2. Index
1 Basics of Sukuk
2 Difference between conventional bond and Sukuk
3 Sukuk in detail
4 Typical International Sukuk Mechanism
5 Sukuk Structures
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3. Basics of Sukuk1
• Sukuk is popularly known as an Islamic or Sharia compliant ‘Bond’ whilst in actual
fact, it is an asset-backed trust certificate.
• In its simplest form Sukuk is a certificate evidencing ownership of an asset.
• The Sukuk structures relay on the creation of a Special Purpose Vehicle (SPV).
• SPV would issue Sukuk certificates which represents the ownership of an asset,
entitlement (right/claim) to a debt or to rental incomes or even accumulation
(collect) of returns from a Sukuk.
• The return provided to Sukuk holders therefore come in the form of profit from a
sale, rental or a combination of both.
• Sukuk could be based on Mudaraba, Musharaka, Murabaha, Salam, Istishna, Ijara or
hybrid of all these
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4. Difference between conventional bond
and Sukuk2
• In its simplest form, a bond is a contractual debt obligation whereby the issuer is
contractually obliged to pay to bondholders, on certain specified dates, interest and
principal.
• In comparison, under Sukuk structure the Sukuk holders each hold an undivided
beneficial ownership in the underlying assets. Consequently, Sukuk holders are
entitled to share in the revenues generated by the Sukuk assets as well as being
entitled to share in the proceeds of the realization of the Sukuk assets.
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5. PAGE 5
Sukuk in detail3
• An undivided proportionate ownership interest in an asset
• The corresponding right to the Islamically acceptable income streams generated by the
asset.
• These current income streams are established and translated into tradable securities.
• Issuer creates a trust (arrangement whereby a person or group manages property on
others behalf) over the leased or assets.
• Trustee issues Sukuk to the Primary Subscribers (the beneficiaries under the trust) in
the Primary Market
• Sukuk Holders have pro-rata (proportionally) undivided beneficial ownership of the
leased assets held in trust -As beneficial owners the Sukuk-holders are entitled to the
income streams from the leased assets.
6. Sukuk in detail (contd..)3
• The Primary Subscribers can resell the Sukuk in the Secondary Market
• The Secondary Buyer will be the new pro-rata beneficial owner of the leased assets
held in the trust
• Sukuks are usually issued through special purpose vehicle (SPV; is a legal entity
created to fulfil narrow, specific or temporary objectives).
• 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 Tenure
• There were record number of Sukuk Issues in year 2007 Worldwide with a Total
volume of US$32.65 Billion
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8. Sukuk Structures5
Sukuk Structuring may based on following modes
• Mudarabah (Trust Financing/Trust Investment)
• Murabahah (Sale and Purchase)
• Musharaka (Partnership, Project Finance Participation)
• Istishna (Purchase by Order or to Manufacture)
• Salam (Upfront Payment Sale)
• Ijarah (Operating Lease Concept)
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9. Sukuk Structures (contd..)5
Sukuk Structuring may based on following modes
Mudarabah (Trust Financing/Trust Investment)
Mudarabah is a special kind of partnership where one partner providers the capital (rabb-
ul-maal) to the other (mudarib) for investment in a commercial enterprise.
Murabahah (Sale and Purchase)
An Islamic financing structure, where an intermediary buys a property with free and clear
title to it. The intermediary and prospective buyer then agree upon a sale price (including
an agreed upon profit for the intermediary) that can be made through a series of
instalments, or as a lump sum payment.
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10. Sukuk Structures (contd..)5
Musharaka (Partnership, Project Finance Participation)
A joint enterprise or partnership structure with profit/loss sharing implications that is
used in Islamic finance instead of interest-bearing loans. Musharakah allows each party
involved in a business to share in the profits and risks. Instead of charging interest as a
creditor, the financier will achieve a return in the form of a portion of the actual profits
earned, according to a predetermined ratio. However, unlike a traditional creditor, the
financier will also share in any losses.
Istishna (Purchase by Order or to Manufacture)
Istishna is a Sharia mode of financing widely used by Islamic banks and financial
institutions to finance the construction of buildings, residential towers, villas and related
products, and manufacturing of aircrafts, ships, machines and equipment, etc.
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11. Sukuk Structures (contd..)5
Salam (Upfront Payment Sale)
It is an advance payment commodity sales contract where the delivery of the commodity
is deferred. When a bank signs to purchase a commodity on salam and pays out the price,
its receivable is the commodity due at a specified future date that is stipulated in the
contract.
Ijarah (Operating Lease Concept)
In an ijarah contract the bank first owns an asset which it leases to its customer. Or the
bank gets a tangible asset on lease from a third party and subleases it to the customer
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