal Loss;, has been caused# I" there has been a )otal Loss, the )rustee may ha!e the ri(ht6ability to substitute or replace the a""ected asset 4 althou(h, in reality, it 'ould only look to do so i" the Ori(inator +as ser!ice a(ent, is able to use the insurance +or taka"ul, or any other total loss proceeds to procure substitute or replacement assets0

I" a )otal Loss is caused by the misuse or ne(li(ence o" the Ori(inator, the Ori(inator 'ill be liable to compensate the )rustee "or depreciation in the !alue o" the a""ected asset, as it 'as immediately be"ore such )otal Loss#
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In the e!ent that an asset has only su""ered partial loss or dama(e, the i3ara 'ill continue to sur!i!e 'ith respect to that asset

St ps I#5$l5 " i# t! str)ct)r )he company 4 /oraque Air4Lines +/AL, trans"ers the o'nership o" the land 'orth <== >illion to the S1-#

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)he S1- raise the "und required to build the 5roup 9eadquarters and ?n(ineerin( .entre at estimated cost o" 8SD @@= million plus the cost by issuin( Sukuk to the in!estin( public#

)he amount raised is used to build the property and its mana(ed by the S1A lease a(reement is si(ned bet'een S1- and /oraque Air4Lines +/AL, "or a "i ed period o" time, 'here the /AL leases back the assets as lessee S1- recei!es periodic rentals "rom /oraque Air4Lines +/AL, )hese are distributed amon( the in!estors i#e# the Sukuk holders At maturity, or on a dissolution e!ent, the S1- sells the assets back to the seller at a predetermined !alue# )hat !alue should be equal to any mounts still o'ed under the terms o" the I3arah Sukuk

C$#c r# )he ori(inator o In case o" "le ible rate i3arah sukuk 'here the returns are tied to LI/OR, an increase in the benchmark rate 'ill increase the payment obli(ations o" the ori(inator 'hich may or may not be sustainable# )his is more pronounced 'hen the payin( capacity o" the ori(inator depends lar(ely on income "rom a pool o" assets 'ith substantial proportion earnin( "i ed returns )he issuer o Lack o" re(ulatory "rame'ork o Limited number o" quali"ied personnel 'ell !ersed in capital market issues both "rom shariah and commercial perspecti!e )he in!estors

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o )he in!estors 'ould be the ri(ht"ul o'ner o" the real estate and is e posed to a lot o" risk "or the entire duration o" time that the real estate is under the lease & I3arah a(reement# o No benchmark "or port"olio monitorin( as a!ailable to con!entional bonds o Secondary market illiquid due to absence o" .ritical >ass and >arket >akers# o I" the underlyin( asset in the pool is denominated in terms o" multiple currencies it reduces the "orei(n e chan(e risk o" the in!estor# o Another concern "or the in!estors is the credit risk that is delay in the payments or repayments "rom the ori(inator# 0) sti$#1 iii# ? plain summary o" basic terms and conditions o" the proposed sukuk S)mmar6 t rms a#" c$#"iti$#s3 /elo' are the summary terms and condition "or the Sukuk Al4I3arah# )he property & Real ?state shall belon( to the in!estors "or the entire duration o" the lease )he In!estors shall be liable to maintain the property and bear the risk o" any loss )he company & Ori(inator shall ensure that the lease payment is made at the a(reed date and promptly# )he property 'ill be trans"erred to the Ori(inator at the end o" the lease period at an a(reed amount# It is permitted "or the o'ner o" the I3arah sukuk certi"icate to sell it on the secondary market to any buyer at a price a(reed upon bet'een them# It doesn2t matter i" the price is the same as, less than, or more than the price at 'hich it 'as bou(ht# )hat is in consideration o" the "act that the !alue o" assets is sub3ect to the market "actors o" supply and demand
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It is not permitted "or the issuer or administrator o" the sukuk to (uarantee the !alue o" the sukuk certi"icate itsel" or the re!enue0 and i" the leased assets should be dama(ed or destroyed, it is the sukuk certi"icate holders 'ho 'ill bear the loss#

I3arah sukuk do not represent a "i ed amount o" money, nor are they debts o'ed by a certain entityAneither a natural nor a le(al entity# )hey are only "inancial certi"icates that represent di""used6undi!ided shares in the o'nership o" a tan(ible asset bein( put to use, such as real estate, an airplane or a ship, or a pool o" such assets, 'hether o" the same or di""erin( speci"ications, 'hen they are leased and, thus, yield de"ined re!enue as a result o" the lease contract#

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