Dubai Sukuk Stds (Draft)

7/29/2019 Dubai Sukuk Stds (Draft)

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DFM Standard ForIssuing, Acquiring and Trading Sukuk


Exposure Draft

Consultation Period:6th January 28th February 2013DFM invites you to comment on the draft DFM Standard for Issuing, Acquiring and Trading Sukuk Email your comments to:[email protected] 28th February 2013

Sharia and Fatwa Supervisory BoardThe Board Secretariat
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Contentsintroduction.................................................................................................................................... 3

definitions....................................................................................................................................... 5WHAT IS SUKUK? ........................................................................................................................... 5SUKUK ASSETS .............................................................................................................................. 5SUKUK UNDERLYING CONTRACTS ................................................................................................... 6THE FORBIDDEN FINANCIAL INSTRUMENTS....................................................................................... 7THE PARTIES TO SUKUK ................................................................................................................. 8REDEMPTION & TRADING OF SUKUK ................................................................................................ 9TYPES OF SUKUK ........................................................................................................................... 9

general principles and sharia parameters ............................................................................... 11THE GENERAL PRINCIPLES FOR ISSUANCE OF SUKUK ..................................................................... 11SHARIA RULES FOR THE ISSUANCE OF SUKUK............................................................................... 13

a. the special purpose vehicle...................................................................................... 13b. stipulating an incentive for the sukuk manager..................................................... 14

c. giving prizes on investment sukuk.......................................................................... 14sharia rules of sukuk .................................................................................................................. 15IJARAH SUKUK ......................................................................................................................... 15SUKUK OF OWNERSHIP OF LEASED OR TO BE LEASED ASSETS .................................................... 16SUKUK OF USUFRUCTS ............................................................................................................. 17SUKUK OF OWNERSHIP OF USUFRUCTS OF SPECIFIED ASSETS .................................................... 18sukuk of human labor (service ijarah sukuk)................................................................... 19PARTICIPATION SUKUK ............................................................................................................. 20mudaraba sukuk: general rules......................................................................................... 20sukuk of musharaka in profit............................................................................................. 21FINANCE SUKUK....................................................................................................................... 24

a.salam sukuk................................................................................................................ 24b.murabaha and bay bethaman ajel sukuk................................................................ 24c.istisna sukuk.............................................................................................................. 24d.funds sukuk................................................................................................................ 24

sukuk guarantees ........................................................................................................................ 26GENERAL RULES.......................................................................................................................... 26THE PROMISE TO PURCHASE......................................................................................................... 26GUARANTEES IN INVESTMENT SUKUK ............................................................................................ 27THE OBLIGATION TO LIQUIDATE THE SUKUK ASSETS AND REFUND THE CAPITAL .............................. 27UNDERTAKING OF PURCHASE AT PRICE EQUIVALENT TO THE REMAINING UNPAID FIXED RENTAL (THENON-MANAGING LESSEES UNDERTAKING) .................................................................................... 27LENDING UNDERTAKING BY THE INVESTMENT SUKUK MANAGER ..................................................... 27LENDING UNDERTAKING BY THE INVESTMENT SUKUK MANAGER ..................................................... 27GUARANTEE OF A CERTAIN DETERMINED PROFIT FOR THE SUKUK HOLDERS .................................... 28


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Introduction

All praise is due to Allah, Lord of the Worlds; and His blessing and mercy be upon hislast Messenger, his family, his companions and upon all who rightly follow them, till theDay of Judgment.

One of the most important features of Islamic finance is that it is based on collectingfunds from their owners through Mudaraba or Wakala Bilistithmar1, then investing thesame through Sharia compliant financing and investment contracts, which may besimple or compound. In all cases, immediate money is not offered to finance-seekers inexchange for future money, rather the dealings are conducted on assets, usufructs andfinancial rights. For instance, financial instruments had started dealing with shares atfirst, but the beginning of this century witnessed dealings in new financial instrumentscalled "Sukuk."

A valid question may arise on the difference between shares and Sukuk. It can be saidin this regard that shares are usually confined to being common rights in the ownershipof the assets of a specific legal company, and they remain in use as long as thecompany itself remains in existence. Sukuk, on the other hand, although they representcommon rights in the ownership of assets, they are not necessarily limited to the assetsof a specific company; besides, they are issued for a specified period after which theycan be redeemed.

When Sukuk first appeared in the beginning of this century, they were considered asubstitute to bonds and for that reason Sukuk borrowed from bonds some mechanisms,procedures and terminologies which were not contradicted to Sharia rules. This

standard aims at setting the rules and parameters with respect to the issuance andtradability of the Sukuk, keeping in mind theirSharia origin which is to be duly observedthrough the use of the mechanisms, rules and parameters endorsed by Islamic law. Thisway, Sukuk become a genuine Islamic financial instrument as dictated by their Shariaorigins.

In fact, Sukuk have made quantum leaps in terms of variety, volume and revenue, andthey have drawn the attention of both the Islamic and international markets. Their issuinghas also been closely monitored by Sharia bodies to ensure the compliance of theirstructure and execution with Sharia rules.

Considering the novelty of Sukuk in the market, there are certain challenges facing

them, such as the absence of an integrated secondary market due to the relativelylimited number of Sukuk issuances in comparison with the market of conventionalfinancial instruments. Some of the other challenges relate to the absence of a newSharia standard for acquiring of and trading in Sukuk, that broadly facilitates the

1 Other Islamic financial modes include: Musharaka, Diminishing Musharaka, Restricted and

Unrestricted Mudaraba, Restricted and unrestricted Investment Wakala, Bay Bithaman Ajil,

Murabaha for the purchase order, operating and financial lease (Ijara Muntahia Bittamlik),

Istisna and Salam Sale.


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issuance of Sukuk, opens the doors to more useful financial innovations and createspotentials for Sukuk investors so they can own and trade in Sukuk with full comfort and

assurance that their investment is in compliance with Sharia.

As we follow the current situation of the Islamic Sukuk market, we notice that theissuance of Sukuk had witnessed considerable development till 2007, after which itshrank in 2008 due to the decline in economic growth. But it improved again to theextent that the value of issued Sukuk in 2011 was worth $70bn. Thus, we should expecta prosperous future for Sukuk in the coming years if we are able to offer the appropriatestandard which bridges all gaps to embrace the expected improvement in the economicsituations. It is also expected that new companies will play valuable roles in this marketand improve its efficiency, thus making Sukuk an excellent instrument for treasuryoperations and trading. Investment Sukuk, which are better alternative to conventionalbonds, are constantly and largely evolving for the use of investors who seek Sharia

compliant investment products. The development of the Sukuk sector however calls forsincere efforts to be exerted by the Muslim scholars and whoever is interested in theIslamic financial thought, in order to innovate and come up with new Islamic financinginstruments that serve both the Islamic and world communities, and so enable thesecommunities to benefit from the fairness of Islamic finance and its efficiency in achievingconstant and balanced growth.

Hence the interest of Dubai Financial Market was towards the establishment of its ownstandard for acquiring of and trading in Sukuk. In order to prepare this standard, theSharia and Fatwa Supervisory Board of Dubai Financial Market has reviewed andstudied the existing Sharia Sukuk standards and the relevant fatwas that were issued bythe reliable fatwa bodies, and then it prepared this new standard.

This new standard, which was prepared by the Sharia and Fatwa Supervisory Board,aims at subjecting Sukuk to the principles and rules of Sharia, which assures Sukukholders and enables Islamic finance industry to achieve more progress in the future.

Just Allahs pleasure is our ultimate goal; and His Favor only destines thesuccess.


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DefinitionsWhat is Sukuk?

1. Sukuk: Plural of Sakk, lexically means a certificate, a deed or security2. In IslamicFinance terminology Sukuk refers to certificates or legal instruments (securities) ofequal value, owned either by a defined person (whose name appears thereon;nominal Sukuk) or by their bearers. They represent undivided shares in ownership ofassets: tangible assets, usufructs, debts, money, services, financial rights or amixture of some or all of these kinds, but subject to certain conditions (the Sukukassets) upon issuance and after subscription. Sukuk holders share the profits andlosses of the Sukuk underlying assets. Sukuk are tradable instruments so long asthey do not represent debt or money alone. They shall not be deemed as debt fortheir owners on their issuer at issuance time; their issuance shall strictly be on thebasis of one of the Sharia contracts, and the rights and obligations of all contractualparties are well defined in the prospectus. Moreover, Sukuk have the following

characteristics:1.1. They are either nominal or for-the-bearer certificates, issued with equal value as

evidence of ownership for their holders in the underlying assets.1.2. They are issued, based on a Sharia contract with all of its rules, conditions and

legal effects.1.3. The holder shares the proportion of the Sukuk he holds, the profit and the

liquidation value of the assets they represent. In case of loss, he is also liable forloss to the proportion of the Sukuk he holds based on the Fiqh maxim "liabil ityis an obligation accompanying gain

1.4. Sukuk ability for redemption and trading is subject to the conditions pertaining tothe tradability of the assets they represent.

1.5. It represents property rights in assets that are either existing at the time of

issuance or to be acquired with the issuance proceeds; however, unlike bonds,Sukuk do not represent interest-bearing loans from their holders to their issuer.On the contrary, Sukuk represent undivided shares in the ownership of assets,and they entitle their holders to the return generated from the investment of theirissuance proceeds.3

1.6. Sukuk are issued for a limited period, and they can be redeemed during or at theend of this period.

Sukuk assetsSukuk assets are what the Sakk represents of tangible assets, usufructs, debts,money, services or a mixture of some or all of these kinds but with certain conditions.

2From the word Sakk were developed later the English word (check) and the French word

(cheque) and their likes.3It is one of the common mistakes to term Sakk a bond. A bond represents a financial

right in a certain amount of money that is payable in the future. This amount

comprises the money paid to purchase the bond and the interest calculated on term.

Therefore, bond and its likes, e.g. treasury bills, are prohibited Riba-bearing financial

instruments.


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Sukuk underlying contracts

Sukuk are issued on the basis of a Sharia contract that has fulfilled its elementsand conditions and produced its legal effects. Sukuk contracts are not limited innumber since permissibility is the original ruling in initiating contracts and makingconditions so that it is the claim of prohibition that needs to be supported withevidence. Contracts, however, can be divided into financing contracts andinvestment contracts. Financing contracts are the ones that lead to the creationof debt liability towards one of the contractors, like the creation of monetary debtin Murabaha, or goods as in Salam and Istisna. Conversely, Investmentcontracts do not result in creation of debt liability upon any of the contractors asin Musharaka, Mudaraba and Wakala bilistithmar (agency in investment).

Sukuk underlying contracts include:

1. Investment contracts:1.1. Musharaka4

4Partnerships:

(1) Partnership in ownership is based on Wakala and Kafala between partners. It isformed when two or more jointly own something by virtue of inheritance, gift, bequest or

other means. It may be formed compulsory; without it being intended by the partners as

when two inherit something, or it may be initiated by the partners as when they jointly

buy something or accept a gift, donation or a bequest. The partners in this partnership are

like foreigners so that no party has the authority to act on behalf of the other unless with

delegation of power; however, one may guarantee the other.

(2) Contractual partnership: This partnership is formed by the contractualagreement of partnerswhose number may increase over time- on the basis of Wakala or

Wakala and Kafala combined. It is of four types.

(3) In a Partnership: An agreement between two or more parties to combine theirassets for the purpose of making profit. Profit sharing is as per agreement and liability for

loss is as per their shares in the capital.

(4) Mufawada Partnership:Mufawada literally means equality, and it is derived from Tafweed which means

authorization to act. Technically, it refers to a partnership in which the parties are equal in

the funds contributed by them, their right to act and their liability and profit. It is based

on Wakala and Kafala combined.

(5) Abdan Partnership (vocational or professional partnership): An agreementbetween two or more parties to provide services pertaining to a profession or a vocationand to share the profit according to an agreed-upon ratio.

(6) Wojoh Partnership (Partnership in creditworthiness or reputation): A bilateralagreement between two or more reputable parties to conclude a partnership without a

capital so they buy assets on credit on the basis of their reputation for the purpose of

making profit. When they sell the assets they repay the debt and share the balance as

profit in proportion to their debt liability.


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1.2. Mudaraba1.3. Wakala Bilistethmar

1.4. Muzaraa1.5. Mugharasa1.6. Musaqah

2. Financing contracts:2.1. Bay Bethaman Ajel (Musawama sale)2.2. Murabaha2.3. Istisna2.4. Salam2.5. Ijarahh (The two types of Ijarahh)

3. The prospectus: Sukuk prospectus represents an invitation from the issuer to

the subscribers. It includes all information about the Sukuk issuer, the use ofthe Sukuk proceeds, the assets in which the proceeds will be invested, theassets manager, the Fatwa and Sharia Supervisory Board, the methodology ofSharia auditing, the controls to protect the interests of the subscribers and soon and so forth.3.1 The act of subscription represents an offer, while the issuers approvalof the subscription represents an acceptance,3.2 However, if it is expressly stated in the prospectus that it is an offer,then in this case the prospectus will be considered as an offer and thesubscription becomes an acceptance.

The forbidden financial instruments

1. Bonds: Bond is a certificate or a deed (security) that represents a guaranteedinterest-bearing debt owed by its issuer (the debtor) to its bearer. A bond thusrepresents a financial right for its bearer (the creditor). Its amount is guaranteed bythe bond issuer to be repaid at a specific future time, and it comprises both theamount paid in the purchase of the bond and the interest calculated on its term.Bonds include government bonds, treasury bills, corporate bonds (Loan instruments)and all financial instruments that are based on lending with interest. All these areReba-bearing financial instruments and thus they are forbidden to deal with. For theirprohibition consideration should be given to their essence and nature and not to theirterminology. Terming bonds as investment certificates does not change theprohibition of their acquisition and trading. Similarly, terming Sukuk that have fulfilled

all Sharia conditions as Islamic bonds does not render them prohibited, yet thename (Islamic bonds) itself is not accurate in economic sense.

2. The stocks of companies whose primary activity is prohibited.

3. The stocks of companies whose primary activity is permissible but:3.1. Its interest based lending or borrowing exceeds 30% of its total assets, or3.2. Its income generated from unlawful sources exceeds 10% of its total income.


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4. All kinds of financial derivatives.

5. Securities that are based on contracts that have not fulfilled their Shariaelements and conditions, or that involved prohibited elements or contracts likethe buy-back sale, the sale whose two counter values have been bothpostponed, sale of debts for less than their nominal value, forward currencyexchanges and fictitious sales of Murabaha, whose Sharia conditions havenot been observed.

The parties to Sukuk

A. The issuer of the Sukuk1. The issuer of the Sukuk is the party who uses the realized fund. Sukuk issuer could

be a firm, a government or a financial institution. The issuer may delegate forIssuance of the Sukuk an intermediary institution (special purpose vehicle, SPV).

2. The issuer of the Sukuk could be the same seller of the leased asset or the asset tobe leased, the seller (lessor) of the usufruct of the asset in a lease contract or theseller of the service in a service lease contract. Sukuk issuer could also be the sellerin a Salam contract, the buyer in an Istisna contact where the Sukuk holders are themanufacturer or the buyer in a Murabaha contract where the Sukuk holders are theseller.

3. The issuer of the Sukuk could be a special purpose vehicle (SPV), which isestablished as agent and trust in favor of the Sukuk holders. In this case the SPV isthe party that gives the offer while the Sukuk holder is the one who accepts thatoffer.

4. The issuer of the Sukuk representing ownership of the leased assets (already leasedor to be leased later), or also the Sukuk representing ownership of the usufruct of theassets or services, is the seller of these assets, usufructs (the lessor) or services.The Sukuk holders are the buyers of these Sukuk assets, while the funds mobilizedthrough the subscription are the purchase price of these assets.

5. The issuer of Musharaka, Mudaraba or Investment Agency Sukuk is the partner, theMudareb or the investment agent respectively. The Sukuk holders are respectivelythe partners, capital providers or the principals. The funds mobilized through thesubscription are the Sukuk holders share in the Musharaka capital, the Mudarabacapital or the entrusted capital of the investment agency.

6. The issuer of Istisna Sukuk is the seller of the manufactured asset, while the Sukukholders are the buyers of this asset and the fund mobilized through the subscription

is the purchase priceof this manufactured asset.7. The issuer of Murabaha Sukuk is the seller of the Murabaha asset, while the Sukuk

holders are the buyers of this asset and the fund mobilized through the subscriptionis the purchase priceof this asset.

8. The issuer of Muzaraa Sukuk:8.1. The issuer of Muzaraa Sukuk could be the owner of the land (the principal

owner or the owner of the usufruct of the land). The subscribers are thecultivators on the basis of a Muzaraa contract. The realized fund is thecultivation cost.


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8.2. The issuer of these Sukuk could also be the cultivator (the worker), thesubscribers could be the owners of the land (investors whose subscription

amounts are used to buy the land) and the Sukuk holders are entitled to a shareof the produce of the land as per agreement.

8.3. Holding the title to the Sukuk assets by the Sukuk holders may be direct orthrough an agent or a trustee, who may be an individual or a special purposevehicle, SPV.

B. Sukuk holders1. They are the owners of the Sukuk assets. They hold all varieties of Sukuk

certificates.

C. Sukuk ManagerThe Sukuk manage may be:

1. A Mudareb managing the Sukuk holders assets against a share in the realized profit,2. An investment agent managing the Sukuk holders assets against a determined fee

that could take the form of fixed amount or a percentage in the assets value, with orwithout an incentive,

3. A managing partner managing the Sukuk holders assets against a regular share or ahigher share in the profit.

Redemption & Trading of Sukuk1. Redemption of Sukuk means distribution of the Sukuk assets on the Sukuk holders,

or selling the Sukuk assets to the Sukuk issuer or someone else, then distributing thesale proceeds on the Sukuk holders in proportion to the number of Sukuk held byevery one of them.

2. Trading of Sukuk is the sale of the Sukuk underlying assets to a third party so that hereplaces the old Sukuk holder in the ownership of these assets.

Types of Sukuk

1. Sukuk of ownership of tangible assets:1.1. These Sukuk represent for their holders a common share in the ownership of

assets that are either ascertained or established as a liability by description. Thisownership grants these Sukuk holders the right in owning the funds realizedfrom the sale of these assets or the sale of their usufructs.

2. Sukuk of usufructs:

2.1. These Sukuk represent for their holders a common share in the ownership ofusufructs of ascertained assets (lease of ascertained assets) or assetsestablished as a liability by description (forward lease).

2.2. They grant their holders the right in reselling the usufructs they representthrough subleasing so that they can claim the rents from the sub-lessees.

3. Sukuk of lease of services:3.1. These Sukuk represent for their holders a common share in the ownership of


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services that could be either ascertained or established as a liability bydescription (from a specific or nonspecific service provider). The provider of

these services commits himself to provide them to others against a determinedfee, whether in person or through what he undertakes to provide of facilities,means, equipment, devices or other things. Examples of these services includemedical and educational services, means of transportation, legal or financialconsultations and geometric designs. The fund mobilized through subscription isthe purchase priceof these services, whether for a certain period or a certainwork.

3.2. These Sukuk grant their holders the right of subleasing the service against adetermined fee, which constitutes the return of these Sukuk.

4. Mudaraba (Muqarada) Sukuk:4.1. The underlying contract of these Sukuk is Mudaraba where Sukuk holders

provide the Mudaraba capital and the Mudareb invests it in a certain venture orproject against a percentage in the return of that investment. The Mudareb is notliable for the damage or loss of the Mudaraba assets as long as he is able toprove that such loss or damage has not been the result of a misconduct,negligence or breach of the Mudaraba contract and conditions.

4.2. The issuer of these Sukuk is the Mudareb, while the Sukuk holders are thecapital providers and the fund realized from issuance of the Sukuk is theMudaraba capital. The issuer of these Sukuk may also be a special purposevehicle (SPV), which is established as agent and trust in favor of the Sukukholders, while the Mudareb is the other party in this Mudaraba contract.

4.3. Mudaraba Sukuk represent at issuance undivided shares in the Mudarabacapital, then after issuance they represent undivided shares in the Mudaraba

assets purchased with the capital. The holder of these Sukuk has the right todispose it of or the assets it represent by all legal means.

5. Musharaka Sukuk:5.1. The underlying contract of these Sukuk is Musharaka, and the underlying asset

of this Musharaka is a stand-alone asset or a share in an existing-Musharakaasset. The latter occurs when the Sukuk issuer securitizes his share in aMusharaka he previously signed with a third party, so the Sukuk holders replacehim in that share and become its owners, and the Sukuk manger manages thisshare for them. As a result they become entitled to the profit according to theagreed-upon profit ratio and also liable for loss in proportion to their share in theMusharaka capital.

5.2. The issuer could also be a party willing to set up a certain project on a land heowns so he wishes to issue Musharaka Sukuk in order to help develop thisproject on the land. Alternatively, he may have insufficient capital to finance aproject he wants to set up, so he issues Musharaka Sukuk to raise the neededcapital. In this case the Sukuk issuer owns a share in the project proportionateto his contribution, while the Sukuk holders own the remaining share each inproportion to the Sukuk he holds.


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6. Salam Sukuk:6.1. Salam Sukuk represent prior to the possession of the Salam asset undivided

shares in the ownership of that asset. After procession they represent undividedshares in the selling price of the Salam asset.

7. Murabaha and Bay Bethaman Ajel Sukuk:7.1. These Sukuk represent after the purchase of Murabaha asset and prior to its

sale undivided shares in that asset. After its sale, they represent undividedshares in the selling price of the Murabaha asset, which has become a debt onthe buyer.

General Principles And Sharia Parameters5

The General Principles for Issuance of Sukuk1. Sukuk must be issued on the basis of a Sharia (financing or investment) contract

which must fulfill the following:1.1 The pillars and conditions of contracts.1.2 Its legal effects and consequences.1.3 Its implementation is meant to meet its Sharia objective.

5 The Sakk issuer is the one who utilizes the issuance realized fund. He could be the

Mudarib, the investment agent, the managing partner, the seller in Salam, the

Mustasni (the buyer in Istisna), the buyer in Murabaha, the Muzari, the Musaqi or

the Mugharis (the farmer in the agricultural partnerships).

The issuer may be the one who initiates the offer by virtue of the prospectus so thatthe subscription of the Sukuk holders is deemed the acceptance to the offer, and

consequently the Sukuk underlying contract is initiated. The issuer may also be the

Sukuk holders through their representative or a special purpose vehicle (SPV) acting as

agent and trust in favor of the Sukuk holders. It also utilizes the Sukuk issuance

realized fund and accepts the offer through the signing of the Sukuk underlying

contract.

However, it is permitted for the Sakk to be issued by a party like the Mudarib, so he

expresses the offer of a Mudaraba whose terms and conditions comply with Sharia,

and requests from the capital provider to provide the capital. Nevertheless, the offer

may originate also from the capital provider, and the acceptance from the Mudarib,

and thus Mudaraba is concluded. In either case, Mudaraba capital shall b divided intoequal units and certificates of equal value shall be issued against them so that every

certificate represents for its holder a share in the capital of the project for whose

financing the Sukuk are issued, and when assets are purchased with the capital then

the certificate represents a share in these assets.

As for the mechanism and the procedures, they are part of the legal system. For

example, the very idea of SPV has originated from the British Law, while the Latin laws

do not recognize it so they consider other means to issue Sukuk.


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1.4 It is free from conditions that contradict its essence and Sharia objectives.

2. The activities: Issuance and trading of Sukuk in notallowed if their issuance realizedfund is meant to be used in unlawful activities, or if some of the Sukuk assets wereunlawful.3. Issuance, trading or redemption of Sukuk must not involve or boil down to the sale ofspot money against deferred but more money. Examples are:3.1 When the transfer of ownership of assets from the seller in the Sukuk of tangibleassets or the Sukuk of usufruct of asset is fictitious, i.e. it does not involve real and legaltransfer of ownership.3.2 When the assets sold to the Sukuk holders in Sukuk of ownership of leased, or to beleased, tangible assets are unsalable according to the official laws, or when they remainas the property of the seller appearing in accounting terms on the balance sheet, and notoff the balance sheet.

3.3 When the investment Sukuk documents state that the Sukuk issuer (as Mudareb,managing partner or investment agent) is indebted for the Sukuk sale proceeds to theSukuk holders, and not managing the Sukuk assets on a trust basis.

4. The return on the Sukuk must reflect the outcome of Sukuk assets investment, and it isnot a financial liability upon the Sukuk issuer in return of his use of the Sukuk proceeds.

5. The Sukuk funds mobilized through subscription must be used for the same purposestated in the prospectus in accordance with Sharia rules and precepts throughout theduration of the investment.

6. The prospectus and documents of the Sukuk must include a clause to the appointment

of a Sharia committee responsible for supervising and auditing the project or the venturewhere the Sukuk issuance proceeds are invested. This committee shall accordinglysubmit periodical reports to the Sukuk holders, and it has the right to summon the Sukukholders or their representatives to take the appropriate action in case of a flagrantinfringement ofSharia rules, procrastination or refusal of the project or venture manger tofollow the Shariacommittees instructions or to remedy any violations.

7. Sukuk may be nominal, i.e. carrying the name of the Sakk holder, and their title istransferred by registration in a special record or by writing on them the name of every newholder. Sukuk may also be for their bearer, so title is transferred then by virtue of changinghands.

8. Sukuk and Ienah: the mere purchase of the leasable assets (the Sukuk assets) fromtheir owners by the Sukuk holders then leasing them back on Ijarahh MuntahiaBettamleek against fixed and variable rents cannot be deemed as unlawful Ienah shouldthe following be observed:

8.1 The sale is genuine, and it transfers both title and liability.8.2 The Sukuk holders are genuinely liable for the burdens and expenses that areassociated with ownership, like insurance premiums, major maintenance and taxes.


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8.3 The Sukuk holders have the absolute right in the disposal of the Sukuk without anyrestrictions.

8.4 The Sukuk assets are saleable according to the official laws.8.5 The sale and lease contracts are not linked together, and the lease is not stipulated inthe sale contract.8.6 A lapse of no less than one year from the lease of the assets to their title transfer tothe lessee.

9. Sukuk and Wafa sale and loan with interest:9.1 This transaction (the purchase of the leasable assets -the Sukuk assets- fromtheir owners by the Sukuk holders then leasing them back on Ijarahh MuntahiaBettamleek against fixed and variable rents) cannot be deemed as Wafa sale; a salewhich includes a stipulation in the very contract to return the sold asset to its originalseller upon his repayment of the same price, so that the buyer can benefit from this

sale contract by utilizing the sold asset for his own benefit, either by leasing it to theseller or to a third party, before returning it back to its original seller.

10. This transaction cannot be deemed as a loan with interest on the account that:10.1 Both title and usufruct are correlated in the sense that leasing an asset after itspurchase to the original seller is similar to reselling it back to him, because a usufructof an asset cannot be segregated from the asset itself, hence the transaction will besimilar to buying an asset for cash price then selling the same to the original seller fora higher credit price.

10.2 Sharia recognizes the complete ownership that involves both title and usufructof the asset, as well as the incomplete one that involves the usufruct only or the title

only. Segregation between the title and the usufruct is feasible in contracts like saleand bequest. However, the subject matter of the sale contract corresponds to thecomplete ownership of both title and usufruct, while the subject matter of the leasecontract corresponds to the incomplete ownership of the usufruct only and not thetitle.

10.3 Sukuk holders take full responsibility of the leased assets since they are theowners of these assets.

Sharia Rules for the Issuance of Sukuk

A. The Special Purpose Vehicle

1. It is permissible for the issuance of Sukuk to be handled by a special purpose vehicleacting as the Sukuk holders trustee in holding title of the Sukuk assets, and as theiragent in directing the Sukuk issuance realized funds towards investing them in whatthey were issued for. It may also initiate the offer in the Sukuk issuance agreementon behalf of the Sukuk holders.

2. The special purpose vehicle cannot be owned by the Sukuk issuer, who utilizes therealized fund, if this shall result in breach ofSharia rules, like in cases that involvesale of the Sukuk assets by the Sukuk issuer to the SPV as in Sukuk of theownership of the tangible assets that are meant for leasing, or in Sukuk of ownership


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of usufructs. If the Sukuk issuer owns the SPV, then the Sukuk issuer will beeffectively selling to himself. However, on the other hand, SPV can be established by

the Sukuk issuer to function as his agent when no breach ofSharia rules is involved,like when the Mudareb sets up an SPV to initiate on his behalf the offer in Sukukissuance.

B. Stipulating an incentive for the Sukuk manager1. It is permitted to state in the prospectus and its documents that the Sukuk manager

is entitled to all or part of the profit that exceeds a certain level as an incentive for hisgood management, in addition to the fees or profit share he is originally entitled to.

2. The Sukuk managers incentive is to be worked out for the Sukuk term upon thematurity of the Sukuk; however, it is permitted to advance to the Sukuk manger somepayments on the account of the incentive during the Sukuk terms and prior to theirmaturity. These advance payment shall be offset against the realized incentive upon

the maturity of the Sukuk.

C. Giving prizes on investment SukukIt is not permitted to issue Mudaraba, Musharaka or Wakala Bilistethmar Sukuk wherethe Mudareb, the managing partner or the investment agent undertakes to offer on lotbasis, on certain conditions and from the profit generated from the Sukuk assets (assetsof Mudaraba, Musharaka or Wakala Bilistethmar) prizes to the Sukuk holders. However,if the price for these prizes is paid from Sukuk mangers own funds then this is allowedbut on the following conditions:1. Giving prizes from the fund providers profit is not the primary objective of the Sukuk

issuance. The following clues may suggest such an objective:1.1 When the Sukuk managers fees or profit share is higher than normal market

fees or profit share for such manger.1.2 When the value of the prizes is too big to be paid for from the Sukuk managersnormal fees or profit share so that it would not serve his interest to pay for the prizesunless his fees or profit share was high enough.

2. Distribution of prizes is based on pure donation so that prizes are not distributed onregular basis and are not customarily considered as commitment on the Sukukmanager that if he stops giving prizes clients stop buying the Sukuk.

3. It is recommended to link the distribution of prizes to the performance of the Sukukassets and the realized profit, and also to determine the value of the prizes inaccordance to the Sukuk mangers realized share in the profit.

4. The Mudarebs profit share is commensurate with the market rate for a Mudarebsprofit share. If, therefore, the Mudarebs profit share has excessively exceeded the

market rate then the Mudaraba is deemed fictitious and the prizes distributable to theSukuk holders are deemed to have been paid for from their own share in the profitand thus, a part of the Sukuk holders profit share will have been allocated to onlysome of the Sukuk holders, which is a kind of gambling.


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Sharia Rules Of Sukuk

Ijarah Sukuk1. The objective of Ijarah Sukuk is to convert the Ijarah underlying usufruct into

securities (Sukuk) so that they can be traded in the secondary market.2. Each Ijarah Sakk represents a common share in the ownership of the usufructs of

the tangible assets before these usufructs are sold to a third party. However, afterthe sale of these usufructs the Sakk represents the rent, which becomes a receivablepayable by the lessee and thus, subject to Sharia rules of sale of debt.

3. Ijarah Sakk does not represent a certain amount of money, nor does it represent adebt liability upon a particular party of natural or juristic personality, rather it is asecurity representing a common share in the ownership of usufruct of an a tangibleasset, like a real estate property or a vessel.

4. It is permitted to issue and trade in the Sukuk that represent ownership of leased, or

to be leased, tangible assets provided these assets have fulfilled their relevantSharia conditions, and they are among the leasable assets, like a real estateproperty or a vessel and the likes. The Sakk must also represent ownership inincome-generating real tangible leased or leasable assets.

5. It is permitted for the Sakk owner to sell the Sakk in the secondary market to anybuyer at any agreed-upon price, whether it is equal, higher or less than the Sakkissuing price, based on the market factors of offer or demand.

6. The Sakk owner is entitled to his share in the return, i.e. the rent, according to therent payment schedule outlined in the prospectus and the lease contract, afterdeduction of the Sakk corresponding share in the applicable expenses as outlined inthe Ijarahh contract.

7. Being the owners of the usufruct, it is permitted for the holders of the Sukuk of the

ownership of tangible assets, or the holders of the Sukuk of the ownership ofusufructs, to issue Ijarah Sukuk representing undivided shares in the usufructs theycame to own by virtue of owning the tangible assets or usufructs of the assets for thepurpose of subleasing the same with the permission of the original lessor. However,this is circumscribed with the issuance of the Sukuk being prior to signing the leaseagreements with the new lessees, whether the lease is for a rent equivalent, higheror less than the first rent. In case signing the lease agreements was prior to theSukuk issuance, the Sukuk become untradeable, because they represent then debtsliabilities on the new lessees and thus, their tradability is subject to the rulespertaining to sale of debt.

8. It is not permitted for the seller of the usufruct, be him the issuer of Sukuk or themanger of the Sukuk, to guarantee the face value of the Sakk or its return. Moreover,

the owners who lease assets are liable for them in case of full or partial damage.9. The leased assets may be already owned by the Sukuk issuer, or they may be a

liability upon his part, i.e. he will come to own them based on a sale or Istisna or anyother contract. Nevertheless, Sukuk holders own the usufruct of these assets oncethe lease contract is signed and thus, they become entitled to the rent payable in thesublease contract. However, these Sukuk of forward lease are not tradable unlessthe assets have been delivered.

10. Sukuk of ownership of tangible assets and Sukuk of ownership of usufructs oftangible assets are issued on the basis of a valid sale contract that transfers the


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ownership from both Sharia and legal perspectives. This ownership however iseither complete or incomplete; the former involves title of both the corpus and the

usufruct (Sukuk of ownership of tangible assets), while the latter involves title of theusufruct only and not the corpus (Sukuk of ownership of the usufruct of tangibleassets). However, in this sale contract it is a must that:10.1. The sale is genuine and genuinely transferring to the Sukuk holders the

complete or the incomplete ownership of the asset form both Sharia and legalperspectives, and thus bestowing on the Sukuk holders all privileges ofownership to conduct all legally valid acts on the asset itself or its usufruct withno restriction whatsoever.

10.2. The object of sale (the Sukuk assets) is among the saleable assets, andits title can be transferred from both legal and Sharia perspectives to the Sukukholders or the agent that represents them. As a result, the following will takeplace:

10.2.1 The assets (sold assets) become no longer the property of the seller, and inhis financial statement they appear off balance sheet.10.2.2 The right of Sukuk holders attaches the assets (the assets) to which they holdtitle (the Sukuk assets) and not the liability of the Sukuk holders who sold the assets.10.2.3 The Sukuk holders shall have the right to conduct on the Sukuk assets all thelegally valid acts like sale, lease-back to the seller and the likes, with no restrictions.10.2.4 The purchase undertaking given by the lessee of the Sukuk assets shall bindthe promising party only so that the Sukuk holders are not obliged to sell to him theseassets.10.2.5 The sale undertaking given by the Sukuk holders as owners of the assets shallbind them to sell the assets to the lessee, who is not obliged to buy them.

10.3. It is not permitted to have two promises; one from the lessee on purchaseand the other from the Sukuk holders on sale, if the object of promises, the timefor their execution and the remaining conditions are the same.

Sukuk of ownership of leased or to be leased assets1. The Sukuk of ownership of the leased assets or the asset to be leased represent the

right of their holders in the ownership of the assets. They grant them the right overthe fund realized from the sale of these assets or the sale of their usufructs.

2. The assets represented by the Sukuk of ownership of tangible assets must be ownedby their seller when selling them to the Sukuk holders. When selling them on Istisnaor Salam, the assets must have been established as liability by description on theseller.

3. The title to these assets must be transferred to the Sukuk holders by virtue of a validtitle-transferring sale, and the Sukuk holder must come to possess them physically orconstructively.

4. The holders of these Sukuk shall become liable for the assets represented by theseSukuk (their damage and loss) each in proportion to the number of the Sukuk heholds, and they shall enjoy their gains and privileges (proceeds, returns, rents andprofits) according to the terms outlined in the prospectus and the issuance contracts.

5. It is permitted for the holders of these Sukuk, with the observance of the aboveconditions, to lease these assets after they come to own and possess them, or even


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to lease them on forward lease basis, i.e. before possessing them, regardless ofwhether the lease is to their original seller or to a third party, and whether it is

operating lease or Ijarah Muntahia Bittamlik.6. It is permitted to appoint the seller of the assets represented by the Sukuk as

Mudareb against a share in the profit, or as an agent on behalf of the Sukuk holdersto manage these assets against fixed fees plus a good management incentive.

7. It is permitted for the seller then lessee (operating lease) of the assets representedby the Sukuk to unilaterally undertake to redeem the Sukuk upon their maturity bymeans of purchasing the assets (Sukuk assets) on the price agreed upon at the timeof executing the purchase. Alternatively, the price could be a market price, a fairprice, or equivalent to the net value of the assets or their face value. However, thisundertaking binds him alone and not the Sukuk holders, and it can be issued by athird party on any price.

8. It is permitted to trade these Sukuk, for they represent claims to tangible assets

(already leased or to be leased at a later stage). When traded, the title to theseassets represented by the Sukuk is transferred from the seller to the buyer along withtheir rights and obligations.

9. As owners of the assets represented by the Sukuk, the Sukuk holders have the rightto conduct on these asses all valid acts, in accordance with the Sharia-compliantissuance contracts and in ways that do not harm others rights.

10. It is permitted for the Sukuk holders to undertake to gift or sell on a determined pricethe assets represented by the Sukuk to the lessee of these assets, regardless ofwhether the lessee is the original seller or a third party.

11. It is permitted for the lessee of the assets represented by the Sukuk to undertake topurchase these assets in case he has defaulted on meeting his financialcommitments toward the Ijarah agreement. The purchase price in this case could be

any price agreed upon at the time of executing the purchase; the market price, a fairprice or equivalent to the net assets value or the face value.

Sukuk of usufructs1. These Sukuk represent their holders right in the ownership of the usufructs of assets

that will be either sold or leased. They also give their holders the right to claim theproceeds realized from the sale or lease of the assets usufruct.

2. The usufruct represented by the Sukuk must be owned by its seller when it is sold tothe Sukuk holders, so that he either owns the asset whose usufruct is to be sold orthe usufruct alone and not its underlying asset. If the usufruct is already sold to athird party then issuing Sukuk against this usufruct is not allowed since the usufructno longer belongs then to its seller.

3. The usufructs represented by the Sukuk may be usufructs of assets that areestablished as a liability by description on the sellers part to deliver on the datedetermined in the lease contract.

4. The ownership of the usufructs represented by the Sukuk must be transferred fromthe seller of these usufructs to the Sukuk holders, who buy them through a leasecontract.

5. The holders of these Sukuk shall become solely liable for the damage or loss ofthese usufructs, each in proportion to his share in these usufructs, and they shallenjoy their gains and privileges (proceeds, returns, rents and profits) according to the


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terms outlined in the prospectus and the relevant Sukuk contracts.6. It is permitted for the Sukuk holders to sell the whole usufruct (its whole duration)

represented by the Sukuk through a usufruct-selling contract, or part of it (part of itsduration) through a lease contract.

7. It is permitted to appoint the seller of the assets usufructs represented by the Sukukas an agent on behalf of the Sukuk holders to manage these usufructs against fixedfees plus an incentive corresponding to the amount in excess of a certain rent limit,or to appoint him as Mudareb against a share in the profit.

8. It is permitted for the seller of the usufruct through Sukuk issuance to unilaterallyundertake to purchase at a determined price the remaining usufruct (the duration ofthe usufruct) upon the maturity of the Sukuk.

9. It is permitted to trade Sukuk of usufructs of assets, for they represent the Sukukholders claims to usufructs ownership. When traded, the title to these usufructsrepresented by the Sukuk is transferred from the seller to the buyer along with their

rights and obligations.10. The holders of Sukuk of usufructs of assets have the right to sell or lease these

usufructs. Restriction to this right is not permitted unless if in accordance with theissuance contracts and in ways that do not harm others rights.

11. It is permitted for the Sukuk holders to undertake to gift or sell on a determined pricethe assets usufructs represented by the Sukuk to the original seller of theseusufructs or to a third party. The sale is executed then on the remaining duration ofthe usufruct. However, this sale is not perceivable if the Sukuk holders have alreadysold or leased the usufruct, because the Sukuk would represent then the price of theusufruct or the rent, which is a debt liability upon the lessee.

Sukuk of ownership of usufructs of specified assets

1. These are Sukuk issued by the owner of a particular asset with the aim of leasing theasset or selling its usufruct for a specified period and receiving the rental from therevenue of subscription so that the ownership of the usufruct of the assets passes tothe Sukuk holders.

2. These are Sukuk issued by the owner of a usufruct of a specified asset (the lessee)through leasing the asset with the aim of subleasing the same and receiving therental from the revenue of subscription so that the usufruct of the assets passes intothe ownership of the holders of the Sukuk.

3. These Sukuk are issued on the basis of a sale of the right of the usufructs, not thecorpus of its underlying specified asset, for a specified time period. This rightattaches the asset and not the liability of the seller who issues the Sukuk, and itreflects an incomplete ownership for the Sukuk holders.

4. It is a condition in all sale contracts, which transfer the ownership of the assets or theassets usufructs, and in the lease contracts which give Sukuk holders the direct rightof utilization that:4.1. The contracts are genuine so that they transfer the ownership of the assets, the

usufructs and the rights of utilization to the Sukuk holders. They shall also giveSukuk holders the absolute right to conduct on them all the legally valid acts.They shall not include any conditions that contradict the nature of thesecontracts or theirSharia objective, rendering otherwise the contracts fictitious orconducive to Riba or Inah.


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4.2. The sale or lease contract is capable of producing its legal effect so that theobject of the contract (the sold or leased asset) admits all acts of disposal,

including transferring its title from its seller to the Sukuk holders and from bothlegal and Sharia perspectives.

5. Based on the above:5.1. The ownership of the underlying Sukuk assets and usufructs should be removed

from the books of the seller, so that on his financial statement they appear offbalance sheet, and become the property of the Sukuk holders rendering themthe right to conduct on them all valid acts.

5.2. The right of the Sukuk holders in the assets o r the assets usufructs and theirutilization, which are acquired by the funds realized from subscription, attachesthese very assets and not the liability of the Sukuk issuer who sold or leasedthese assets.

Sukuk of human labor (Service Ijarah Sukuk)Sukuk of service Ijarah give their holders the right to own a service provided by theSukuk issuer (the service provider) and to sell this service and claim its price from itsbuyer or user. The services represented by these Sukuk may be obtained from aspecified service provider or from an unspecified one.

A. Sukuk of services provided by a specific provider1. These Sukuk are issued with the aim of purchasing a specific service from a

particular provider (like the service of tuition from a particular provider) with its pricebeing paid with the funds mobilized through subscription. The services purchasedbecome the property of the Sukuk holders so they have the right to sell them to athird party (the service receiver) against an agreed-upon price or fee.

B. Sukuk of services provided by unspecific provider1. These Sukuk are issued with the aim of purchasing a service established as liabilityby description without specifying its provider, with its price being paid with the fundsmobilized through subscription. The services purchased become the property of theSukuk holders so they have the right to sell them to a third party (the servicereceiver) against an agreed-upon price or fee.

2. The ownership of these services is immediately transferred from their provider to theSukuk holders through a sale or lease contract. Alternatively, the owner of services,who has not utilized them yet, may sell them to the Sukuk holders against adetermined price or fee. However the services sale or lease contract must fulfill its allSharia rules and conditions.

3. Since services Sukuk represent ownership rights in the services, their holders shall

share these Sukuk risks, each to the proportion of the Sukuk he holds, and they shallalso enjoy the Sukuk gains and privileges according to the terms outlined in theprospectus and the issuance contracts.

4. It is permitted for the seller of the services to undertake to purchase the unutilizedservices, or the remaining period of the services, at a fair price, market price, anyprice agreed upon at the time of executing the purchase or at the face value.Similarly, it is permitted for the Sukuk holders to undertake to sell at any of theseprices the unutilized services or the remaining period of the services to the seller ofthe services who manages the Sukuk on behalf of their holders.


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5. It is permitted to trade the Sukuk that represent specific services before and not afterthe sale or the full utilization of these services, for they represent ownership rights

over these services. When traded, ownership of these services or the remainingperiod thereof is transferred from the seller to the buyer along with its rights andobligations. As for Sukuk of forward services they are also subject to the same rules.

6. If only part of the services represented by the Sukuk has been sold or utilized thenthe ratio of this part to the unsold one must be taken into consideration for thetradability of these Sukuk, so that the selling price of the later part is not equivalent tothe face value of the Sukuk, since this may render the very transaction fictitious.

7. The holders of services Sukuk have the right to dispose of the unutilized part of theservices or their remaining period. Restriction to this right is not permitted unless if inaccordance with the issuance contracts and in ways that do not harm others rights.

8. It is permitted for the services Sukuk holders to undertake to gift, sell or lease to theoriginal seller the remaining unutilized services, or the remaining duration of the

services, for the price referred to in clause (4). The sale, however, is not permitted ifthe services have already been utilized or sold to others for the Sukuk represent inthis case the due price or fee of the service, which is a debt liability upon the other.

9. It is permitted for the seller of a service for a specific period of time to undertake tobuy the remaining period of the services at a price determined in the very saleundertaking, provided it is reasonable for such remaining period. This is in order forthe sale not to be fictitious like when the service of a ten-year period is sold for onethousand, then bought when only one year is remaining for one thousand as well.

Participation Sukuk

Mudaraba Sukuk: General Rules

1. Sukuk holders provide the capital to be invested by the Mudareb.2. The Mudareb is responsible for returning the Mudaraba capital and the realized profit

unless he proves that the Mudaraba assets have been damaged or lost for reasonsthat were beyond his control, and which he neither could anticipate nor avoid.

3. The realized profit shall be distributed between the Sukuk holders and the Mudarebaccording to a ratio agreed upon in advance and stated in both the prospectus andthe Mudaraba contract.

4. The loss that is not attributable to the Mudareb shall be borne by the Sukuk holders,while the Mudareb shall lose his efforts in this case.

5. If the Mudaraba is restricted and not absolute, then the Mudareb is bound by therestrictions incorporated in the Mudaraba contract.

6. These Sukuk are issued by the Mudareb for the purpose of utilizing the issuance

realized fund in a particular project or activity. They represent at issuance undividedshares in the Mudaraba capital, then after issuance they represent undivided sharesin the Mudaraba assets purchased with the capital. However, they never represent adebt liability upon their issuer (the Mudareb) for their holders (the capital providers).

7. These Sukuk are issued on the basis of the Sharia contract of Mudaraba, whichmust fulfill its all relevant rules and conditions and produces its legal effects.

8. The issuance prospectus and its underlying Mudaraba contract must determine therespective profit share of the Mudareb as well as the Sukuk holders; nevertheless,upon the distribution of profit, each party may waive to the other his share in the


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profit or a part thereof. However a previous agreement to this effect may not bemade in the Mudaraba contract or the issuance prospectus.

9. The Mudareb invests Mudaraba assets on a trust basis in which case he is not liablefor damage or losses of these assets except in cases of breach of the requirementsof trust, negligence or misconduct in respect to taking the appropriate investmentdecisions, according to the standards of an experienced Mudareb in the respectiveMudaraba activity. In case of dispute between the Sukuk holders and the Mudarebover the occurrence of misconduct it is the responsibility of the Mudareb to prove thatthe occurrence of damage or loss was for reasons beyond his control, and which heneither could anticipate nor avoid; otherwise, he would be held liable for theMudaraba capital and the realized profit.

10. It is permitted for the Mudareb to undertake to purchase the Mudaraba assets at theprice that will be agreed upon at the time of executing the purchase, at the marketprice, a fair price or a price equivalent to the net value of the Mudaraba assets.

However, in cases where Mudareb is held liable for the loss, i.e. in cases of breachof the requirements of trust, negligence or misconduct in respect to taking theappropriate investment decisions, Mudareb may provide an undertaking to purchasethe Mudaraba assets at their face value, for this price represents then the Mudarabacapital for which Mudareb becomes liable in the aforementioned cases.

11. The said undertaking in cases of breach of the agreement, negligence ormismanagement however binds the Mudareb only and not the Sukuk holders. If theMudareb does not execute his undertaking, the Sukuk holders shall then have theright to sell the Mudaraba assets in the market and claim from the Mudareb thedifference, if any, between the selling price and the Mudaraba capital. However,Sukuk holders shall not have the right to compel the Mudareb to execute thepurchase (the actual execution of the very purchase contract).

12. It is permitted that the Mudareb undertakes to purchase the Mudaraba assets uponthe maturity of the Mudaraba, if the Mudaraba assets remain the same as they wereat the time of giving the undertaking and without a change in their value, at the pricethat will be agreed upon at the time of executing the purchase, the market price, afair price or a price equivalent to the net value of the Mudaraba assets as will beagreed by the two parties or by a third party determined mutually in the Mudarabacontract or the issuance prospectus.

13. The Mudareb is responsible for refunding the Mudaraba capital if it remains intact aswell as the realized profit on the maturity of the Mudaraba after liquidation of theMudaraba assets. Sukuk holders on the other hand, being the owners of theMudaraba assets, have the right to dispose of the Mudaraba assets; however, theyare liable to pay the Mudareb his share in the realized profit.

Sukuk of Musharaka in Profit

A. Sukuk of Joint Ownership1. It is permitted to issue Sukuk for the purpose of acquiring a common share in the

ownership of an asset or a usufruct so that the other partner remains the owner ofthe remaining share.

2. Sukuk holders and the other partner are like foreigners to each other so that no partyhas the authority to act on behalf of the other unless with delegation of power, and


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each party is independently entitled to the return on his share in the ownership.3. It is permitted to appoint the other partner as an agent in acts like taking procession

or assets or settling payments, but not in investment, against a determined fee.However, it is permitted to give the agent an incentive if the return on principalsshare has exceeded a certain limit.

B. Musharaka Sukuk (contractual partnership)1. Contractual Musharaka Sukuk can be issued in two different structures:

1.1. First, they can be issued by the owner of an asset, a particular project or aspecific venture regardless of its legal form, for the purpose of receiving themonetary contribution of the Sukuk holders, as partners, to develop a project orfurnish it with new equipments. The contribution of the Sukuk issuer shall be inthe form of tangible assets of his project or venture. The combination of the cashcontributed and the value of the tangible assets contributed constitute the capital

of this partnership, and the share of each partner, the Sukuk issuer and Sukukholders, shall be proportionate to his contribution.

1.2. Second, they can be issued by a party seeking a Musharaka capital to beinvested in a particular project or venture. He handles the management of thispartnership and may become a partner to it if he buys some of the issuedSukuk.

2. Each Sakk represents a common share in the Musharaka capital when Sukuk areissued, then a common share in the Musharaka assets when these assets arepurchased with the Musharaka capital.

3. It is not permitted for the Sukuk issuer who manages the Sukuk to give a purchaseundertaking to the Sukuk holders to buy their share in the Musharaka assets at itsface value. However, if the purchase undertaking was on the value that will be

agreed upon at the time of executing the purchase, at a fair value or at the price thatwill determined by an independent party, then it is permitted.4. Contractual Musharaka Sukuk is two types:

4.1. First, Sukuk of Musharaka in a particular, existing, specific and Shariacompliant project or venture. This project or venture is owned by the Sukukissuer, and the aim of issuance is to expand the venture or increase its capital.

4.1.1. The Sukuk holders share in the specific project or venture is the Sukukissuance realized fund, while the Sukuk issuer share is the net value of hisproject or venture based on a valuation conducted by a specializedindependent party. However, all Sharia rules and conditions must befulfilled in this project or venture.

4.1.2. It is permitted to appoint the project owner (the Sukuk issuer) as the

Musharaka manager against a specific fee based on a managementcontract which must be independent of the Musharaka contract. It is alsopermitted for the Sukuk holders, through their representative, to be the partyhandling the management of the project against a specific fee. It ispermitted as well that the management is handled jointly by the Sukukholders representative and the Sukuk issuer or by a third partly appointedby them based on a mutual agreement. In the latter case, the manager mayhandle the management as a Mudareb against a share in the profit or as anagent against a specific fee plus a percentage in the realized profit as


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incentive if applicable.4.1.3. Both Sukuk holders and Sukuk issuer (Sukuk holders partner) are liable

for loss in proportion to each partners share in the specific project orventure. Profit shall be distributed as per their agreement.

4.1.4. It is permitted for the Sukuk issuer who manages the Sukuk to undertaketo purchase the share of the Sukuk holders in the project at the price thatwill be agreed upon at the time of executing the purchase, at a fair value, amarket value or the net value and not the face value. However, if thepurchase undertaker was not the Sukuk manager, then he may undertaketo purchase it at face value.

4.1.5. It is not permitted for the Sukuk manager (Sukuk holders partner) toundertake to purchase the share of the Sukuk holders in the specific projector venture (the project) at its face value. However the price may beequivalent to the face value of the Sukuk holders share in the Musharaka in

cases of breach of the requirements of trust, negligence or misconduct inrespect to taking the appropriate investment decisions according to thestandards of an experienced Mudareb in the respective Mudaraba activity.

4.1.6. In all cases, the project manger manages the project on trust basis, andhe is not liable in principle for the Musharaka assets.

4.2. Second, Musharaka Sukuk that are aimed for financing a specific project orventure that will start with the fund mobilized through the issuance of the Sukuk,and the issuer is a partner in proportion to the number of Sukuk he subscribe to.

4.2.1. These Sukuk represent a common share in the ownership of the project,and thus the holder of these Sukuk shares profit and loss in proportion tothe number of Sukuk he holds.

4.2.2. Whatever applies to the Sukuk of Musharaka in existing project in terms

of appointment of the Musharaka manager and his undertaking to buy theSukuk holders share in case of wrongful acts or on the maturity of theSukuk applies as well to this type of Sukuk.

5. It is permitted for the Sukuk issuer to form a partnership with the Sukuk holderswhereby each partner makes a specific contribution to a specific capital; thiscontribution may be in form of cash money or some tangible assets.

6. It is permitted for the Sukuk issuer who owns a specific project or venture to issueSukuk with the aim of using the Sukuk issuance realized fund to increase the capitalof the project and expand its activities. The partners shares in this Musharaka shallbe determined by measuring the ratio of the net value of the project assets to thefund realized for the issuance of the Sukuk. The loss shall be borne by the twopartners according to the said ratio, while profit shall be distributed as per

agreement.7. The managing partner manages the project on trust basis, so he is not liable for thedamage or loss of the Musharaka assets unless in cases of breach of trust ornegligence. However, if a dispute arises between the Sukuk holders and themanaging partner over the occurrence of misconduct then it is the responsibility ofthe managing partner to prove that the occurrence of damage or loss was forreasons beyond his control, and which he could neither anticipate nor avoid;otherwise, he would be held liable for the Mudaraba capital and the realized profit.


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Finance Sukuk

A. Salam Sukuk1. Salam Sukuk are issued in two different ways:

1.1. One: After the Sukuk issuer has already purchased the Salam goods.1.2. Two: When the Sukuk issuer undertakes in the Sukuk prospectus to buy some

goods on Salam basis then sell them to the Sukuk holders.2. The Sukuk holders replace the Sukuk issuer in the ownership of the goods

purchased so each one owns a share in these goods in proportion to the number ofSukuk he holds.

3. It is permitted to return (sell) the Salam goods (to their seller) provided they are notfoodin kind and the price is not higher than the original selling price, since suchresale is deemed Iqala (cancellation of contract).

4. It is also permitted to, according to the view of Sheikh Dr. Hussain Hamed Hassan,

to trade (sell to a third party) the Salam goods at their market value.5. However, according to the view of Sheikh Dr. Abdulsattar Abughuddah, which is in

line with the Fiqh academy resolution and AAOIFI standards, only the return of theSalam goods to their original seller is permitted and not their trading, but subject tothe fulfillment of the relevant Sharia conditions.

B. Murabaha and Bay Bethaman Ajel Sukuk1. Murabaha or Bay Bethaman Ajel Sukuk are issued for the purpose of utilizing their

proceeds by the issuer to buy some goods then sell them on Murabaha or BayBithaman Ajil basis. In case of Murabaha, the Sukuk issuer will have alreadyobtained a promise backed by adequate guarantees from specified parties to buythese goods on Murabaha basis.

2. The holders of these Sukuk are the joint owners of the goods purchased so theyproportionately share the selling price and the profit margin.

3. It is not permitted to trade Murabaha and Bay Bethaman Ajel Sukuk.

C. Istisna Sukuk1. Istisna Sukuk are issued for the purpose of utilizing their proceeds in the purchase of

some assets of certain specifications on Istisna basis, then the sale of these assetseither after taking delivery of them or before through a parallel Istisna that isindependent of the first.

2. They can be issued as well against assets already purchased through Istisna so thatthe Sukuk issuer sells them to third party through a parallel Istisna.

3. The Sukuk holders own the Istisna assets and so have the right to sell them through

a parallel Istisna and claim the price.4. It is not permitted to trade Istisna Sukuk.

D. Funds Sukuk1. It is permitted to issue Sukuk for the purpose of utilizing their proceeds in the

purchase of a fund of a legal entity and independent financial liability, which isinclusive of tangible assets, usufructs, cash money, receivables and financial rightsprovided:


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1.1. The ratio of cash, receivable or the two combined shall not exceed 70% of thetotal fund assets.

1.2. The purpose of establishing this fund is not to go around the sale of debt or cashso that they can be traded without the observance of their relevant Sharia rules.However, if the ratio of the tangible assets, the usufructs, the rights of personalutilization of assets and financial rights is below 30% then acquiring this fund isnot permitted unless with observance of the Sharia rules pertaining to sale ofreceivables, money or the two combined together.


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Sukuk GuaranteesGeneral Rules

1. Investment in Sukuk is an investment in ownership rights whereby Sukuk holdersbear the risk of the assets in which the fund realized from their subscription isinvested, such as in stocks or funds. Thus, Sukuk do not represent debts liabilityupon their issuer towards their holders. Consequently:

1.1 Sukuk holders shall bear the risk and reap the fruits of the assets in which the fundrealized from their subscription is invested.1.2 Neither the Sukuk issuer nor the Sukuk manager or the user of the fund mobilizedfrom subscription, through one of the investment contracts like Mudaraba, Musharaka orWakala Bilistethmar is permitted to guarantee to the Sukuk holders the face value of theirSukuk or a certain return on their investment; otherwise the very issuance and itsunderlying contract are null and void.

2. The meaning of guarantee in this context is guaranteeing the value of the Sukuk

assets by the guarantor when they get destroyed or damaged, or when they fully orpartially lose their value, without any misconduct, negligence or breach of theissuance conditions on the part of the guarantor. Nevertheless, the Sukuk managershall guarantee the value of the Sukuk assets in these cases unless he proves thattheir occurrence was for reasons beyond his control, and which he neither couldanticipate nor avoid.

3. The Sukuk managers undertaking to buy the Sukuk assets at any value does notamount to a guarantee of the Sukuk assets resulting thus in holding the Sukukmanager liable for these assets in cases of full or partial damage or loss. This isbecause the purchase undertaking binds its undertaker only when the assetspromised to buy are existent at the time of its executing, while if the assets havebeen destroyed or damaged then the undertaking is not executable, because selling

non-existing assets is not valid. However, if the assets undergo depreciation in theirvalue, then the purchase undertaking may not be on the face value of the Sukuk, butonly on a fair value or the market value.

4. The investment Sukuk manager is obliged to physically or constructively liquidate theSukuk assets upon the maturity of the Sukuk as per the market practice, and torefund the capital as well as the realized profit unless he proves that the Sukukassets have been damaged or have lost value for reasons beyond his control.

5. It is permitted for the holders of Istethmar Sukuk to obtain from a third party a bindingpromise over the purchase of the Sukuk assets at certain time or upon the maturityof the Sukuk. It is permitted as well for this promise to originate from the Sukukmanager so that he undertakes to buy the Sukuk assets described in the undertakingat one of the permitted values; the market value, the value agreed upon at the time

of executing the purchase, the net assets value, a fair value or the value determinedby the market experts at the time of executing the promise.

The promise to purchase1. This promise binds the promising party and not the beneficiary; however, it is not

permitted to force the promising party to execute his promise, but only to bedemanded by the beneficiary to compensate him for any actual harm that may attachhim as a result of default on the promise. The actual harm in this case shallcorrespond to the difference between the cost of acquiring the goods and their


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selling price when sold to a third party.2. This promise shall not bind its giver unless it is given on something known by

description, and which shall remain as per description until the time of executing thepromise. If it was damaged or disposed of then the promise would not bind its giversince purchase of non-existing assets is not valid.

Guarantees in Investment Sukuk1. Manager of Istethmar Sukuk may guarantee the value of the Sukuk assets in case of

breach of the agreement (cases of breach of the requirements of trust, negligence ormisconduct in respect to taking the appropriate investment decisions which shouldnormally be expected of an investment expert) or the investment rules stipulated bythe Sukuk holders. The guarantee shall be over the capital and in accordance withthe general rules of guarantees.

The obligation to liquidate the Sukuk assets and refund the capital1. The Sukuk issuer, who utilizes the Sukuk proceeds, is obliged to liquidate the assets

of Mudaraba, Musharaka or Wakala Bilistethmar upon the maturity of the Sukuk, andto refund the capital as well as the realized profit to the Sukuk holders. However, ifhe claims damage, loss or deterioration in the market value of the Sukuk assets,then the burden of proof shall lie on his shoulder to suggest that the occurrence ofthese incidents was not the result of his breach of the requirements of trust,negligence or misconduct in respect to taking the appropriate investment decisionswhich should normally be expected of an investment expert.

Undertaking of purchase at price equivalent to the remaining unpaid fixed rental(the non-managing lessees undertaking)

1. It is permitted for the purchase undertaking of the Ijarah Muntahia Bettamleek Sukukassets to be at a value equivalent to the remaining unpaid fixed rental (fixed rentalsbalance), regardless of whether the leased assets were originally bought from thesame lessee or a third party. Such undertaking does not tantamount to guaranteeingthe capital or the profit to the Sukuk holders (neither to a non-independent third-partyguarantee if the Sukuk manager was the one who sold the leased asset to a thirdparty). If, however, the lessee is the Sukuk manager through Wakala Bilistethmar,Mudaraba or Musharaka then the undertaking is not permitted. If, on the other hand,the lessee is a service agent then the undertaking is permitted.

Lending undertaking by the investment Sukuk manager1. It is not permitted for the Sukuk manager (as Mudareb, partner or investment agent)

to undertake to lend the Sukuk holders in case of shortfall in the Sukuk assetsexpected returns, for this involves the prohibited combining of a commutativecontract with a loan contract. It is permitted, however, for the Sukuk manager tosource a Sharia compliant financing or an interest-free loan in order to cover theshortfall. In this case, the Sukuk manager shall claim the same amount from thefuture profit or the selling price of the Sukuk assets.

Lending undertaking by the investment Sukuk manager1. It is permitted for the Sukuk manager or the Sukuk issuer of finance Sukuk (Sukuk of


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assets, usufructs or rights of utilization) to give an undertaking independent of thefinancing contract to lend the Sukuk holders in case of shortfall in the Sukuk assets

expected returns, because in this case the Sukuk manger can be deemed as a thirdparty.

Guarantee of a certain determined profit for the Sukuk holders1. It is not permitted for the manger of investment Sukuk to guarantee for the Sukuk

holders a certain profit as a fixed amount or as a percentage of the capital, becausethis guarantee nullifies profit sharing; the underlying principle of investment.

Documents

Dubai Sukuk Stds (Draft)