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Sukuk
ICIEC’s Sukuk Insurance Policy
Contents
• The Market
• Definition Of Sukuk
• Sukuk Types
• Sovereign Ijara Sukuk
• Sukuk Insurance Policy
THE MARKET
0
10
20
30
40
50
60
70
80
90
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1 1 6
8 12
30
49
19
26
45
85
Sukuk Issuance in USD billion
Amount in US million % of total value Number of Issues % of total number
UAE 25,050 52.3% 30 18.2%
Bahrain 5,633 11.8% 90 54.5%
Malaysia 5,496 11.5% 12 7.3%
Saudi Arabia 5,440 11.4% 9 5.5%
Qatar 2,020 4.2% 4 2.4%
Kuwait 1,575 3.3% 9 5.5%
Indonesia 650 1.4% 1 0.6%
Pakistan 600 1.3% 1 0.6%
USA 600 1.3% 2 1.2%
UK 271 0.6% 2 1.2%
Brunei Darussalam 200 0.4% 2 1.2%
Sudan 130 0.3% 1 0.6%
Japan 100 0.2% 1 0.6%
Turkey 100 0.2% 1 0.6%
Total 47,865 100.0% 165 100.0%
Sukuk Issuance by Markets (During last 10 years)
DEFINITION OF SUKUK
Definition by AAOIFI (1) (The Accounting & Auditing Organization for Islamic Financial Institutions)
“Sukuk are defined as Certificates of equal value representing undivided shares in the
ownership of tangible assets, usufructs* and services or (in the ownership of) the assets of particular projects or special investment
activities”
* Use of benefit of an asset
Definition (2) (In more simple terms)
“Sukuk are defined as undivided shares in the ownership of underlying assets (tangible or intangible) relating to a particular project
or investment activity”
Sukuk vs. Bonds
Sukuk – Investment certificate
– Ownership in a real or financial assets
– Right to share in the revenues & realized proceeds of Sukuk assets
– The underlying business arrangement must be Shariah compliant
– Expected earnings should not be guaranteed by the issuer
– The issuer shall not undertake to repurchase the assets for its nominal value (except in Ijara Sukuk)
– Sukuk holders can’t extend financing to issuer in order to enable repurchase of assets.
Bonds – Contractual Debt obligation
– The issuer is obliged to pay regular interest on specific dates
– The amount of interest is determined as % of capital
– The Principal is guaranteed at maturity
– Don’t give voting rights in the company,
– Give right to interest before distribution of profits to shareholders
SUKUK TYPES
Structure
• Murabahah
• Mudarabah
• Musharakah
• Ijarah
• Salam
• Istisnaa
• Wakala
• Hybrid
Originator
• Sovereign
• Sub-Sovereign
• Corporate
Market (Jurisdiction)
• Domestic
• Global
* There are 14 Sukuk Types identified by AAOIFI
NB: In 2012, 61% of Sukuk are of MURABAHAH Structure
SOVEREIGN IJARA SUKUK
What is Ijara?
In the Islamic finance industry, the term “ijara” is broadly understood to mean the
‘transfer of the usufruct of an asset to another person in exchange for a rent claimed from him’ or, more literally, a
“lease”.
Definition of Sukuk Al-Ijara
Sukuk Al-Ijarah refers to the buying and leasing back of assets by the investors to the issuer
and such Sukuk shall represent the undivided beneficial rights/ownership/interest in the asset held by the trustee on behalf of the
investors
The Originator Sells assets to a Special Purpose Vehicle (“ SPV”) which is set up as a trustee for the sukuk holders and then leases them back from the SPV. The SPV pays the purchase price to the Originator as consideration for its purchase of the Assets in an amount equal to the Principal Amount. The SPV leases the Assets back to Originator under a lease arrangement (Ijara) for a term that reflects the maturity of the Sukuk.
Stage 1 (initiation)
Originator
(Lessee)
Member Country
SPV
(Issuer, Trustee,
Lessor)
Investors
(Sukukholders)
1) Sells Assets
4) Transfers Purchase Price Of Assets
2) Issues Sukuk
3) Invests in Sukuk Assets
The Originator (as Lessee) makes Rental payments at regular intervals to the SPV/Trustee (as Lessor). The amount of each Rental is equal to the Periodic Distribution Amount payable under the sukuk at that time.
Stage 2 (Ongoing)
Originator
(Lessee)
Member Country
SPV
Investors
(Sukukholders)
5) Leases Assets Back
6) Makes periodic payments
7) Transfers periodic distributions
The assets are transferred back to the Originator, who makes the final payments to the SPV. The SPV makes final distribution to the Sukuk holders as the full redemption of their investment in Sukuk.
Stage 3 (Redemption)
Originator
(Obligor)
Member Country
SPV
Investors
(Sukukholders)
8) Pays Asset’s Purchase Price
11) Transfers Sukuk assets
9) Transfers redemption value
10) Redeems Sukuk Certificates
Main Parties… Parties Role
Originator : Seller, Lessee, Obligor, Servicing Agent
SPV : (Special Purpose Vehicle)
Issuer of the Sukuk, Lessor & Trustee
SPV issues Sukuk. Right against SPV to payment of the
Periodic Distribution Amount and the Dissolution Amount.
Investors : Sukukholders assume investment risks, which would
include non-payment by the obligor (originator)
(MLA) : Mandated Lead Arranger
Advisor, Principal Paying Agent, Book runner
Servicing
Banks
: Commercial banks providing various services e.g. Sukuk
issuance, collection and transfer of subscription monies
Sukuk Issue
Underwriters
: Investment banks, institutional investors participating
in the Sukuk underwriting syndication
ICIEC’S SUKUK INSURANCE POLICY
AAOIFI Sharia Standard No.17 (year 2003)
“It is permissible for the issuer or the certificate holders to adopt permissible methods of managing
risk, of mitigating fluctuations of distributable profits (profit equalization reserves), such as establishing an Islamic insurance fund with
contributions of certificate holders, or by participating in insurance (Takaful) by payment of premiums from the income of the shares of Sukuk holders or through donations (tabarru’at) made by
the Sukuk holders.”
AAOIFI Resolution (year 2007)
“The Shariah Council of the Accounting and Auditing Organization for Islamic Financial Institutions
(“AAIOFI”) issued a resolution prohibiting originators, issuers and managers from guaranteeing Sukuk or specifically providing loans to Sukukholders when
actual earnings fall short of expected earnings but it allowed third party guarantee”
Fiqh Academy Resolution
The Figh Academy of the Organization of the Islamic Cooperation, issued a resolution at its 20th meeting held in Algeria last September
2012, permitting the protection of Sukukholders by Islamic insurance instruments.
Shariah Clearance
The wording of ICIEC Insurance Policy was cleared by the Shariah
Committee of IDB Group
In its meeting held in KL in September 24th 2012
The first insurance policy to cover Sukuk in the market
Sukuk Policy Profile-1 Rationale : Gaps in the Islamic capital markets in terms of supporting
Sukuk issuance owing to lack of 3rd party guarantees
Member countries’ need to mobilize resources from the
Capital markets
Development of Islamic Financial Services Industry
Objective : ICIEC’s position as the world’s only Shariah compliant credit &
political risk insurer makes it the prime party to issue 3rd party
guarantees in the form of Takaful
Key Benefits : Credit enhancement of the Sukuk Structure
Better rating
Better pricing
Improve risk management.
Increase financing facilities
Help in structuring Shariah compliant financial facilities
Sukuk Policy Profile-2 Risks Covered : Political risks & Non-payment risks
Insolvency of the originator
Failure or refusal of the originator to pay on due date
Currency inconvertibility and transfer restrictions imposed
by the obligor’s country
Expropriation, confiscation or government intervention in
the business of the obligor
War or civil disturbance in the originator’s country
Eligibility : Originator from a Member Country (Sovereign or Sub-Sovereign
or Corporates).
Ijarah Sukuk only.
Asset backed structure.
Tenor : Up to 15 years
Cover % : 95%
Stage 1 (Policy Issuance)
Originator
(Member Country)
SPV
Investors
(Sukukholders)
5) Transfers assets 9) Issues Sukuk
Reinsurers
2) ICIEC works closely
with the MLA
6) ICIEC signs a
reinsurance agreement
1) Applies for Cover
4) Accept Policy
8) Pays premium
3) Issues offer
7) Issues policy
MLA
(Adviser/Arranger)
2) ICIEC works closely
with the Reinsurers
Stage 2 (Policy Management)
Originator
(Member Country)
policyholder
(SPV)
Investors
(Sukukholders)
10) Leases Assets Back 12) Transfers periodic distributions and notifies ICIEC
11) Makes periodic distributions
ICIEC coverage remains in the ongoing until closing stage, the policyholder will report to ICIEC all periodic distributions.
Originator
(Member Country)
Policyholder
(SPV)
Investors
(Sukukholders)
13) Completes repayments
16) Transfers Sukuk assets
14) Transfers redemption value
15) Redeems Sukuk Certificates
Stage 3 (Closing)
Policyholder informs ICIEC when Sukuk certificates are redeemed and are transferred to the Originator. The policy officially closes.
Stage 4 (In case of Claim)
Originator
(Member Country)
Policyholder
(SPV)
Investors
(Sukukholders)
17) Delay/nonpayment 19) loss minimization effort
Reinsurers
22) ICIEC recovers from originator
18) NPL/Claim Submitted
21) Claim paid
23) Reinsurers pay share of claims
Underwriting Approach
• History: what is the originator, asset class and underlying obligor payment history, what is their business history?
• Security: is the underlying asset sufficient to secure payment in the event
of problems or default? • Strength of the issuer’s balance sheet? Does the issuer have cash,
reserves, standby access to ensure timely payment? what is the nature, history and consistency of the issuers cash flow? What coverage does this provide for the future?
• Servicing: will the originator service collections related to the underlying
Asset ? Is the originator skilled and competent to perform this?
• Country & Sector Risks: Country rating, W&CD, Expropriation, transfer and convertibility, sector analysis.
Thank you