This document defines and describes Musharakah Sukuk. It begins by defining Sukuk and Musharakah Sukuk. Musharakah Sukuk represent ownership shares in a business venture or project on a profit-and-loss sharing basis. The document then explains the modus operandi of Musharakah Sukuk, including how the funds are used to execute a project and how profits and losses are shared. It also summarizes various fatwas and resolutions issued on Musharakah Sukuk by organizations like AAOIFI.

1. SUKUK
(MUSHARAKAH)
PREPARED BY :
NUR SYAKHIRAH BINTI AB RAHMAN M 142003713
NUR SALWATI HANIM BINTI MOHAMAD AMRAN MI42008613
NORIDAHNI BINTI JAMIL MI42006713
SITI SYAZWANI BINTI MUHAMMAD JAJAM M141062913
SAMIRAH BINTI
NAJWA

2. CONTENT
 DEFINITION OF SUKUK
 MUSHARAKAH SUKUK
 MODUS OPERANDI OF MUSYARAKAH SUKUK
 ISSUED ON MUSHARAKAH SUKUK

3. Literal Meaning
Sukuk is the plural of sak which
means certificates. Other similar
terms:
• Taskik – process of dividing
assets into papers (sukuk)
• Tawriq – to render
something into cash SUKUK
Technical Meaning
Sukuk refers to securities,
notes, papers or
certificates, with features
of liquidity and tradability
(except for salam and
murabahah sukuk)
AAOIFI
“Investment sukuk are certificates of equal
value representing undivided shares in
ownership of tangible assets, usufructs and
services (in the ownership of) the assets of
particular projects or
special investment activity”
Malaysian Securities Commision
“A document or certificate which represents
the value of an asset”
• Asset – may include financial asset such as
receivables and debts, as well as non-
financial assets like tangible assets,
usufructs and services

4. WHAT ARE SUKUK?
• Sukuk refers to an Islamic investment certificate, which allows investors to
have rights of ownership of the asset, including the cash flow and risks
associated with such ownership.
• Sukuk are asset-backed, tradable, and Shari’ah compatible trust certificates.
• Sukuk (plural) and sakk (singular) means legal instrument, deed, and check.
• It is the Arabic name for financial certificates.
• It is also an Islamic debt instrument and can be referred to as securities,
notes, papers, or certificates, with features of liquidity and tradability.

5. MUSYARAKAH SUKUK
• Musharakah sukuk are participatory types of investment sukuk that are based
on profit-sharing terms and for mobilizing funds for establishing new large
scale projects or developing existing ones, or financing business activities on
the basis of equity partnerships.
• The certificate holders become the owners of the project or the assets of the
activity as per their respective shares as they are all considered to be the
investors.

6. MUSHARAKAH SUKUK
• It represents the ownership of the project or the assets of the activity as per
their respective shares in the musharakah venture i.e profit and loss sharing
business venture.
• All providers of capital are entitled to participate in management, but is not
necessarily required to do so. Normally, the issuer is appointed as the
musharakah partners’ agent in managing the business.
• The profit is distributed among the partners in pre-agreed ratios, while the
loss is borne by every partner strictly in proportion to respective capital
contributions.

7. MUSHARAKAH SUKUK
• Musharakah sukuk is treated as negotiable instruments and can be bought
and sold in the secondary market.

8. MUSHARAKAH SUKUK
• Musharakah sukuk are issued for funding and the units of each partner for
partnership are determined based on the investment need.
• The funds from the sukuk will be utilized for executing the project.
• The musharakah sukuk will be utilized for executing the project.
• The musharakah sukuk certificate evidences the capital contribution of the
investors and the ‘indicative rate of profit.’
• Profit, if any, will be shared between the Issuer and Investors at an agreed
sharing ratio.

9. MUSHARAKAH SUKUK
• Financial loss will be borne by all certificate holders proportionate to their
respective investment.
• At maturity, if the project generates enough revenue for issuer to buy back
the asset as per undertaking to pay off the sukuk holder and they will receive
their face value and share of their dividends.

10. Musharakah sukuk, based on the two categories of
musharakah described above, can be structured in the
following manner:
Shirkah al-milk
(co-ownership)
Shirkah al-´aqd
(contractual partnership)
An arrangement in which either i)
the Originator and the Trustee
contribute cash to the
musharakah to purchase an asset
together; or ii) the Originator sells
an ownership interest in an asset
to the Trustee. Accordingly, the
Originator and the Trustee
become co-owners of that asset
An arrangement in which the
Originator and the Trustee agree
to combine their efforts and
resources (typically in the form of
cash and/or other asset from the
Originator and the Trustee) with
the objective of developing a
project or financing a business
activity

11. MUSHARAKAH SUKUK STRUCTURE
Musharakah sukuk can be structured in two main forms, namely
i. musharakah (partnership) among investors, and
ii. musharakah between investors and the issuer.
However, the second form can be further extended into two types:
a) Musharakah between investors and the issuer to undertake project(s)
b) Musharakah between investors and the issuer for participation in the issuer’s business
operation.

12. Basic Structure of Musharakah Sukuk among
Investors :
1. Musyarakah Venture (partnership
arrangement) between the Investors
2. The Musyarakah Venture shall be
carried out through the Issuer in it's
capacity as an agent
3. Issuer shall issue the Sukuk
Musyarakah to the Musyarakah
Partners
4. Trustee shall declare a trust over the
Trust Asset and all rights under the
Musyarakah Venture

13. • As indicated in the above structure, firstly, the investors will form a
partnership (musharakah) among themselves to invest in a musharakah
venture or to finance the construction of a specific project. This musharakah
must be formed on the basis that all the musharakah partners will contribute
capital and any profit obtained from theventure will be distributed according
to the pre-agreed profit sharing ratio. Concurrently, the trustee will declare a
trust over the trust assets and all rights under the musharakah venture.
Therefore, the income generated from the trust assets will be distributed
among the sukuk holders (i.e. investors) based on the pre-agreed ratio.

14. • Secondly, the issuer, who acts as an agent to manage the musharakah
venture, will receive the capital contribution that was invested by the
musharakah partners in the musharakah venture and then construct and/or
oversee the overall development of the project.
• Thirdly, in return for the capital contribution received from the musharakah
partners, the Issuer will issue musharakah sukuk to evidence their
proportionate and undivided ownership in the musharakah venture.

15. Structure of Sukuk al-Musharaka (based upon a
shirkat al-’aqd arrangement)

16. 1. Issuer SPV issues sukuk, which represent an undivided ownership interest in an underlying asset or
transaction. They also represent a right against Issuer SPV to payment of the Periodic Distribution
Amount and the Dissolution Amount.
2. The Investors subscribe for sukuk and pay the proceeds to Issuer SPV (the “Principal Amount”). Issuer
SPV declares a trust over the proceeds (and any assets acquired using the proceeds – see paragraph 3
below) and thereby acts as Trustee on behalf of the Investors.
3. Trustee enters into a musharaka arrangement with Originator, pursuant to which Trustee contributes the
proceeds from the issuance of the sukuk into the musharaka and is allocated a number of units in the
musharaka in proportion to its capital contribution.
4. Originator enters into a sale and purchase arrangement with Trustee, pursuant to which Originator
agrees to sell, and Trustee agrees to purchase, certain assets (the “Assets”) from Originator.

17. 5. On each periodic distribution date Trustee shall receive a pre-agreed percentage share of the
expected profits generated by the Musharaka Assets and, where the Musharaka Assets generate a
loss, Trustee shall share that loss in proportion with its capital contribution to the musharaka.
Trustee’s share of profits will typically be a percentage high enough to at least equal the Periodic
Distribution Amounts payable under the sukuk.
6. On each periodic distribution date Originator shall receive a pre-agreed percentage share of profits
generated by the Musharaka Assets and, where the Musharaka Assets generate a loss, Originator shall
share that loss in proportion with its capital contribution.
7. Issuer SPV pays each Periodic Distribution Amount to the Investors using the profit it has received
from the Musharaka Assets.

18. 8. Upon:
I. an event of default or at maturity (at the option of Trustee under the Purchase Undertaking); or
(ii)
II. the exercise of an optional call (if applicable to the sukuk) or the occurrence of a tax event (both
at the option of Originator under the Sale Undertaking),
Trustee will sell, and Originator will buy-back, the Assets at the applicable Exercise Price, which will be
equal to the Principal Amount plus any accrued but unpaid Periodic Distribution Amounts owing to the
Investors.
9. Payment of Exercise Price by Originator (as Obligor).
10. Issuer SPV pays the Dissolution Amounts to the Investors using the Exercise Price it has received
from Originator.
11. Trustee and Originator will enter into a management agreement whereby Trustee shall appoint
Originator.

19. RESOLUTIONS (FATWÃ) ISSUED ON
MUSHARAKAH SUKUK
AAOIFI’s Statement of 2008:
• Before the AAOIFI Statement it was possible for the Originator to grant a purchase
undertaking to the Trustee and for the Exercise Price to be a fixed amount determined in
accordance with a formula (and not by reference to the market value of the Musharaka
Assets).
• The Exercise Price would therefore typically have been, in the event of a default or
maturity, equal to the face amount of the sukuk plus any accrued but unpaid Periodic
Distribution Amounts.
• The Investors were therefore ‘guaranteed’ to receive their principal investment and profit
(subject to the usual risks, such as insolvency, present in any sukuk or conventional bond
structure)

20. • However, under the AAOIFI Statement, Shari’a scholars have taken the view that it is not
permissible for an Originator to grant a purchase undertaking to the Trustee to purchase the
Musharaka Assets for any amount other than the Trustee’s share of the market value of the
Musharaka Assets at the time of sale.
• The premise for this ruling has been that sukuk al-musharaka are analogous to equity-based
instruments and therefore the partners in the musharaka must take the risk of both profit and loss.
• Determining the value of the Musharaka Assets by reference to the face amount of the sukuk (or by
reference to a shortfall amount) is akin to a guarantee of profit and principal, which, unless given by
an independent third party (i.e. anyone other than the Originator), is not permitted under Shari’a.
• This ruling has resulted in a significant decline in the number of sukuk al-musharaka issuances in
2008 and 2009.