SHARIAH CHALLENGES IN SUKUK CHALLENGES IN SUKUK ... Maqasid Agenda Shariah Issues in Sukuk . ......
Transcript of SHARIAH CHALLENGES IN SUKUK CHALLENGES IN SUKUK ... Maqasid Agenda Shariah Issues in Sukuk . ......
Introduction
• Sukuk is one of innovative instruments in Islamic capital market to fund long-term financing in a Sharīʿah compliant way.
• It provides an alternative for corporate and government for funding national and international development projects to the predominantly interest debt-based instruments of bonds.
• The successful of its development in the global scene is a result of exhaustive efforts from Islamic financial institutions and fiqh councils to provide a substitute for riba-based instruments to meet the ever-increasing demand for large-scale Sharīʿah-compliant financing.
• The term sukuk is the Arabic plural of sakk which
means a “legal instrument, deed, cheque”
• In general, the term ṣakk is said to refer to any
written document. Thus, written documents of
rulers which entitled their employees to wages or
grants were called Sukuk .
• AAOIFI Sharīʿah Standard 17(2) (2010) Investment
Sukuk is:
– certificates of equal value representing undivided
shares in ownership of tangible assets, usufructs and
services, assets of particular projects or special
investment activity.
Definition of Sukuk
Definition of Sukuk
• Certificates of equal value
representing undivided shares in
ownership of tangible assets,
usufruct and services or (in the
ownership of) the assets of
particular projects or special
investment activity
AAOIFI (Shariah Standard 17 (2)
2015)
• Certificates of equal value which
evidence undivided ownership or
investment in the assets using
Shariah principles and concepts
approved by the SAC
SAC-SC
(Guidelines on Sukuk, 2012)
Characteristic of Sukuk
Tradable (?) Shariah
Compliant Certificate
Characterized by regular
periodic income stream
Directly linked with real sector activities
Involve in production of tangible asset and funding
of trade
SHARIAH ISSUES IN
SUKUK STRUCTURING
Documentation
Underlying Assets
Ownership
Right of Disposal
Sukuk Proceeds
Return
Secondary Market Trading
Purchase Undertaking
Maqasid Agenda
Shariah Issues in Sukuk
A. Documentation:
• Proposal form and contractual agreement should conform to
Sharīʿah requirements.
• Observe the requirement of Islamic contract – general principles of fiqh muamalat .
• Avoid prohibitions in Shariah (riba, gharar, maysir etc)
• Clear and transparent specification of rights and obligations of all parties to the transaction, in particular the originator (customer) and sukukholders.
• Income from securities must be related to the purpose for which the funding is used, and not simply comprise of interest.
• Securities must be backed by real underlying assets – rather than being simply paper derivatives.
• Approved by Shari’ah advisors.
• Material information that must be disclosed in the issuance of Islamic securities:
Details of utilisation of proceeds
Underlying/ identified assets
Shariah principles used Name of Shariah advisor Declaration statement from
Shariah advisor Description of facility /
structure Prices i.e. sale & purchase
price Details on primary &
secondary sukuk
B. Underlying Assets
• It is a fundamental requirement of underlying assets
in ṣukūk issuance must be Sharīʿah compliant (SAC-
SC, 7th meeting, 1995)
– Zarqā (2004, p.426): Assets should be subject to intrinsic
value of the contract.
– SAC-SC (2007, p.77): Assets in ṣukūk takes the rule of
māl in Sharīʿah.
– Māl can be movable and immovable (Bāshā, Muḥamad
Qadrī, 1308A.H, p.3-4).
C. Ownership of Underlying Assets
AAOIFI Pronouncement on Sukuk (2008):
• Investors have an undivided interest in the
underlying assets and are therefore entitled to
share jointly the related returns/cashflows.
• Sukuk must represent proportionate ownership
of the Sukuk investors in the underlying asset,
project, right/services.
• This ownership must entail both the rights and
obligations of the investors. As such there must
be a transfer of assets to the investors.
Legal and Beneficial Ownership
• From Sharīʿah perspective, al-milkiyyah (ownership) is all inclusive.
• It embraces mainly three elements, the substance of Sharīʿah (ḥaqīqah Sharʿiyyah); subject and effects of the ownership; relationship between owner and the object owned.
• In reference to authority, ownership can be complete ownership and incomplete ownership.
Continue…
• Complete ownership gives
authority to asset, its
usufructs and unconditional
rights to the asset.
• Characteristics:
rights to disposal of assets;
rights to usufructs;
first ownership;
not timing;
subject to transfer;
no liability for defects by
owner
Incomplete ownership
gives either legal or
beneficial and/or usufruct
rights.
Characteristics:
legal ownership only:
transferrable; no timing;
separable from beneficial
rights; can be banished.
beneficial ownership:
subject to restriction in
time, place, and manner of
usage.
it is personal right to
usufructs without ownership.
Continue…
Sharʿīah Principles of the same characters on the
ownership issues:
1) Bayʿ al-Wafāʾ which is allowed by some medieval scholars of
Ḥanafī and Shāfiʿī based on customary practices, need and
avoidance of ribā.
2) ʿAqd Tamalluk al-Zamanī (Time Sharing)
– Ownership of assert via lease or sale by way of time sharing. It
is approved by OIC-Fiqh Academy.
3) Ḥaqq Hikr (Right to monopolize Waqf Landed Property)
It is a contract in which waqf property is leased for long-term
period to a lessee.
Ibn ʿĀbidīn, it is a kind of lease contract with the aim to prevent
others from accessing the waqf property by use of long-term
lease known as (ḥikr).
Restriction in right of Sukuk holders to dispose asset
Since Sukuk holders do not have interest in the underlying asset,
they cannot dispose the asset to third parties
They rely on Purchase Undertaking which promises principal +
unpaid profit
In most cases, the asset used to facilitate an asset based
Sukuk will continue to stay on the balance sheet of the
obligor.
Although this restriction is not explicitly mentioned in Shariah
related documents, it is clearly indicated in the offering
circular’s risk section and the enforcement and exercise of
rights clause.
D. Right of Asset Disposal
E. Sukuk Proceeds
• Funds raised must be used for Shariah compliant (halal) activities.
• Fund raised may be used to finance needed tangible assets.
• Specificity of assets is important, since Sukuk unlike conventional bonds cannot be used for general financial needs of the issuer.
F. Return/profit Payment
• Income received by sukukholders (investors) must
be derived from the cash flows generated by the
underlying.
• Loan provided by the Issuer to the investors to
smoothen the profit payment is not permissible.
However, the Issuer can:
– Establish reserve account; or
– Apply “profit on account” methodology; or
– Assist the sukuk investors to get Islamic financing to
smoothen the profit payment.
– Hence, no liquidity facility, top-up payment
G. Secondary Market Trading
Type Features Tradability
Murabahah Sakk represents assets purchased & intended for sale. Once sale is made, the sakk represents a debt. In M’sia – this is short term debt security
Sukuk are only tradable under Malaysian rules
Ijarah Sakk must lay title claim to asset. The claim may be direct or beneficial.
Sukuk are universally tradable
Musharakah Sakk must lay title claim to asset, but this may include participation in business ownership or operations. Frequently, an undertaking is added to make musharakah operation more debt like.
Depending on the underlying asset, these sukuk are tradable. In M’sia, the underlying asset may be a permissible debt form such as a murabahah receivable.
BBA Sakk represents assets purchased and intended for sale. Once the sale is made, the sakk represents a debt. In M’sia – this is a long term debt security
Sukuk are only tradable under Malaysian rules.
Wakalah Sukuk holders appoint the beneficiary of funds as their agent to perform certain business operations.
Depending on the underlying asset, these sukuk are tradable. In M’sia, the underlying asset may be a permissible debt form such as a murabahah receivable.
Bay al-Dayn in debt based sukuk in secondary
market trading
• AAOIFI (Shariah Standard No 17,
para 5/2/15) on Sukuk
Murabahah:
– The sukuk is acknowledged
– It can be traded after
purchasing of asset and before
selling it to the buyer.
– It can not be traded after the
delivery of the asset to the
buyer.
– Reason: The subject matter is
considered as financial asset
(receivable). Issue on sale of
debt (bay’ al-dayn)
Shariah Advisory Council of
Securities Commission,
Malaysia:
Can be sold at a discount in a
securitization exercise.
Bay’ al-dayn is adopted based
on the views of some scholars
(Malikis & Shafiites) who
allowed this principle subject to
certain conditions.
In capital market, these
conditions are met with a
transparent regulatory system
which can safeguard the
interest of the market
participants
However, the securitisation of HYBRID ASSET is acceptable if it consists of at least 30%
of physical asset (refer to AAOIFI Shariah Standard no 21.)
Bay’ al-dayn bi al-Sila’
• Malaysia has developed Bursa Suq Al-Sila' as commodity trading platform specifically dedicated to facilitate Islamic liquidity management and financing by Islamic banks.
• It is used for Commodity Murabahah program of selling and buying commodity with credit.
Shari’ah requirements for the commodity used in Bursa Suq al-
Sila’:
Commodity must be owned by supplier or agent (CSP); Commodity
must be in existence; Defined specification – quantity & quality;
Specified location during offer; and Unencumbered – not tagged to
any sale at point of offer
H. Purchase Undertaking
• Purchase undertaking is an agreement that states the obligor
shall execute a purchase undertaking in favor of the trustee on
or about the closing date all of the Trustee’s rights, title and
interest in and to the investment Assets at the exercise price.
• Purchase undertaking is actually intended to dissolve the
contract relating to the Sukuk whereby the Sukuk issuers buy
back all of the Sukuk from the investor and the investor will
recover his principal investment by getting the cash.
• The agreement of purchase undertaking is developed based on
the concept of promise (wa’d) between the issuers and investors
to buy back the ownership of The agreement of purchase
undertaking is developed based on the concept of promise
(wa’d) between the issuers and investors to buy back the
ownership of sukuk.
• Securities Commission Malaysia (2012: 161) views the promise (wa’d) for purchase undertaking is legitimate and binding upon the promisor (issuer who give promise).
• However the exercise prices, according to AAOIFI in their Pronouncement (2008) “shall be based either market value; or Fair value; or a price to be agreed at the time of exercise”.
• Any agreement to purchase the assets at face value/ nominal value is not permissible.
• This is only permissible in the case of negligence and misconduct of the Issuer
I. Maqasid Agenda
• Maqasid should be given consideration apart from
fiqh legal requirements
• Ethical & ESG Sukuks
• Real economics impact
• Benefit to all segment of the societies
• Its timely for Islamic finance to move away from
conventional practices and introduce a better holistic
solutions.