Global Experience for Sukuk Issuance

1. Islamic Research and Training Institute, a Member of IDB Group Global Experience for Sukuk Issuance Dr. Abd elrahman Elzahi Saaid Ali Economist

2. Introduction • Since the end of the last century, Islamic finance has become a continuing growing industry. • The market consensus is that Islamic finance has a bright future, owing to: • Favorable demographics and • Rising incomes in Muslim communities • Leading banks are buying sukuk and forming subsidiaries specifically to conduct Islamic finance • Laws have been enacted in non-Muslim financial centers

3. Sukuk • Generally, Sukuk are asset-backed, stable income, tradable and Shari’ah compatible trust certificates. • The primary condition of issuance of Sukuk is the existence of assets on the balance sheet of the entity which wants to mobilize the financial resources. • The identification of suitable assets is the first step in the process of issuing Sukuk certificates. • Shari’ah considerations dictate that the pool of assets should not solely be comprised of debts

4. Types of sukuk The proper classification of the assets classes will determine the certificates issued Diversified and Mixed assets • Hybrid Sukuk Types of sukuk Trade used in Structuring Modes of Financing • Murabahah Sukuk • Mudarabah Sukuk • Musharakah Sukuk • Ijarah Sukuk • Salam Sukuk • Istisna’a Sukuk • Tradable Sukuk • Non-tradable Sukuk

5. Murabahah Sukuk The buyer of Murabahah commodity The seller of Murabahah commodity The ownership of debt arising from an Istisna’ and/or Murabaha financing. These certificates are not tradable . Entitle the final sale price upon the re-sale of the commodity Murabahah cannot legally traded at the secondary market!

6. Mudarabah Sukuk Mudarib No guarantee For the funds? capital or profit • Rabb al-mal • Suppliers of capital • Owns shares in MD equity • transfer the ownership Its an investment sukuk /common ownership Certificates of permanent ownership in a company and businesses without control and management rights

7. Musharakah Sukuk • holders of sukuk : • Committee • Shared investment decisions investment sukuk ownership of MSH. equity • Certificates of permanent ownership in a company and businesses with control and management rights • SPV can purchased or construct Musharakah Assets or construct by the issuing entity • MSH. Sukuk are negotiable instruments that can be bought and sold in the secondary MRTS.

8. Ijarah Sukuk • Right to : • Own the real estate • Receive the rent • Trade their sukuk • In exchange: • Bear the cost of • maintenance Ijarah sukuk ownership of equal shares RS or UF. Ownership of durable assets given on rent and/or ownership of usufructs of durable assets These certificates are issued on stand-alone assets identified on the balance sheet The rental rates of return can be fixed or floating in Ijara certificates .

9. Salam Sukuk The issuer is the seller of Salam goods The holders are the buyer of the goods Sukuk of equal value for mobilizing S. Capital • They are entitle to: • Sale the price of the certificates • Or sale price of the Salam goods • In salam, funds are paid in advance and the commodity becomes debt. It can also be in the form of certificates representing the debt. These certificates are non-tradable. • Investors pay in advance funds to the SPV in return for a promise to deliver a commodity in Future.

10. Istisna’a Sukuk The issuers Manufacturers The subscribers are the buyers Of the intended products Owned the products Certificates of equal value issued to mobilized fund for production of goods products The ownership of debt arising from an Istisna’ • The funds realized from the subscription are the cost of the product • Shari'ah prohibit these sukuk certificates to be traded in the secondary markets

11. Hybrid/Pooled Sukuk • The underlying pool of assets can comprise of Istisna’, Murabahah receivables as well as Ijarah • However, still at least 51 percent of the pool must comprise of Ijarah assets • having a portfolio of assets comprising of different classes allows for a greater mobilization of funds

12. The global Market for Sukuk • The development Islamic financial Institutions • The need for capital market instruments • The legitimization of the concepts of sukuk in 1988 • Why sukuk are important? • Islamic Issuers and Investors and conventional securities.

13. The global Market for Sukuk • Pioneer Sukuk Issuers: Malaysian, Shell (1990), Sudan Government (2000) • Sukuk become global from 2001: • USA issued Sukuk al Ijarah of US 100 Million (5 year tenor) • Central Bank of Bahrain issued Sukuk Al Salam • After that Sukuk issued in various jurisdictions: • Malaysia, UAE, KSA, Indonesia, Qatar, Pakistan; bruin, Singapore, Kuwait.

15. Total Global Sukuk Issuance for the Period 1st Jan 2001 – 31st Dec 2010

18. Global sukuk Development in 2011 • November 2011 witnessed a record number of sukuk issues totaling USD 8.86 billion globally • a global level • corporate level • Major announcements of new sukuk

19. Sukuk Trends in 2011onwards • 2011 is the best year in terms of sukuk issuance, with USD 79.5 billion • The global sukuk market has reached a record level of USD 180 billion. • Market dominated by sovereign issuers and financial institutions • The sukuk industry benefited from the Eurozone debt crisis. •  More conventional issuers will join the club of sukuk issuers. • Standardization of the rules governing the structures and the market.   • The industry continues to suffer from the effects of double taxation • Many countries are opening up Islamic banking on their territories • Short-term sukuk issue is on the rise. • New structures, such as Wakala

21. Regulatory Developments • Islamic Interbank Benchmark Rate • Islamic Benchmark for Pricing Credit Instruments