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55.
Musharakah is a mode of financing against which Sukuks can be issued.
If a comapany required financing for any of its project through Musharakah it can issue Sukuks against which investors would provide funding as per the rules of Musharakah.
56. Every Sukuk would represent holder's proportionate ownership in the assets of the Musharakah.
Once the majority of the cash amount is converted into fixed assets, these Musharakah Sukuk can be treated as negotiable instruments in the secondary market.
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57. Profit earned by the Musharakah is shared according to an agreed ratio between the Issuer and Investors at an agreed ratio.
Loss is shared on pro rata basis.
Profit & Loss is shared between the investors as per investment ratio only.
58. To ensure tradability of the Sukuks following condition should be adhered to:
All the assets of the Musharakah should not be in liquid form.
At least 20% of the value of Portfolio should be invested in non-liquid assets.
59. Musharakah Sukuks can be used for number of purposes including:
Construction of Projects and factories
Expansion Projects
Working Capital Finance
Sitara's Musharakah's TFC advised and arranged by Meezan Bank Ltd. is an excellent example of a Musharakah Sukuks.
61. Sitara Chemical Industries Limited
Incorporated In Year 1981, Listed on All Stock Exchanges in Pakistan.
Commencement Of Commercial Production in 1984.
The Company’s Core Business is Manufacturing of Caustic Soda - Largest Producer Of Caustic Soda In Pakistan.
62. Issuer Sitara Chemical Ind.
Total Issue Size Rs. 360 Million
Private Placement Rs. 255 Million
Public Issue Rs. 105 Million
Tenor 5 years (Aggregate)
Profit Payment Six monthly
Based on profit and loss sharing on the Operating profits of the Chemicals Division
64. Profit was linked to the Operating Profit of the Chemical Division.
Level 1 Profit: On First Rs. 100 Million Operating Profit @ 12% p.a. of the Outstanding Principal.
If Operating Profit is less than Rs. 100 Million then:
Actual profit entitlement rate = (Actual Operating profit/ Rs.100 million)* 12%
65. Level II Profit:
2% p.a. of the outstanding principal on each subsequent Rs. 100 million operating profit(over and above first Rs. 100 Million).
If operating profit falls between the two brackets of Rs. 100 million then:
Profit entitlement rate=(Actual operating profit/Rs. 100 Million) * 2%
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The Company formed and maintains Takaful Reserve during the tenor of the TFCs to mitigate the risk of loss for the TFC holders.
TFC holders also contributed 25% (1/4th ) of their level II Profit to Takaful reserve annually during the tenor of the TFCs.
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The Company transfered Rs 50mm in the reserve.
In case of no losses during TFCs tenor the amount contributed by the company and TFC holders will be paid on final settlement.
68. Sukuks are also issued under other Islamic mode of finance and currently much focus is given Sukuk Al Intefah which is transfer of usufruct instead of ownership of the asset.
Other types include Sukuk Al Muzar'a (sharecropping), Sukuk Al Musaqa (irrigation), Sukuk Al Mugharasa (agricultural) etc.
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69. Sukuks are also issued under hybird structures where number of Islamic modes of finance are used to issue a single Sukuk.
Under these structures each of Islamic mode is applied at different intervals to cater to different requirements of the issuer.
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70. AAOIFI has also issue Shariah standards for Sukuks and its expected that issuance of these standards would help reducing differences in fatwas issued for Sukuks.
71. Some Sukuks are criticized for their close resembelence with conventional bonds.
Many times these closeness is created to adhere to the tax and other regulatary laws of the country.
For example, in Pakistan SPVs cannot hold actual assets. For this reason assets cannot be carved out from the balance sheet of the issuer which creates complexities in identification of the assets and only a hypothecation charge ensures bank's benefical ownership in the Musharakah assets.
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72. Similarly, concept of the Diminishing Musharakah financing is not there in the stamp duty laws of Pakistan, which compels banks to sell share in assets without any legal registration.
It should be noted that concept of Diminishing Musharakah is recognized in British stamp duty laws since April 2003.
Nevertheless, not all of this criticism is incorrect, and therefore it should be ensured that unesseccary usage of artificial structures should be avoided as much as possible.
73. The problems could be resolved by Shariah rating systems
This will help investors in making informed decisions regarding the authenticity of the Shariah structure of the Sukuk.
74. Sukuk can be used very effectively as a halal alternate to conventional bonds for provding funding for matching maturities and without relying too much on commerical banking sector.
Another aspect of Sukuks which make them more effective than bonds is there ability to mobilize and motivate investors to work for the overall benefit of the issuer.
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75. Sukuks based on Ijarah can be used very effectively to finance Government projects.
If general public is involved in the construction of these project through issuance of Sukuks, it can give them sense of ownership.
Effective usage of such Sukus would increase the ratio of success and ratio of sustainbility of the projects by many folds.
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76. Corporate Sector can also benefit from unique characteristic of Sukuks.
Musharakah Sukuks can be used to associate general customer with the company.
Sense of ownership and share in the profit of the company can be used as a marketing tool for the products of the company especially in FMCG sector.
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77. “The more company earns the more return investor would get” concept can revolutionalize sales.
Even Sukuks Al Ijarah would help the companies to position themselves as an caring member of the society by involving community in the business of the company.
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78. Sukuks can be used very effectively to obtain Shariah Compliant funding which surely bring Allah's blessing and barakah for the business.
Issuers can also benefit from the huge increase in liquidity in the Islamic world, and can tap on these new sources of funds. Raising funding from the Islamic bond market in the current environment has been 10 to 20 basis points lower than mainstream bonds.
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