Application of Wa'Ad in Equity Based Sukuk Empirical Evidence

RESEARCH PAPER (No: 20/2011)
APPLICATION OF WAAD IN EQUITY BASED SUKK EMPIRICAL EVIDENCE

SHABNAM MOKHTAR
APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

Shabnam Mokhtar*
ABSTRACT The AAOIFI pronouncement on ukk issued in February 2008 reiterated its strong view against the application of purchase undertaking (PU) at par in equity-based ukk, namely mushrakah, murabah and waklah. The main research question that this study attempts to answer is whether the purchase undertaking (at par) guarantees principal in the equity-based ukk. This paper aims to provide empirical evidence on actual application of wad in equity-based ukk in the market to answer the research question. We utilized two main methodologies to answer the research question: a detailed term-sheet analysis, and interviews with market players. We studied 11 preAAOIFI deals and 4 post-AAOIFI deals. We examined two main features of wad: the trigger event and the price. With regards to the main trigger events for PU, both the pre- and post-AAOIFI ukk that used PU had maturity and default as the main trigger events. With regards to price, the PUs in pre-AAOIFI equity-based ukk are priced not only at principal but also include expected profit (not realized profit) that has not yet been paid. The price for post-AAOIFI deals differed from pre-AAOIFI deals, as Sorouh used a conditional PU priced at par while PLSA used a PU priced at market value or value to be agreed in future. Besides the case studies, we also conducted interviews with different market players (bankers, lawyers, rating bodies, regulators and Sharah scholars). We interviewed 42 respondents in all. The final usable respondents were 34 persons. The main question covered in the analysis section is about the function of PU. The top two functions of PU identified from the interviews is guarantee and recourse to the obligor. The scholars and the regulators had the highest percentage of respondents who viewed PU as a guarantee. Also, in IDB 2005 Sukk, the scholars clearly stated that the PU functions as a guarantee of capital and return. Nonetheless, this was allowed in the deal, which was considered a murabah ukk, because the obligor (IDB) and the issuer (SPV) were viewed as independent parties.
*
Shabnam Mokhtar was previously a researcher at ISRA. This research was done during her service at ISRA.
ISRA RESEARCH PAPER (NO. 20/2011) Shabnam Mokhtar
1. INTRODUCTION
In November 2007, Shaykh Taqi Usmani, a prominent Sharah scholar and the Chairman of AAOIFI, made an announcement during a conference in Bahrain that 85% of the ukk in the market are not Sharah compliant.1 His statement was referring particularly to the equity-based ukk (EBS), namely mushrakah, murabah and waklah ukk. Following this, in February 2008, AAOIFI issued a formal pronouncement regarding the matter. The AAOIFI pronouncement called attention to two main issues with regards to EBS: the usage of liquidity facility, and the purchase undertaking at par to acquire the ukk (AAOIFI, 2008). Box 1 highlights the February 2008 AAOIFI pronouncement relevant to EBS.2 This AAOIFI pronouncement is not a new standard; it reiterates what is mentioned in the existing AAOIFI standards. AAOIFI emphasized this in their pronouncement.3 According to AAOIFI, the usage of liquidity facility and the purchase undertaking at par contradict the nature of EBS. From a Sharah point of view, EBS should not have assurance on either the return or the principal, as it is viewed as a trust-based instrument that has strong equity-like features. The liquidity facility is used when actual earnings fall short of expected earnings. The obligor would provide this liquidity facility (either in the form of a loan or a Sharah-compliant facilityprobably tawarruq) to ensure that the issuer is able to pay the expected return to the ukk-holders. The undertaking by the obligor (at the beginning) to re-purchase the assets from ukk-holders for its nominal value would assure that the principal/capital invested by the sukk-holders remains intact.
1 2
Reuters, 21 November 2007. The pronouncement highlighted 6 issues regarding Sukuk. The first two discussed about the tradability of Sukuk. The next two highlighted purchase undertaking and liquidity facility in EBS. The fifth pronouncement was about Sukuk Ijarah while the last one made recommendation for more active involvement of the Shariah Boards The pronouncement highlights: After taking into consideration the deliberations in these meetings and reviewing the papers and studies presented therein, the Shariah Board - while re-affirming the rules provided in the AAOIFI Shariah Standards concerning Sukuk - advises Islamic financial institutions and Shariah Supervisory Boards to adhere to the following matters when issuing Sukuk... (page 1 of AAOIFI pronouncement)
Third: It is not permissible for the Manager of Sukuk, whether the manager acts as Mudarib (investment manager), or Sharik (partner), or Wakil (agent) for investment, to undertake to offer loans to Sukuk holders, when actual earnings fall short of expected earnings. It is permissible, however, to establish a reserve account for the purpose of covering such shortfalls to the extent possible, provided the same is mentioned in the prospectus. It is not objectionable to distribute expected earnings, on account, in accordance with Article (8/8) of the AAOIFI Shariah Standard (13) on Mudaraba, or to obtaining project financing on account of the Sukuk holders. Fourth: It is not permissible for the Mudarib (investment manager), sharik (partner), or wakil (agent) to undertake {now} to re-purchase the assets from Sukuk holders or from one who holds them, for its nominal value, when the Sukuk are extinguished, at the end of its maturity. It is, however, permissible to undertake the purchase on the basis of the net value of assets, its market value, fair value or a price to be agreed, at the time of their actual purchase, in accordance with Article (3/1/6/2) of AAOIFI Shariah Standard (12) on Sharikah (Musharaka) and Modern Corporations, and Articles (2/2/1) and (2/2/2) of the AAOIFI Shariah Standard (5) on Guarantees. It is known that a Sukuk manager is a guarantor of the capital, at its nominal value, in case of his negligent acts or omissions or his non-compliance with the investors conditions, whether the manager is a Mudarib (investment manager), Sharik (partner) or Wakil (agent) for investments. In case the assets of Sukuk of al-Musharaka, Mudarabah, or Wakalah for investment are of lesser value than the leased assets of Lease to Own contracts (Ijarah Muntahia Bittamleek), then it is permissible for the Sukuk manager to undertake to purchase those assets - at the time the Sukuk are extinguished - for the remaining rental value of the remaining assets; since it actually represents its net value.
Box 1: AAOIFI Pronouncement Regarding EBS
In order to analyze the affect of the AAOIFI pronouncement on the type of ukk issued, we first identified the types of ukk issued. IFIS provided the starting database to work with. The cut-off date for our analysis was 5th August 2009. However some ukk on the database were identified generally as ukk. For these types of ukk, if there were term sheets available, we classified them according to the underlying transaction explained in the term sheet. We classified Islamic asset-backed deals (such as Hanco and Tamweel 2007) as mushrakah, although they involved owning a pool of leased assets, because these are effectively ukk al-istithmr (investment ukk). We applied the same rationale for the IDB ukk. As for Malaysian ukk, a cross reference to the website of the Securities Commission (SC) and to PTCs available on SCs website helped identify many of the unidentified Malaysian ukk categories in IFIS. Nonetheless, some ukk (a majority of which were issued out of Pakistan and Indonesia) did not have accompanying term sheets. Since we were unable to identify their categories without the term sheets, we grouped these as unidentifiable with regard to ukk type. Total ukk issued as of 5th August 2009 amounted to US$133 billion. Total ukk of unidentifiable category comprised about USD5.3billion or 4% of the ukk issued. In summary, an active ukk market began from the year 2000 onward. Refer to Chart 1 for the trend of total ukk issued each year. The issuance grew 145% in 2006 compared to 2005, reaching US$27 million. The ukk market peaked at US$47 billion in 2007 and dropped by 55% (to US$21 billion) in 2008. The global market turmoil, drying up of liquidity, widening of credit spreads, and investors wait-and-see attitude are some of the factors to which the sharp decline in 2008 is attributed (Damak, Mohamed; Volland, Emmanuel ; Maheshwari, Ritesh ;, 2009).
Chart 1: Growth of the Sukk Market

(Source: Authors own, based on IFIS Sukk Database)
Having identified the type of ukk issued (bay bi-thaman jil, murbaah, salam, istin,4 ijrah, mushrakah, murabah and waklah), we grouped them into three main clusters: sale-based ukk (comprised of bay bi-thaman jil, murbaah, salam and istin), lease-based cluster (ijrah) and an equity-based cluster (mushrakah, murabah and waklah). Chart 2 illustrates the trend of each cluster. Note that in 2007 equity-based ukk were the most popular type of ukk issued. They represented 75% of ukk issued in that year. The big drop in the EBS category may be attributed to the AAOIFI pronouncement. We do not say that the AAOIFI pronouncement caused the ukk market to decline; nonetheless, based on the data available, the pronouncement may have affected the type of ukk issued. This would reflect AAOIFIs strength in driving market development, which should be viewed as a positive feature rather than a negative one.
Chart 2: Trend in Types of Sukk Issued (Source: Authors own)
The global istin + ijrah type are included in the istin category. We believe this will not distort the analysis because the total global istin + ijrah type were only US$504.5million (about 0.4% of total ukk issued).
In 2008, the lease-based ukk issued comprised 31% of ukk issued while equitybased ukk represented about 36%. Although EBS still comprised the largest category of ukk issued, they no longer held the commanding majority they had the year before. The unidentifiable category was quite significant in 2008 (18% of ukk issued). This was related to two big-ticket issuances from Kuwait (ALAFCO Aviation; US$1100m) and Bahrain (Manara Developments Company; US$2600m) that did not have the accompanying term sheet and were merely categorized as ukk in IFIS. This study focuses on the issue of purchase undertaking and the main research question that it is attempting to answer is whether the purchase undertaking (at par) guarantees principal in the equity-based ukk. This paper aims to provide empirical evidence on actual application of wad in equity-based ukk in the market to answer the research question. The paper is organized into four sections. The following section describes the research methodology utilized in this research. Section Three provides empirical evidence from the case studies and interview conducted followed by the analysis. The final section provides conclusion of the study and suggestions for future studies.
2. METHODOLOGY
In order to answer the research question above, we embarked on two approaches. Firstly, a detailed term sheet review was done on selected case studies, and secondly, interviews were conducted with market players and Sharah scholars. 2.1 Term Sheet Analysis A term sheet analysis is important to provide empirical evidence from actual cases to answer whether a purchase undertaking guarantees the principal. The selected case studies involve pre- and post-AAOIFI structures. We relied on IFIS as our main source of data and term sheets. As of 5th August 2009, there were 1191 ukk (based on various structures) listed on the IFIS Database. This is our main population. Of this population, we only focused on the equity-based cluster, which had (as of 5th August 2009) 266 ukk worth US$63 billion. We then applied a structured convenience sampling method to select the cases to be studied. Tables 1 to 3 list the EBS issued up until 2006. Year 2006 was chosen as the cut-off year for our sampling because, as we learnt from Chart
1 and Chart 2 above, in year 2007 the ukk market peaked at US$47billion and EBS represented 75% of ukk issued in that particular year. This would have been too cumbersome to track. We believe that having a detailed sampling frame up until 2006 provides a systematic approach to our sampling method. For year 2007 we applied convenience sampling without a detailed sampling frame. The aim of this sampling is to detect which EBS deal first explicitly utilized purchase undertaking at par. Before choosing the term sheet to analyze, we first sourced for the term sheets (from IFIS). Thus the tables also indicate if the term sheet is available and, if yes, whether purchase undertaking at par was explicitly used in the deal. The criteria for our sampling are: 1. 2. term sheet is available; and purchase undertaking was either used or not used.
As long as the term sheet is available, a ukk qualifies to be included in our sampling frame. The rationale behind this approach is that in order to conduct a term sheet analysis the documents are a must. Whether or not the deal utilized explicit purchase undertaking, we may still include it in our sample because that would enable us to distinguish how an EBS (prior to the AAOIFI pronouncement) behaved with or without the purchase undertaking. In Table 1 to Table 3, there are a total of 57 EBS deals. Out of these, 14 deals did not have the term sheets on IFIS. Therefore, our sampling frame for years 2001-2006 consists of 43 deals. However, some of these deals (especially Cagamas and Time Engineering, a total of six deals) involved receivables as the underlying asset, so these were excluded due to the issue of bay al-dayn (selling debt). Nonetheless, we have to mention that Time Engineering was an asset-backed ukk without the need to have any purchase undertaking. The only hurdle in this deal was the underlying receivable that was used. 5 Outside Malaysia, this ukk would not be tradable. After excluding Cagamas and Time Engineering from the sampling frame, we had 37 deals to choose from. Out of these 37 deals, 30 deals were from 2006. Refer to Table 4 for details of the sampling frame. As mentioned earlier, the main aim of this sampling is to try to track the earliest EBS deals issued. If we refer to Table 1, it seems that MUIS Sukk Mushrakah was the first EBS deal issued. Although the term sheet is not
5
The structure itself did not have any Sharah issues. It involved a true securitization model like an assetbacked security (ABS), similar to Hanco. The Sharah issue was due to the receivable that was used as the underlying asset rather than a non-financial asset.
available in the public domain (as it was a private deal), we could gauge from write-up on the structure that the deals utilized mushrakah-cum-ijrah structures, and there was no purchase undertaking at par used explicitly for the mushrakah. 6 However, we could not include it in the study due to non-availability of the term sheet. In 2003 IDB also issued its first ukk al-Istithmr; however, the term sheet is also not available on IFIS. Nonetheless, we managed to source this term sheet, and thus we included it in our study.
Year Date Obligor Domicile Type of Sukk Issued Amount (US$m) Term Sheet Available Explicit Purchase Undertaking at par
2001
15/6/2001
Majlis Singapore Ugama Islam Singapura Cagamas Berhad Cagamas Berhad Sitara Group of Industries Cagamas Berhad PT Indosat Tbk Cagamas Berhad PT Berlian Laju Tanker Bank Bukopin Malaysia Malaysia Pakistan Malaysia Indonesia Malaysia Indonesia Indonesia
mushrakah
33
No
No
2002
26/2/2002 23/4/2002 15/6/2002 22/8/2002 6/11/2002
murabah murabah mushrakah murabah murabah murabah murabah murabah murabah mushrakah (Istithmar) murabah mushrakah (Istishmar) murabah
13.15 131.57 5.93 15.78 19.4 31.57 6.89 5.2 22.97 500
Yes, but bay al-dayn Yes No Yes, but bay al-dayn No Yes No No No No
No No Unknown No Unknown No Unknown Unknown Unknown Yes
2003
27/3/2003 28/5/2003 10/7/2003 15/7/2003 20/7/2003
Bank Syariah Indonesia Mandiri Islamic Saudi Development Arabia Bank Ciliandra Perkasa HANCO Rent a Car -Caravan I PTPN VII Indonesia Saudi Arabia Indonesia
26/9/2003 2004 15/2/2004
6.89 25.12
No Yes
Unknown No
26/3/2004
8.71
No
Unknown
Table 1: List of Equity-Based Sukk from 2001-2004

6
(Abdul Karim), (Kamsani, 2005).
Year
Date
Obligor
Domicile
Type of Sukk Issued
Amount (US$m)
Term Sheet Available
Explicit Purchase Undertaking at par
2005
28/2/2005
PG Municipal Assets Bhd Time Engineering (Musyarakah One)
Malaysia
murabah
21.05
Yes
No
4/4/2005
Malaysia
mushrakah
658.02
Yes, but bay al-dayn
No
19/5/2005
UAE Gold Sukk (Dubai Metals & Commodities Centre) Islamic Saudi Development Arabia Bank IJN Capital Sdn Bhd IJN Capital Sdn Bhd Cagamas Berhad Sanctuary Building Sukk The Investment Dar Company K.S.C Malaysia Malaysia Malaysia
mushrakah
200
Yes
Yes
11/6/2005
mushrakah (istithmr) mushrakah mushrakah mushrakah
500
Yes
Yes
1/8/2005 1/8/2005 8/8/2005
26.31 28.68 539.47
Yes Yes Yes, but involved bay al-dayn No
No No No
24/8/2005
GB
mushrakah
261
Unknown
3/10/2005
Bahrain
mushrakah
100
No
Unknown
23/12/2005 Vastalux Sdn Bhd
Malaysia
mushrakah
26.31
Yes
No
Table 2: List of Equity-Based Sukk in 2005
10
Year
Date
Obligor
Domicile
Type of Sukk Issued
Amount (US$m)
Term Sheet
2006
4/1/2006
Dubai Ports Authority and DPI Terminals (PCFC) Rantau Abang Capital Rantau Abang Capital IJN Capital Sdn Bhd Bukhatir Group Aabar Petroleum Investment Company East Cameron Gas Co.
UAE
mushrakah
3500
Yes
Yes
14/3/2006
Malaysia
mushrakah
2029
Yes
Yes
15/3/2006
Malaysia
mushrakah
789.47
Yes
Yes
21/3/2006 17/5/2006
Malaysia UAE
mushrakah ukk alwaklah bi alistithmr murabah (exchangeable)
55 50
Yes Yes
No Yes
2/6/2006
Cayman Islands
460
Yes
Yes
15/6/2006
United States
mushrakah
167
Yes
No (assetbacked sukk) Yes
11/7/2006
Saudi Basic Saudi Industries Arabia Corporation (SABIC) Rantau Abang Capital Investment Dar Qatar Real Estate Investment Company (QREIC) AAyan Leasing Malaysia
mushrakah (istithmr)
800
Yes
14/8/2006
mushrakah
394.73
Yes
Yes
17/9/2006 18/9/2006
Cayman Islands Qatar
mushrakah mushrakah
150 270
Yes No
Yes Unknown
20/9/2006
Bahrain
mushrakah
100
Yes
Yes
11
Year
Date
Obligor
Domicile
Type of Sukk Issued
Amount (US$m)
Term Sheet
29/9/2006
Khazanah Nasional Bhd Mukah Power Generation Sarawak Power Generation Sharjah Islamic Bank (SIB) Projek Lebuhraya UtaraSelatan Berhad ( PLUS)
Malaysia
mushrakah
750
Yes
Yes
3/10/2006
Malaysia
murabah
175
Yes
No
3/10/2006
Malaysia
mushrakah
56.57
Yes
No
6/10/2006
UAE
mushrakah
225
No
Unknown
8/10/2006
Malaysia
mushrakah
184.21
Yes
Yes
9/10/2006
National Cayman Industries Islands Company for Building Material PLUS Malaysia Malaysia Malaysia UAE
mushrakah
100
Yes
Yes
9/10/2006
mushrakah mushrakah murabah mushrakah
177.63 1184.21 52.63 800
Yes Yes No Yes
Yes Yes Unknown Yes
11/10/2006 PLUS 23/11/2006 OCBC Bank 7/12/2006 Abu Dhabi Islamic Bank Khazanah Nasional Bhd
8/12/2006
Malaysia
mushrakah
564.9
Yes
Yes
18/12/2006 PLUS 20/12/2006 PLUS 20/12/2006 PLUS 20/12/2006 PLUS 20/12/2006 PLUS 20/12/2006 PLUS
Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia
mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah
52.63 15.78 52.63 52.63 52.63 52.63
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
12
Year
Date
Obligor
Domicile
Type of Sukk Issued
Amount (US$m)
Term Sheet
2006
21/12/2006 Am Islamic Bank Berhad 26/12/2006 Sarawak Power Generation 27/12/2006 Lagoon City Sukk 27/12/2006 Mukah Power Generation
Malaysia
mushrakah
105.26
Yes
Yes, but restricted PU Yes
Malaysia
mushrakah
56.58
Yes
Kuwait Malaysia
mushrakah murabah
200 250
Yes Yes
Yes No (murabah + istin)
Table 3: List of Equity-Based Sukk Issued in 2006
Year
Date
Obligor
Domicile
Type of Sukk Issued
Amount (US$m)
2003
20/7/2003
Islamic KSA Development Bank (IDB) HANCO Rent a Car (Caravan I LLC) PG Municipal Assets Bhd Gold Sukk (DMCC) KSA
mushrakah
500
Yes
2004
15/2/2004
mushrakah
25.12
No (ABS)
2005
28/2/2005 19/5/2005 11/6/2005 1/8/2005 1/8/2005 23/12/2005
Malaysia UAE
murabah mushrakah mushrakah mushrakah mushrakah mushrakah
21.05 200 500 26.31 28.68 26.31
No Yes Yes No No No
Islamic KSA Development Bank IJN Capital Sdn Bhd IJN Capital Sdn Bhd Vastalux Sdn Bhd Malaysia Malaysia Malaysia
13
Year
Date
Obligor
Domicile
Type of Sukk Issued
Amount (US$m)
2006
4/1/2006 14/3/2006 15/3/2006 21/3/2006 17/5/2006 2/6/2006 15/6/2006 11/7/2006
Dubai Ports Authority (PCFC) Rantau Abang Capital Berhad Rantau Abang Capital Berhad IJN Capital Sdn Bhd Bukhatir Group Aabar Petroleum Investment Co. East Cameron Gas Company Saudi Basic Industries Corporation Rantau Abang Capital Berhad Investment Dar AAyan Leasing & Investment Co.
UAE Malaysia Malaysia Malaysia UAE Cayman USA KSA
mushrakah mushrakah mushrakah mushrakah waklah murabah mushrakah mushrakah
3500 2029 789.47 55 50 460 167 800
Yes Yes Yes No Yes Yes No (ABS) Yes
14/8/2006 17/9/2006 20/9/2006 29/9/2006 3/10/2006
Malaysia Cayman Bahrain
mushrakah mushrakah mushrakah mushrakah murabah
394.73 150 100 750 175
Yes Yes Yes Yes No
Khazanah Nasional Malaysia Bhd Mukah Power Generation Sdn Bhd Sarawak Power Generation Projek Lebuhraya Utara Selatan National Industries Company for Building Material Projek Lebuhraya Utara-Selatan Projek Lebuhraya Utara-Selatan Abu Dhabi Islamic Bank Malaysia
3/10/2006 8/10/2006 9/10/2006
Malaysia Malaysia Cayman
mushrakah mushrakah mushrakah
56.57 184.21 100
No Yes Yes
9/10/2006 11/10/2006 7/12/2006 8/12/2006
Malaysia Malaysia UAE
mushrakah mushrakah mushrakah mushrakah
177.63 1184.21 800 564.9
Yes Yes Yes Yes
Khazanah Nasional Malaysia Bhd
14
Year
Date
Obligor
Domicile
Type of Sukk Issued
Amount (US$m)
2006
18/12/2006 20/12/2006 20/12/2006 20/12/2006 20/12/2006 20/12/2006 21/12/2006 26/12/2006 27/12/2006
Projek Lebuhraya Utara-Selatan Projek Lebuhraya Utara-Selatan Projek Lebuhraya Utara-Selatan Projek Lebuhraya Utara-Selatan Projek Lebuhraya Utara-Selatan Projek Lebuhraya Utara-Selatan Am Islamic Bank Berhad Sarawak Power Generation Al Ahlia Gulf Holding (Lagoon City) Mukah Power Generation Sdn Bhd
Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia Kuwait
mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah
52.63 15.78 52.63 52.63 52.63 52.63 105.26 56.58 200
Yes Yes Yes Yes Yes Yes Yes, but restricted Yes Yes
27/12/2006
Malaysia
murabah
250
No (murabah + istin)
Table 4: Sampling Frame for Years 2001-2006
If we refer to the sampling frame, the earliest deal that is available for study is IDB 2003. Although the term sheet was not available on IFIS, we sourced it from Rafe Haneef, Managing Director of Fajr Capital. Next on the list is Hanco, issued in 2004. Hanco did not use any purchase undertaking at par. Hanco was also a true Islamic asset-backed deal. It will be interesting to learn how it is different from the normal asset-based ukk. In 2005, there were seven deals available in the sampling frame. We only chose three deals, the earliest of them all. These were Pasir Gudang Municipal Sukk Murabah, Gold Sukk DMCC and IDB 2005. Pasir Gudang Municipal Sukk Murabah was the first non-Cagamas Malaysian deal that utilized EBS. It did not have the purchase undertaking. The Gold Sukk DMCC and IDB 2005 were amongst the earlier EBS deals that explicitly utilized purchase undertaking at par. We were fortunate because the IDB term sheet attached the Sharah pronouncement, thus sharing the Sharah justification for
15
applying the purchase undertaking at par. Thus, we included both Gold Sukk DMCC and IDB in our sample. Although there were more EBS in 2005 (IJN Capital, The Investment Dar & Vastalux) we decided to limit our sampling to only three in 2005 due to time constraints. As for 2006, we only selected two deals, one in the beginning of the year (PCFC Sukk Mushraka issued in January 2006) and one towards the end of year (ADIB Sukk Mushraka issued in December 2006). We hope to capture any change in the use of the purchase undertaking (if any) by choosing one from the beginning of the year and one towards the end. In addition, we also included East Cameron Gas Sukk, which was facing default. Notice that the EBS deals in Malaysia did not explicitly use purchase undertaking in 2004 or early 2005. Based on the data in Table 1 to Table 3, it seems that Rantau Abang Capital was the first EBS deal in Malaysia that utilized purchase undertaking at par in an explicit manner in year 2006. However, based on other data, 7 we learnt that Assar Chemical was issued prior 8 to Rantau Abang and that it utilized put options at par. Nonetheless, for this research we only include Rantau Abang.9 Since the number and value of EBS issued reached their peak in 2007, we did not develop a specific sampling frame for that year as it would have been too time consuming. We selected two deals based on convenience sampling, nevertheless with certain specific criteria. The deals selected for 2007 were KL Sentral Sukk Mushraka issued in April 2007 and DP World Sukk Muraba issued in July 2007. KL Sentral was chosen as it utilized third party credit enhancement together with the purchase undertaking. DP World had both the sale and purchase undertaking in the deal, a feature practiced by a number of ukk issuers. Therefore, the pre-AAOIFI pronouncement structures that were studied include: i) ii) iii) iv)
7 8 9
IDB Sukk Al-Istithmr issued in July 2003. Caravan 1 (Hanco) Sukk Al-Istithmr issued in February 2004 Pasir Gudang Municipal Sukk Muraba issued in February 2005 Gold Sukk DMCC Sukk Mushraka issued in May 2005
Based on SCs website and confirmation with MARC and RAM in Malaysia. Assar Chemical was issued on 26/8/2005. Assar Chemical will be analyzed in another project at ISRA titled, A Critical Appraisal of Sharah Issues in ukk: Developing a Comprehensive ukk Database.
16
v) vi) vii) ix) x) xi)
IDB Sukk Al-Istithmr issued in June 2005 PCFC Sukk Mushrakah issued in January 2006 Rantau Abang Sukk Mushrakah issued in March 2006 Abu Dhabi Islamic Bank Sukk Mushrakah issued in December 2006 KL Sentral Sukk Mushrakah issued in April 2007 DP World Sukk Murabah issued in July 2007
viii) East Cameron Gas Sukk issued in June 2006
As for post-AAOIFI ukk structures studied, refer to Table 5 for the sampling frame. Similar to the pre-AAOIFI structures, we first sourced for the term sheet. Table 5 also indicates if the term sheets are available and, if yes, whether purchase undertaking at par was explicitly used in the deal. The criteria for our sampling for post-AAOIFI structures are: 1. 2. term sheet is available; and did not use purchase undertaking
Date
Obligor
Domicile
Sukk Type
Amount (US$m)
Term Sheet
Purchase Undertaking at par
22/1/2008 23/1/2008 24/1/2008 30/1/2008 5/3/2008 7/3/2008 7/3/2008 7/3/2008 16/3/2008 26/3/2008
Sistem Lingkaran Lebuhraya Kajang Tamweel PJSC Gamuda Berhad Pace (Pakistan) Limited
Malaysia UAE Malaysia Pakistan
murabah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah
229.9 300 73.58 31.87 550 77.53 31.64 31.64 66.84 31.54
No Yes Yes No Yes Yes Yes Yes No Yes
Unknown Yes Yes Unknown Yes Yes Yes Yes Unknown Yes
Khazanah Nasional Malaysia Bhd Westports Malaysia Westports Malaysia Westports Malaysia Tajeer WCT Engineering Berhad Malaysia Malaysia Malaysia KSA Malaysia
17
Date
Obligor
Domicile
Sukk Type
Amount (US$m)
Term Sheet
26/3/2008 26/3/2008 27/3/2008
WCT Engineering Berhad WCT Engineering Berhad Salam International Investment Lingkaran Trans Kota Holdings Berhad Lingkaran Trans Kota Holdings Berhad Muhibbah Engineering (M) Bhd (WCT) Hong Leong Industries Hong Leong Industries Gulf Holding Company (Villamar) Mohammed H. Al Mana Group Tanjung Langsat Port Sdn Bhd Tanjung Langsat Port Sdn Bhd Tanjung Langsat Port Sdn Bhd Tanjung Langsat Port Sdn Bhd Tanjung Langsat Port Sdn Bhd Tanjung Langsat Port Sdn Bhd Saudi Basic Industries Corporation Matang Highway Sdn Bhd
Malaysia Malaysia Qatar
31.54 31.54 137.5
Yes Yes Yes
Yes Yes Yes
14/4/2008
Malaysia
mushrakah
95.02
Yes
Yes
14/4/2008
Malaysia
mushrakah
362.68
Yes
Yes
15/4/2008
Malaysia
murabah
126.18
Yes
Yes
2/5/2008 2/5/2008 7/5/2008
Malaysia Malaysia Bahrain
15.84 15.84 190
Yes Yes Yes
Yes Yes No
11/5/2008 15/5/2008 15/5/2008 15/5/2008 15/5/2008 15/5/2008 15/5/2008 26/5/2008
Qatar Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia KSA
murabah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah
163.4 1.53 9.17 13.78 13.78 13.78 12.25 1333.2
Yes Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes Yes
27/5/2008
Malaysia
mushrakah
4.64
Yes
Yes
18
Date
Obligor
Domicile
Sukk Type
Amount (US$m)
Term Sheet
27/5/2008 27/5/2008 28/5/2008
Matang Highway Sdn Bhd Matang Highway Sdn Bhd BumiputraCommerce Holdings Berhad Eden Developers Ltd Toyota Motor Corporation PT
Malaysia Malaysia Malaysia
6.18 10.82 107.83
Yes Yes Yes
Yes Yes Yes
28/5/2008 3/6/2008 5/6/2008 26/6/2008 10/7/2008 20/8/2008 28/8/2008 28/8/2008 28/8/2008 28/8/2008 17/9/2008 31/10/2008 31/10/2008 31/10/2008 31/10/2008 31/10/2008 21/11/2008 24/11/2008
Pakistan Malaysia
mushrakah mushrakah murabah mushrakah murabah murabah mushrakah murabah murabah murabah murabah murabah murabah murabah murabah murabah mushrakah murabah 5.6 5.52 54.9
3 30.8 21.7 322.8 34.2 89.87 18.2 68.31 751.49 273.27 267 27.9 13.9 8.4 8.4
No Yes No Yes No Yes No Yes Yes Yes No Yes Yes Yes Yes Yes Yes No
Unknown Yes Unknown Yes Unknown Yes Unknown Yes, but limited Yes, but limited Yes, but limited No No No No No No Yes Unknown
Mayora Indah Tbk, Indonesia PLUS Expressway Bhd Bank Muamalat Malaysia Indonesia
Islamic Malaysia Development Bank Sitara Group of Industries (SGI) Pakistan
Sorouh Real Estate UAE Company Sorouh Real Estate UAE Company Sorouh Real Estate UAE Company Binladin Group, Saudi Arabia KSA
Projek Lintasan Malaysia Shah Alam (PLSA) Projek Lintasan Malaysia Shah Alam (PLSA) Projek Lintasan Malaysia Shah Alam (PLSA) Projek Lintasan Malaysia Shah Alam (PLSA) Projek Lintasan Malaysia Shah Alam (PLSA) Tanjung Langsat Port Sdn Bhd OCBC Bank Malaysia Malaysia
19
Date
Obligor
Domicile
Sukk Type
Amount (US$m)
Term Sheet
28/11/2008
Chemical Company of Malaysia Saudi Hollandi Bank
Malaysia
mushrakah
41.43
No
Unknown
30/12/2008
Saudi Arabia
murabah
206.7
No
Unknown
Table 5: Sampling Frame for Post-AAOIFI Structures
Unlike pre-AAOIFI structures, in order to understand how the market segment relevant to the AAOIFI pronouncement manages the issue of purchase undertaking at par, we specifically looked for deals that had term sheets and did not use purchase undertakings at par. As for deals that still used purchase undertakings at par, they were still documented similarly to pre-AAOIFI deals. Thus we only had four deals to work with, namely: 1. 2. Villamar Sukk Mushrakah, issued in Bahrain (May 2008) without a purchase undertaking. Sorouh Murabah ABS, issued in Abu Dhabi (August 2008). This was an ABS deal. It had a purchase undertaking at par, but the use of the purchase undertaking was limited to the availability of funds that the project had, i.e. a conditional purchase undertaking. Project Lintasan Shah Alam (PLSA) Sukk Murabah, issued in Malaysia (October 2008). The Sukk Murabah used purchase undertaking at market value or value to be agreed in future. Bin Ladin Sukk Murabah, issued in Saudi Arabia (September 2008), which utilized a third-party guarantee. This deal was privately placed, thus there is limited public material available. We attempted to source for case studies that discuss this deal and have managed to obtain the term sheet from other sources.
3.
4.
20
2.2 Interview We conducted interviews with different groups of participants in the ukk market, including bankers, lawyers, rating agencies, investors, regulators and Sharah scholars. A quota sampling method was used in this study to ensure we had views from different market participants. We targeted 30 samples, based on the sampling distribution shown in Table 6. We allocated the largest quota for bankers (i.e. lead arrangers), as they are directly involved in structuring and distributing ukk, and as there are a high number of banks involved in the ukk market. Since we are studying a pertinent Sharah issue, we allocated slightly more than 20% of the quota for scholars (second highest after bankers). Market Participant Regulators Bankers Legal counsels Rating bodies Sharah scholars Total Targeted sample 4 10 5 4 7 30
Table 6: Target Sampling Distribution
% 13 33 17 13 23 100%
We targeted regulators from four jurisdictions that are active in the ukk space, namely Malaysia, the UAE, Saudi Arabia and London. Malaysia, the UAE and Saudi Arabia are leading players in the ukk market. In 2008, Malaysia, UAE and Saudi held 36%, 35% and 13% market share in the global ukk market.10 London is an increasingly popular listing destination for many ukk issuers. Legal counsels and rating bodies were allocated the remaining quotas. We then administered the interviews using a convenience sampling technique to achieve the quota. The bankers and the legal counsel were chosen based on their involvement in the ukk market. The firms are easily determined via the IFIS Sukk Database, as IFIS tracks the lead arrangers and legal counsels that are involved. We relied on our market contacts in Malaysia to identify the respective relevant individuals in charge of the Islamic debt capital market for jurisdictions outside Malaysia. In other words we used the technique of snowballing, beginning with the Islamic debt capital market players in Malaysia. This was important to make sure we were contacting the right individuals who would give relevant and valid responses to the interview questions.
10
Based on a report by (Global Investment House, 2009).
21
As for regulators, if we were not able to obtain a formal response from the respective regulators, we used the available online resources in order to understand the ukk regulatory framework in the jurisdiction, or we referred to legal counsels and lead arrangers to grasp the ukk issuance procedure. With regards to scholars, we referred to those active in the ukk space. This included scholars who are external Sharah advisors as well as those in the internal Sharah divisions of Islamic banks. Altogether, we interviewed 42 respondents. The final number of usable respondents was 34 people. Their institutions are listed in Appendix I. For confidentiality reasons, we do not disclose the names of the respondents, with the exception of the Sharah scholars. We do quote some respondents by name in our analysis section, after having obtained approval. At some institutions we met more than one respondentusually a banker and a Sharah-background person (the Head of Sharah normally). If their responses were usable, we would recognize them as two different respondents. Table 7 compares the actual respondents to our target sample. We worked well within our planned target. Of the final usable sample, most of the respondents were bankers (38%). Included in the bankers group is one transaction administrator. There were five legal counsels (15%) and four rating bodies (12%) that participated in the interviews. Last but not least, we managed to obtain responses from eight scholars (24%). However, we should qualify that most of the scholars interviewed shared the same view on the issue of purchase undertaking. We did not manage to obtain the views of other scholars with differing opinions due to time constraints. Therefore, the results should be read with this caveat in mind.
Market Participant Regulators Bankers Legal counsels Rating Bodies Sharah Scholars Total
Actual Respondent 4 (12%) 13 (38%) 5 (15%) 4 (12%) 8 (24%) 34

Table 7: Actual Respondents
Targeted sample 4 (13%) 10 (33%) 5 (17%) 4 (13%) 7 (23%) 30
22
We utilized open-ended questions in the interview. This method was chosen rather than a survey with a close-ended questionnaire because we wanted to gain rich input from various market participants. Most interviews were conducted face to face and recorded. Some interviewees declined to be recorded; thus, notes were taken to capture their views. A few phone and e-mail interviews were conducted as well. The main focus of the interviews was to obtain the answer for our main research question: does purchase undertaking (at par) guarantee principal in EBS? Since our research question was particularly looking into PU as a guarantee, after asking the respondents their general view on the function of PU, we followed up by specifically asking if the respondents considered PU to play the role of a guarantee. We asked this question to clearly identify those who do not think PU is a guarantee. We also asked other questions in the interviews; however, this paper will only focus on the question asked regarding the function of PU and whether it is a guarantee. 1.3 Empirical Evidence from Case Studies In this section we will discuss our findings from the case studies and interviews. The case studies will provide empirical evidence on how purchase undertaking was applied in actual ukk issued. We will look at two important features: the trigger event and, most importantly, the price of the purchase undertaking, as this well help answer the research question. The interview results provide the views of different participants in the Islamic finance market regarding the function of purchase undertaking in equitybased ukk. 1.3.1 Pre-AAOIFI Sukk We conducted a detailed term sheet analysis for 11 pre-AAOIFI ukk deals. Table 8 shows the application of wad in these deals. Out of 11 pre-AAOIFI deals, 8 deals (73%) utilized wad. The remaining three deals (33%) did not utilize wad. They were either asset-backed ukk (Hanco & East Cameron) or followed due diligence standards for asset-backed ukk (PG Municipal). Among the deals that utilized wad, three deals (40%) used both a sale undertaking and purchase undertaking, while five deals (60%) used only a purchase undertaking. For the deals that used wad, we then did detailed tracking of the trigger event and the price of the purchase undertaking, which is shown in Tables 9 to 11.
23
Pre-AAOIFI Deals Short Deal Name Used Wad? IDB Sukk Al-Istithmr issued in IDB 2003 1. Yes. PU only July 2003. Caravan 1 (Hanco) Sukk Al2. Hanco No (asset-backed Istithmr issued in February ukk) 2004 Pasir Gudang Municipal Sukk 3. PG Municipal No (followed Muraba issued in February asset-backed due 2005 diligence) Gold Sukk DMCC Sukk 4. Gold Sukk DMCC Yes. PU only Mushraka issued in May 2005 IDB Sukk Al-Istithmr issued in IDB 2005 5. Yes. PU only June 2005 PCFC Sukk Mushrakah issued PCFC 6. Yes. PU and SU in January 2006 Rantau Abang Sukk 7. Rantau Abang Yes. PU and SU Mushrakah issued in March 2006 East Cameron Gas Sukk issued East Cameron 8. No (asset-backed in June 2006 ukk) Abu Dhabi Islamic Bank Sukk 9. ADIB Yes. PU only Mushrakah issued in December 2006 10. KL Sentral Sukk Mushrakah KL Sentral Yes. PU only issued in April 2007 11. DP World Sukk Murabah DP World Yes. PU and SU issued in July 2007
Table 8: Pre-AAOIFI Sukk Deals and Utilization of Wad
24
IDB 2003 Issuer Obligor Type of Wad PU trigger event Periodic distribution Maturity (Scheduled dissolution) Dissolution Event Conversion into equity Tax Event Optional Dissolution Change of control Price of PU Solidarity Trust Services Limited IDB PU by Obligor (IDB)
Gold Sukk DMCC Gold Sukk DMCC (SPV) DMCC PU by obligor (DMCC)
IDB 2005 IDB Trust Services Ltd (SPV) IDB PU by obligor (IDB)
Principal + Unpaid Profit
Principal + Unpaid Profit (LIBOR+0.6%)
Principal + Unpaid Profit
SU trigger event Tax event Look Back Period Maturity (Scheduled dissolution) Dissolution Event
Table 9: Trigger and Price for IDB and Gold Sukk DMCC Deals
25
Issuer
PCFC PCFC Development (SPV) PCFC PU by obligor (PCFC) and SU by obligor for look back period
Rantau Abang Rantau Abang Capital Bhd (SPV) Khazanah PU by Obligor (Khazanah) SU by Trustee (matched with PU)
ADIB ADIB Sukk Co Ltd (SPV) ADIB PU by obligor (ADIB)
Obligor Type of Wad
PU trigger event Periodic distribution Maturity (Scheduled dissolution) Dissolution Event Conversion into equity Tax Event Optional Dissolution Change of control Price of PU
**
**
Principal + acrrued return (7.125% if convert, 10.125% if not)
CP: Cost + YTM MTN: Cost + YTM-Periodic Distribution
Principal + Unpaid Profit (LIBOR+0.4%)
SU trigger event Tax event Look Back Period Maturity (Scheduled dissolution) Dissolution Event **
**
Table 10: Trigger and Price for PCFC, Rantau Abang and ADIB Sukk Note: ** Matched PU and SU trigger
26
Issuer Obligor Type of Wad
KL Sentral KL Sentral Bhd KL Sentral Bhd PU by obligor (KL Sentral)
DP World DP World Sukk Ltd (SPV) DP World Ltd PU by obligor (DP World) and SU by issuer (tax event)
PU trigger event Periodic distribution Maturity (Scheduled dissolution) Dissolution Event Conversion into equity Tax Event Optional Dissolution Change of control Price of PU
Principal + Unpaid Profit (6.25%)
No specific price on PU itself, but the redemption prices are at face amount plus profit. In case of early redemption, the minimum price of principal is implied in the formula
SU trigger event Tax event Look Back Period Maturity (Scheduled dissolution) Dissolution Event
Table 11: Trigger and Price for KL Sentral and DP World Sukk
27
2.3.1.1 Trigger Events of Wad in Pre-AAOIFI EBS Let us first look at the trigger events in the purchase and sale undertaking. Table 12 shows summary of the PU trigger events. PU Trigger Event Periodic Distribution Maturity Dissolution Event Conversion Tax Event Optional Change of control Count 1 (Gold Sukk) 7 8 1 (PCFC) 1 (ADIB) 2 (ADIB, KL Sentral) 1 (DP World) % 13% 88% 100% 13% 13% 25% 13%
Table 12: Trigger Event Analysis in Purchase Undertaking
The two main trigger events in which the PU will be exercised are the dissolution event (default) and maturity. Although the table shows that only 7 deals (88%) used PU for maturity, in our opinion this should actually be 100% because the Gold Sukk DMCC was an amortizing ukk, i.e. on each periodic distribution date, 10% of the principal would be redeemed. It was a semi-annual distribution, thus each year 20% of the principal would be redeemed. The final distribution date (i.e. at the end of 5 years) would also be the maturity date. If we combine this periodic distribution with the maturity trigger event, all 8 deals used maturity as a trigger event for PU. Other trigger events include optional dissolution (due to a call option or early redemption at the discretion of the obligor), conversion (when any PCFC group goes for listing), tax event (change in tax ruling that adversely affects the sukk-holders) and change of control (when the Government of Dubai ceases to own/control 50% of Dubai World Ltd). Next, let us analyze the trigger events for sale undertaking that are summarized in Table 13. SU Trigger Event Tax Event Look Back Maturity Dissolution Event Count 1 (DP World) 1 (PCFC) 1 (Rantau Abang) 1 (Rantau Abang) % 33% 33% 33% 33%
Table 13: Trigger Event Analysis in Sale Undertaking
28
Only three deals (PCFC, Rantau Abang and DP World) utilized a sale undertaking. However, unlike the trigger event for the PU, there wasnt any leading trigger event for all the SUs; each deal utilized the SU for different events. DP World used a tax event as the trigger event for SU, whereby the trustee (issuer) will sell its interest in the murabah assets to the obligor. On the other hand, PCFC (obligor) promises that it will sell a certain number of shares to the issuer during the look-back period (12 months after maturity or dissolution event) if there was any listing of shares. Both DP World and PCFC utilized two unilateral promises (wadn) because the PU and the SU had different trigger events. Last but not least, Rantau Abang utilized an SU with trigger events matched to those of its PU (i.e. maturity and dissolution). Thus the PU and SU in Rantau Abang are muwadah (bilateral promise) rather than wadn. 2.3.1.2 Price of the PU in pre-AAOIFI EBS As far as the price of the PU is concerned, all eight deals that used PU priced it at principal outstanding plus unpaid profit. At first glance, the price of PU is usually referred to as the exercise price. We conducted a detailed tracking of the definition of the exercise price from various sections of the offering circular and term sheet to find that the exercise price refers to outstanding principal plus unpaid profit. For most of the deals, even the specific return could be traced from the term sheet. In Rantau Abang Sukk Mushrakah the term sheet did not mention the yield specifically because it was determined based on demand when the ukk was issued. Some deals (Gold Sukk DMCC and KL Sentral) utilized a formula for the exercise price. However when we do a detailed tracking, the formula can be substituted with principal plus unpaid profit. Let us look at Gold Sukk DMCC as an example. The price of the purchase undertaking during the periodic distribution date was stated as U + (P-X). Nonetheless a detailed tracking of the formula shows that it is actually referring to principal amortized (US$20m) plus the accrued return (LIBOR + 0.6%) on the outstanding principal for the six-month period. This is illustrated in Table 14.
29
When Periodic distribution date
Buy What 10% of Issuers unit
Detail of purchase undertaking price Exercise Price = {U + (P X)} = Principal amortized + unpaid Periodic Distribution Profit Amount accrued =US$20 m + {[(6m LIBOR+0.6%)*Outstanding principal* n/360] profit paid} Exercise Price = Aggregate principal amount outstanding + unpaid Periodic Distribution Profit Amount accrued = Outstanding principal + {[(6m LIBOR + 0.6%) * Outstanding principal * n/360] profit paid}
Dissolution Event
All of Issuers unit
Table 14: Price of Purchase Undertaking in Gold DMCC

11 12
For KL Sentral Mushrakah Sukk, the PU itself did not specify the exercise price in detail. We had to rely on the redemption prices to determine the price of the PU. Table 15 shows the tracking of the redemption events and the price at which the redemption will be done. We can observe that the price is outstanding principal (face amount of primary ukk) plus profit due (secondary ukk) or early redemption amount (ERA). Let us analyze the ERA, as this an example of a formula that can be tracked to outstanding principal plus profit. Box 2 shows the formula for the ERA. Please note that, while KL Sentral was chosen as a sample, there are also other deals that utilized a similar approach.
When Maturity Event of default
At what price Face amount11 of matured ukk Face amount of all primary ukk and face amount for secondary12 ukk maturing in 6 months Optional Early Redemption Early redemption amount (ERA)
11 12
Face amount is the outstanding principal. Secondary ukk is the profit portion of the ukk while primary ukk is the principal portion.
30
Mandatory Early Redemption 1. Compulsory trigger event of put option Face amount of all primary ukk and the face amount of the secondary ukk maturing within six months of redemption date Early redemption amount (ERA)
2. Non-compulsory trigger event of put option prior to maturity
Table 15: Summary of Redemption Events in KL Sentral Sukk Mushrakah
Early Redemption Amount =
(PB x ERP) 100
where: PB = aggregate nominal value of the relevant tranche of the ukk to be redeemed ERP = early redemption price per RM100 of the nominal value of the ukk to be redeemed (rounded to the nearest 5 decimal places), subject to a minimum of RM100, calculated based on the formula set out below.
Box 2: Formula for Early Redemption Amount (Source: p. 45 of KL Sentral Term Sheet)
31
If we analyze the early redemption amount (ERA) formula, we will notice that the amount repaid will depend on the early redemption price (ERP). It is further explained in Box 2 that the ERP is the price per RM100 of the nominal value of the ukk to be redeemed (rounded to the nearest 5 decimal places) subject to a minimum of RM100. Please note that the ERP formula would play an important role only in case the price is more than RM100. If the formula produces an amount below RM100, then the minimum condition would kick in. What is the effect of this minimum RM100 amount? Let us do a simple simulation to understand it: Case 1: ERP = RM100, PB = RM720million If we plug in the information into the ERA formula, then the ERA would be: = (PB x ERP) 100 720million * 100 100 RM720 million (which is the principal amount)
Case 2: ERP = RM105, PB = RM720million If we plug the information into the ERA formula, then the ERA would be: = (PB x ERP) 100 720million * 105 100 RM756 million
This brings us to a question: what is this additional amount of RM36 million? If we refer to clause 27.9, Condition on Early Redemption, in the KL Sentral term sheet, it is indicated that any early redemption must be done on a periodic distribution date. This means that when the redemption is done, not only will the principal be redeemed, but also the periodic distribution amount that is supposed to be allocated to the sukkholders. So the additional RM36 million would be the profit to the sukk-holders.
32
Simply put, although there is a formula in place for the early redemption amount, it ensures that, at a minimum, the investors are paid back their principal. Tables 16 and 17 provide examples of absolute purchase undertaking prices in PCFC and ADIB Sukk Mushrakah. Although there are certain terms used to price the purchase undertaking, a deeper tracking of the definition of these terms leads to a clear reference to principal plus return to be paid. Trigger Events QPO Redemption Date Price of Purchase Undertaking QPO Redemption Amount + QPO Accumulated Sukk Return Amount Relevant Exercise Price = Outstanding Sukk Amount + Scheduled Accumulated Sukk Return Amount Relevant Exercise Price = Outstanding Sukk Amount + Scheduled Accumulated Sukk Return Amount Implied amount from formula Outstanding principal + (principal*7.125%*days)
Final Redemption (maturity)
Outstanding principal + (principal*10.125%*days)
Mandatory redemption: (Dissolution Event)
Outstanding principal + (principal*10.125%*days)
Table 16: Absolute Price of Purchase Undertaking in PCFC
Dissolution Avenues in Formula for Price US$800 million series Payable by ADIB 1. Scheduled dissolution Final Dissolution Amount (i.e. maturity) + Periodic Distribution Amount payable. 2. Early dissolution (tax) Early Dissolution Amount (Tax) + Periodic Distribution Amounts
Absolute amount payable Principal + (3 month LIBOR + 0.40% p.a accrued) Principal + (3 month LIBOR + 0.40% p.a accrued)
Table 17: Absolute Price of the Purchase Undertaking in US$800 million ADIB Sukk
33
These findings provide empirical evidence that the price of PU in pre-AAOIFI equitybased ukk13 not only captures the outstanding principal but also any accrued but unpaid profit. Notice that accrued profit is not necessarily actual profit earned. Profit accrued is the expected profit that is earned by the investors as time passes by. If the venture is not performing and the obligor fails to pay the expected profit, then the sukk-holders have the option to exercise the purchase undertaking and create an obligation for the obligor to pay not only the outstanding principal but also any profit accrued up to that point of time. Therefore, PU creates an element of indebtedness in the equity-based ukk. Out of the eight pre-AAOIFI deals that utilized wad, we managed to obtain the Sharah pronouncements for three of them (IDB 2003, IDB 2005 and KL Sentral). We were fortunate that these pronouncements discussed the issue of PU, although in varying detail. This is summarized in Table 18. Deals 1. IDB 2003 2. IDB 2005 Sharah Pronouncement on PU The repurchase obligation is not a contingent obligation but will occur on such date (pp. 11-12 OC) IDB is a third party, not the issuer or manager, although there is special relationship as wakl (8 OC). As IDB is not the issuer or the manager or the participant, IDB can enter into contractual obligation which has the effect of guaranteeing the aggregate nominal amount of the Sukk and any periodic distribution amounts (pp. 8-9 OC) It is permissible for the partner to promise to purchase the shares of the other partner (sukk-holders) whereby such promise is considered as a unilateral binding promise. The promise is valid from a Sharah point of view. In the event that the managing partner doesnt fulfill its purchase undertaking, the first party (sukk-holders) has the right to take relevant procedures to dissolve the joint via selling all assets in the joint venture. (p. 2 of Sharah pronouncement section in IM)
3. KL Sentral
Table 18: Sharah Pronouncement on Purchase Undertaking

13
Note that the same pricing is also present for lease-based ukk that are asset based (i.e. not asset-backed ukk), whereas in asset-backed ukk there are a few variations: no PU is used (Hanco, East Cameron, Musharakah One, Cagamas MBS); PU is priced at par but the trigger is a non-default related event (like in Tamweel); or there is conditional PU priced at par (like Sorouh). For Malaysian asset-backed ukk ijrah, refer to (Mohamad Mokhtar, 2009).
34
The IDB 2003 fatw did not give much reasoning on the use or the effect of PU. It only mentioned that the PU is not a contingent obligation. The IDB 2005 fatw, however, provides not only the effect of the PU but also the Sharah justification for why it was allowed. The fatw clearly indicates that the PU has the effect of guaranteeing the principal (aggregate nominal value outstanding) and the profit (periodic distribution amount). The full fatw on the purchase undertaking section is shown in Box 3. From a Sharah perspective, the IDB Sharah Board viewed this deal as a murabah arrangement (between the sukk-holders and the issuer).14 The Sharah Board allowed PU with the effect of guaranteeing the principal and profit in what it considered a ukk murabah because IDB was viewed as an independent party from the issuer (IDB Trust Services Limited; a Jersey-based SPV). The issue of independence of the SPV and the obligor is an area that presents opportunity for future research. KFHs Sharah Board allowed the PU on the basis of a unilateral promise and the right of the sukk-holders to dispose of the asset if KL Sentral doesnt fulfill its promise. In other words, as far as the Sharah Board is concerned, the existence of PU should not restrict the right of the sukk-holders to dispose of the asset. In a different piece of research (Dusuki & Mokhtar, 2010) we have shown that there are restrictions in disposal in asset-based ukk. It is beyond the scope of this paper to discuss the issue of restriction in disposal. Nonetheless, an area for future research would be whether a security interest in the underlying asset that allows the sukk-holders to sell the asset and get back the amount of debt due is considered sufficient evidence of ownership from a Sharah perspective.
14
Refer to p. 8 of the IDB 2005 offering circular (the Shariah pronouncement section) where the Shariah Board identified the ukk as murabah; Accordingly, the Trust Certificates are investment certificates or Mudaraba Sukuk and not merely a sale of debts under ijara, murabaha and istisnaa contracts
35
(8) Undertaking by IDB in Respect of the Aggregate Nominal Amount of the Trust Certificates and the Periodic Distribution Amounts: As it is not the issuer of the Trust Certificates and is not a manager or participant, IDB can enter into contractual obligations which have the effect of guaranteeing the Aggregate Nominal Amount of the Trust Certificates and any Periodic Distribution Amounts in respect of the Trust Certificates. This is achieved by: (a) IDB undertaking to purchase the Portfolio on the Maturity Date or Dissolution Date of the relevant Series of Trust Certificates for an exercise price equal to (i) the Aggregate Nominal Amount of the relevant Series of Trust Certificates and (ii) the amount of any payable but unpaid Periodic Distribution Amounts on such date (including any additional amounts payable pursuant to Condition 12 (Taxation) of such Series. This irrevocable and unconditional undertaking will have the effect of a guarantee by IDB of the payment of the Aggregate Nominal Amount of the Trust Certificates on the Maturity Date or Dissolution Date of the relevant Series of Trust Certificates. (b) IDB undertaking to extend an interest free loan (a liquidity facility) to the Trustee if the Rentals and/or Instalments are not collected or if the Rentals and/ or Instalments are not sufficient to pay in full a Periodic Distribution Amount in respect of the relevant Trust Certificates payable on the relevant Periodic Distribution Date. Extending such loans, however, does not preclude the Trustee from appointing IDB as Wakeel to carry out certain functions for a specified fee plus amounts remaining from the Profit after paying the Trustees and the Transaction Administrators costs, fees and other expenses, and any Periodic Distribution Amounts to the Certificateholders, as an incentive for good performance, as long as there is no linkage between the undertaking to extend the loan and performance of the functions, and as long as each is dealt with in a separate document.
Box 3: Function of PU and the Sharah Justification in IDB 2005
(Source: The Sharah pronouncement, pp. 8-9, IDB 2005 Offering Circular)
36
In summary, the main trigger events for PUs in pre-AAOIFI equity-based ukk are maturity and default. With regards to price, the PUs in pre-AAOIFI equity-based ukk are priced not only at principal but also include expected profit (not realized profit) that has not yet been paid. The IDB 2005 fatw clearly stated that the PU is, in fact, a guarantee of principal plus profit, but allowed it because the obligor and the issuer were viewed as independent parties. 2.3.2 Post-AAOIFI Sukk Next, let us examine the post-AAOIFI deals. As per our sampling criteria, we only studied four deals. Table 19 shows the details on the application of wad in these deals. Post AAOIFI Deals 1. Villamar 2. Sorouh Use of Wad Trigger Events No NA Yes, PU from Exercise date PropCo -maturity, tax event, early dissolution and dissolution event. Yes, PU from Maturity, murib EOD under ijrah or murabah NA Outstanding principal + accrued but unpaid profit. Conditional PU Market Value, net value of assets, fair value or price to be agreed in future NA Price of Wad Sharah Pronouncement NA Sharah pronouncement didnt discuss PU
3. PLSA
4. Bin Ladin
No
NA
Sharah pronouncement didnt discuss justification for PU as it was not pre-determined for murabah No Sharah pronouncement
Table 19: Application of Wad in Post-AAOIFI Equity-Based Sukk
Out of the four post-AAOIFI deals, only two deals utilized wad: Sorouh and PLSA. Both were ukk murabah. Sorouh Sukk involved Sorouh, a property developer in Abu Dhabi, selling land plots to an SPV in Abu Dhabi, PropCo. Titles on the land
37
plots were re-registered in PropCos name. These land plots were sold (by Sorouh) to sub-developers who will develop it. However titles will only be transferred to the sub-developers once they have made the full payment of the sale price. 15 PropCo then entered into a murabah with Sun Finance (an SPV in Jersey). The PU in Sorouh Sukk Murabah was given by PropCo to Sun Finance, under which PropCo promises to purchase a portion of Sun Finances beneficial interest in the land plots forming part of the murabah assets. The PU will be exercised upon maturity, tax event, early dissolution or the dissolution event. In the case of PLSA, the murabah was between PLSA (a toll operator in charge of developing and maintaining expressways) and the investors. The PU was given by PLSA (the issuer-cum-murib) under which it promises to acquire the beneficial interest in the murabah venture from the investors. The trigger events in PLSA include maturity and the event of default. If we analyze the trigger events for the PU in both deals the main trigger events are, similar to pre-AAOIFI deals, maturity and dissolution event. As for price, Sorouh was priced similarly to pre-AAOIFI deals (i.e. at outstanding principal plus accrued but unpaid return); however, it was a conditional purchase undertaking (which we will explain following this). In PLSA, the PU was priced according to AAOIFIs recommendation: at market value, net value of assets, fair value or price to be agreed in future. The lead arranger for RHB Islamic clarified in our interview 16 that it did take time to educate the investor when the PU was priced in this manner. The same experience was shared by Al-Rajhi, which did not use any PU in their deal. Let us analyze the purchase undertaking in Sorouh.17 Although the PU was priced at principal plus unpaid profit (similar to pre-AAOIFI deals), it was a conditional PU. This is highlighted in Box 4. A limited or a conditional purchase undertaking means that PropCo (the promisor) will only pay the price agreed on the PU if they earn enough money from the venture. The investment plan in the murabah was to buy the plot of land from Sorouh and income will be generated from the payment by the sub-developers who bought the land.
15 16 17
This is a conditional sale in which the seller will hold the legal title until full payment is made by the buyer. Conducted on 13th October 2008 with RHB Islamic Capital Market team at 3-5pm The author and ISRA would like to record our appreciation to support given by Khalid Howladar, Senior Credit Officer for Asset-Backed and ukk Finance at Moodys Dubai, in completing the case study for Sun Finance (Sorouh) Sukk.
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Investors should note that the Purchase Undertaking is not a guarantee by the PropCo of the face value of the Mudaraba Assets. Funds available to the PropCo to meet its payment obligation under the Purchase Undertaking are limited in recourse to any funds which the PropCo has earned (in its capacity as Mudareb) as Mudareb Profit. PropCo will only earn sufficient Mudareb Profit to meet its obligations under the Purchase Undertaking to the extent that Sub-Developers have made sufficient payments under the Sale and Purchase Agreements. To the extent that the Sub-Developers have not made sufficient payments, it may therefore be the case that Certificateholders will ultimately not receive all of the amounts which may be due to them under the Sukuk Certificates.
Box 4: Conditional Purchase Undertaking in Sorouh (Source: p. 23 of the Sorouh Offering Circular)
The purchase undertaking in this manner does not shift the risk from the underlying asset/venture to PropCo (the promisor). Recall that in pre-AAOIFI deals, regardless of the performance of the venture, the PU is exercisable. It doesnt matter if the murib doesnt have the money; it will still be his obligation to pay. On the other hand, in Sorouh, PropCo is saying, in plain English, If the venture fails, I cannot pay you, and you cannot then come and chase me for payment. We clarified this issue with Khalid Howladar of Moodys.18 Khalid said, This purchase undertaking is not a purchase undertaking like in typical ukk which plays the role of par value guarantee. Sorouhs purchase undertaking is only effective to the extent that the project is successful, i.e. the underlying developers will continue to pay for the land. If the sub-developers default, the land must be sold in the market (by the servicer, which may incur gain/loss). Therefore, only to the extent that enough cash is generated or available from the land payment or sales can the murib pay back the investors (via the undertaking). There is no guarantee of par. He also added that if the land has dropped in value then the murib will be unable to get the original price for the land and will not have enough to pay back all the investors. There is real asset risk/project exposure in Sorouh unlike almost all other ukk.
18
An e-mail interview on 24th August 2009.
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This conditional PU is not viewed as a guarantee by the rating bodies because it does not shift the source of payment from the murabah venture to Sorouh or PropCos creditworthiness. On the other hand, an unconditional PU as applied in the pre-AAOIFI deals does shift the source of payment to the sukk-holders from the trust asset to the obligor via the PU. Recall that in the Sorouh deal, when the sub-developers have made the full payment, PropCo, as the new owner of the land plots, will have an obligation to transfer the land plots to the sub-developers. Therefore, the purchase undertaking in this sense plays a clear role as exit mechanism for the investors so that PropCo can meet its obligation to transfer the title to the sub-developers when they have made full payment. Next, let us briefly discuss how Villamar Sukk Mushrakah and Bin Ladin Sukk Murabah dealt with the issue of purchase undertaking in equity-based ukk. In the Villamar deal, Villamar Sukk Company (a Caymans Island SPV) issued the ukk and used the proceeds (US$190 million) to enter into a mushrakah agreement with Residential South Real Estate Project Company (RSRED, a residential property developer in Bahrain). RSRED contributed capital in kind in the form of a license agreement and certain rights to land (worth US$100,000,000). The mushrakah venture was to construct, develop, complete, operate, manage and maintain a real estate development known as the Villamar in the Bahrain Financial Harbour. In this deal no PU was used; however, there is redemption of the principal called an additional amount on each periodic distribution date (7th of February, May, August and November). The clause about the additional amount is shown in Box 5. Note that each additional amount (US$19 million) is 10% of the principal amount (US$190 million). Nonetheless, similar to Sorouh, the payment of this capital redemption is dependent upon the success of the project (i.e., a conditional redemption).
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The cash flows generated from the Project (through sales, leasing, timeshare or other arrangements) shall be used for the purposes of making payments under the Sukuk Certificates on a pro rata basis on ten (10) Additional Payment Dates: (A) 7 February 2011; and (B) each Periodic Distribution Date thereafter until (and including) 7 May 2013 (Scheduled Dissolution Date), in an amount (the Additional Distribution Amount) equal to nineteen million Dollars (US$19,000,000). Certificateholders should note that the ability of the Issuer to pay any amounts (including Additional Distribution Amounts) under the Sukuk Certificates will ultimately be dependent on the success of the Project.
Box 5: Redemption of Capital in Villamar Sukk Mushrakah (Source: p. 67 of the Offering Circular)
Last but not least, let us briefly analyze Bin Ladin Sukk Murabah. In this deal Purple Island Corporation (PIC)a British Virgin Island SPVissued the ukk and used the proceeds (US$268 million) to enter into a murabah agreement with Advance Al-Bait Group for Development & Construction (AABG) - SPC in Saudi Arabia. The investment plan required the murib (AABG) to lease properties19 from Saudi Bin Ladin Group (SBG) for 10 years and sublease it to Al-Borj Alalmiah Real State Investment Co (ABARSI)another SPC in Saudi Arabiafor 5 years (and renewable for another 5 years). Instead of using a purchase undertaking, SBG gave three performance guarantees in the deal, as follows (Latif & Thakur, 2009): i) ii) iii) A guarantee to the murib (AABG) as to the performance of the lessee under the ijrah agreement and the offer to extend lease. A guarantee to the issuer (PIC) as to the performance of the murib under the murabah. A guarantee to the sukk-holders as to the performance of the issuer under the ukk.
19
Thirteen floors of the Al-Safa Tower of the Abraj Al-Bait Complex in Makkah.
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We should note that PIC (issuer) and AABG (murib) were owned by four Bin Ladin family members. We could not find any information on the owner of the lessee (ABARSI). Similar to the issue of an independent SPV in IDB 2005, this deal could be another interesting deal for future studies in identifying an independent third party that is allowed to give a guarantee in an equity-based ukk. With the exception of Bin Ladin Sukk Murabah, we managed to obtain the fatws for the other three deals. However, the fatws did not discuss anything specific on PU because Villamar provided no PU, only a conditional redemption. In Sorouh, the PU was conditional upon the performance of the murabah while in PLSA the price of the PU was not pre-determined. In summary, for the post-AAOIFI equity-based ukk that used PU, the trigger events were similar to pre-AAOIFI deals; maturity and default. However the price of the PU differed from pre-AAOIFI deals, as Sorouh used a conditional PU priced at par while PLSA used a PU priced at market value or value to be agreed in future. 1.4 Empirical Evidence from Interviews Having understood how wad is utilized in pre- and post-AAOIFI equity-based ukk, let us examine the view of different market participants on the function of PU. The question asked to bankers, legal counsels, regulator and rating bodies was the same: What is the function of PU? We then followed up with another question: Is PU a guarantee? For Sharah scholars we asked the question in a slightly different manner: Does purchase undertaking (PU) in EBS guarantee principal? Table 21 shows the keyword from the answers of respondents to the question of whether PU is a guarantee. We then classified the answers into 5 main categories according to the most frequently repeated keywords. The results are shown in Table 20: Code 1 2 3 4 5 Category Recourse Crystallize obligation to pay Comfort Guarantee (direct or indirect) Others Total Count 7 6 2 12 6 33 % 21% 18% 6% 36% 18% 100%
Table 20: Frequency Count on Function of PU
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Out of 32 respondents that answered this question, fifteen people (36%) said that PU at par is a form of guarantee of the principal (either direct or indirect). This is the highest category of all the answers. Note that we included an answer in Category 4 (Guarantee) only if they explicitly mentioned that it is a guarantee. If they just mentioned that it creates recourse or creates an obligation to pay, we have provided a separate category for that. Others include stand-alone answers that are not repeated by other respondents. Only three responses were in this category. The keywords that were included in others were: a) b) c) Protect investor capital and profit Undertake nominal value of investment Legally, not a guarantee, but bankers will say, This is what we use to get back principal. Respondent 1 2 3 4 5 6 7 8 9 10 11 12 13 Recourse Credit (recourse) Comfort because if obligor bankrupt, PU has no value Recourse (how far can deal with asset) Guarantee because it gives recourse Crystalize obligation to pay Obligation to buy Legal instrument for recourse Protect investor capital and profit Comfort because it restricts risk to credit risk Creates obligation to pay Sense of guarantee because obligor is obliged to buy back Undertake nominal value of investment Key word Coding 1 1 3 1 4 2 2 1 5 3 2 4 5
Category Bankers
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Rating Bodies
1 2 3 4
Mechanism to pay principal by creating payment obligation Shift focus from asset to entity (recourse) Shift credit assessment to obligor not asset (recourse) Form of guarantee because PU gives recourse to obligor Guarantees the return of capital contractual stipulation Guarantee - comfort of debt instrument sort of capital guarantee coz capital is not subject to normal market forces guarantee guarantee allows investor to get back capital indirect guarantee because you use the proceeds from the sale to pay off the outstanding balance Unilateral undertaking capital and profit guarantee in substance like a guarantee
2 1 1 4 4 5 4 4 4 4 5 4
Regulators
1 2 3
Scholars
1 2 3 4 5
6 7 8
5 4 4
Table 21: View on Function of Purchase Undertaking
Take note that although the above key words (in Table 21) could be easily interpreted as a guarantee, we did not lump them under the guarantee category. We created a separate category for them altogether. The purpose of this approach is to ensure that those who say PU is a guarantee surely meant it; it is not our own interpretation of what they said. Following Category 4 (guarantee), other categories that were frequently quoted as the function of PU are Category 1 (recourse - 21%), Category 2 (crystallize obligation to pay 18%) and Category 5 (others 18%). Since we have respondents from different groups, Table 22 shows the keyword count according to the group of respondents.
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Code
Keyword
Bankers Count 4 3
1 2
3 4
Recourse Crystallize Obligation to pay Comfort Guarantee (direct or indirect) others
Legal Rating Regulators Counsel Bodies % Count % Count % Count % 31% 0 0% 2 50% 0 0% 23% 2 40% 1 25% 0 0%
Scholars Count 0 0 % 0% 0%
2 2
15% 15%
0 2
0% 40%
0 1
0% 25%
0 2
0% 67%
0 6
0% 75%
2 13
15%
1 5
20%
0 4
0%
1 3
33%
2 7
25%
Table 22: Function of PU According to Respondent Groups
If we refer to the different groups of respondents, it seems that the scholars (75%) and the regulators (67%) are the groups that have the highest percentage of respondents who say PU functions as a guarantee. Among bankers, the largest single bloc view PU as a mechanism to provide recourse to the obligor (31%), and the same view prevails among the rating bodies; 50% (2) of the rating bodies interviewed consider PU an instrument that provides investors recourse to the obligor. Last but not least, the lawyers cite two main functions of the PU: recourse (40%) and guarantee (40%). Let us now analyze the reasons cited by the scholars and regulators for viewing the PU as a guarantee since these are the groups with the highest percentage that characterized it in this way. We interviewed nine scholars, but only eight answered this question. Their answers are displayed in Table 23. Scholar 1 It does work to sort of guarantee capital because it does not leave the capital to be subjected to the normal market forces, unless you have purchase undertaking to buy at market prices at the time of purchase.
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Scholar 2
1. If there is a guarantee to purchase the asset in mushrakah murabah at nominal price or pre-determined price, it will become a guaranteed debt, not mushrakah anymore. 2. If PU is at par, it clashes with the concept of the valuation of the asset. Regardless of the value of the asset, you give me your money and at maturity I will redeem back the asset with principal & profit.
Scholar 3
If the wad is at pre-determined value, it will be a guaranteed ukk, and it is prohibited. If the wad is at MV or value to be agreed in future, its OK.
Scholar 4
It does not directly guarantee the principal, but the element of buying the asset at par allows the investor to get back his capital regardless of the performance of the venture. So if we look into the effect (natjah) of the PU, it allows the investor to get back his principal. Yes, because its stated clearly in AAOIFI Standard, p. 206: Partners are trustees for each other and cannot be made liable for loss of capital. PU is an indirect guarantee because you use the proceeds from the sale to pay off the outstanding balance. Similarly ZCB is also an indirect guarantee, because its issued at discount, but at maturity the investor gets the full face value amount. In most cases, the undertaking is from one party. I do not argue or debate so much on this; the risk is when it comes from both sides because when both parties give wad, it becomes a contract and hence binding religiously. Anybody who gives a promise, it makes it binding on him religiously. For example, when I give you a wad to buy a particular item, you have the option to provide it or not. You definitely look at your own benefit.
Scholar 5
Scholar 6
Scholar 7
From a Sharah perspective, some scholars have allowed the application of PU at par for shirkat al-milk that provides capital and profit guarantee. In banking all are shirkat al-aqd.
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Scholar 8
Initially when scholars allowed PU, it was viewed as an exit mechanism and not a guarantee. If a third party can promise to purchase, it can become the obligor. Later, some scholars realized that to give a purchase undertaking at face value is, in substance, like a guarantee. If the price of the undertaking was at the face value of $100 and the market price of the asset falls to $50 then it is almost like guaranteeing the $100, i.e. the face value.
Table 23: Scholars Answers to the Query: Is PU a Guarantee?
Out of the eight scholars, only two did not specifically mention that PU is a guarantee (Scholar 4 and Scholar 6). Scholar 4 said the effect of PU allows the investor to get back his principal but did not specifically characterize this as a guarantee. Therefore, we let this answer remain in Category 5 (others). Scholar 6, on the other hand, viewed PU as a unilateral instrument, and thus, did not say whether it was a guarantee or not. For all other scholars, they specifically mentioned that PU is a guarantee (either direct or indirect). Out of the six scholars that viewed PU as a guarantee, three scholars gave clear reasons for their view. These are summarized in Table 24.
Scholar 1 2
Reason for viewing PU as guarantee Capital is not subject to market forces Clashes with the concept of asset valuation. Regardless of the asset value, you get your money back. Indirect guarantee because it uses the proceeds of the asset sale to pay the outstanding balance.
Table 24: Reasons Given by Scholars Who Say PU Is a Guarantee
Two other scholars (7 and 8) highlighted the reasons why some scholars allow the PU in EBS. These include allowing PU (although it has the effect of a guarantee) in shirkat al-milk and scholars who (in the past) allowed PU as they viewed it as an exit mechanism; however, they later realized that PU at par is a guarantee in substance because, regardless of the market price of the asset, the investor will get his money back.
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Readers should note that this is an issue about which scholars differ. The fairest method to approach this issue is to examine why certain scholars view PU as a guarantee while others do not. On the one hand, scholars who do not view PU as a guarantee cite the reason that PU is only unilateral and is not a literal guarantee. On the other hand, scholars who view PU as a guarantee say that although PU is not literally a guarantee, in substance it does provide the effect of a guarantee, as the investors are protected from losses. We included four regulators in our interviews, but only three answered this question. From the three respondents, two were interviewed face-to-face while one more regulators input was obtained from the available online resources. Their answers are displayed in Table 25. The regulators that were interviewed said that the PU at par is a guarantee because it makes the EBS more debenture-like, i.e. it gives the investors the comfort of debt. The first regulator highlighted a clear distinction between the role of PU at par and PU at market value. If the PU is at par, it gives the investors the comfort of debt; whereas, if the PU is at market value, it does not change the nature of the instrument; the EBS would still remain as an equity-like instrument; only, in this case the PU would play the genuine role of an exit mechanism. If not (i.e. if the PU is at par), it doesnt function merely as exit mechanism; it plays the role of guarantee. Regulator 1: Interview In general, the PU is used as an exit mechanism; however, that would not in itself require the fixing of the term (price) of the PU. If the PU is at par, in effect it is to guarantee the return of capital subject only to the counterparties credit-worthiness, and thats what makes it debenturelike Regulator 2: Online resources Asset-based ukk may have underlying assets, but essentially they require some form of guarantee or contractual stipulation such as a purchase undertaking from the issuer. Purchase undertaking is a guarantee. It gives the investors the comfort of a debt instrument.
Regulator 3: Interview
Table 25: Answers from Regulators Regarding the Function of PU
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In sum, the top two functions of PU from the interview results are a guarantee (36%) and recourse to the obligor (21%). The scholars (75%) and the regulators (67%) had the highest percentage of respondents who viewed PU as a guarantee. Rating bodies (50%) and bankers (31%) had the highest percentage of respondents who viewed PU as a recourse. The most common reason cited by the scholars who said that PU functions as a guarantee is that the capital of the investors is not subject to market forces because, regardless of the value of the asset/venture, the investors will get their original value back if the PU is priced at par.
3. SHARAH ANALYSIS OF PU IN EBS

In this section, we will provide a brief Sharah analysis of PU (at par) in EBS. We will utilize a review of the relevant AAOIFI standard as well as the interview results with the Sharah scholars. Before going into the Sharah analysis, let us recap the application of wad in EBS. In summary, the pre-AAOIFI case studies provide clear evidence that in practice, the price of PU is at principal plus any accrued but unpaid profit. In addition, the profit element can always be traced to a predetermined (expected) return. Although in some cases there are formulas given instead of an absolute number, this formula can be transformed into an absolute number when we conduct detailed tracking in the term sheet of the variable used in the formula. In reference to the way the PU is priced, the PU then becomes an instrument to create an element of indebtedness in the equity-based ukk. What does this mean? By utilizing PU, the sukk-holders can be assured that they can claim not damages (i.e. actual damages suffered if any), but the amount of the principal plus any accrued but unpaid profit, from the other partner/agent (i.e. the obligor). Equity-based instruments (mushrakah, murabah and waklah) fall under the category of trust-based contracts (uqd al-amnah). AAOIFI Sharah Standard Number 5 (guarantee) clearly indicates that a guarantee is allowed in contracts of exchange (e.g., sales) but not in trust (fiduciary) contracts. Refer to Box 6.
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2/2/1 It is not permissible to stipulate in trust (fiduciary) contracts, e.g. agency contracts (wakalah) or contracts of deposits, that a personal guarantee or pledge of security be produced, because such a stipulation is against the nature of trust (fiduciary) contracts, unless such a stipulation is intended to cover cases of misconduct, negligence or breach of contract. The prohibition against seeking a guarantee in trust contracts is more stringent in Musharaka and Mudaraba contracts, since it is not permitted to require from a manager in the mudaraba or the musharaka contract or an investment agent or one of the partners in these contracts to guarantee the capital or to promise a guaranteed profit. Moreover, it is not permissible for these contracts to be marketed or operated as a guaranteed investment.
Box 6: AAOIFI Sharah Standard on Guarantee in Trust Contracts (Source: p. 59 of AAOIFI Sharah Standards, 2008, Standard No. 5,)
It is clear from the above that a guarantee in equity-based (or fiduciary) instruments is not permissible in Sharah because it contradicts the nature of the instruments. However, the fundamental question is: is PU a guarantee? The empirical evidence from our interview shows that this was the main function cited by the respondents. In our opinion, when PU is priced at principal plus any unpaid profit, and it is unconditional, it may play a role of guarantee in substance because PU creates the element of indebtedness in these trust-based contracts. In other words, an unconditional PU at par takes away the profitand-loss sharing nature of equity-based instruments. Furthermore, if we recall the IDB 2005 deal, the Sharah Board20 clearly stated that the PU functions as a guarantee of principal and profit. Nonetheless, a conditional PU, albeit at par (like in Sorouh), does not take away the nature of profit-and-loss sharing21 in the equity-based instruments. In other words, the payment to investors is still subject to project performance. Thus, it is not a guarantee because it does not create an element of indebtedness to one partner in the venture. This is our preliminary view, and it is subject to future in-depth study on the nature of conditional PUs from a Sharah perspective.
20
21
The members of the Board at the time of issuance were Sh. ussein amid assan, Sh. Saleh al-usayn, Sh. Abdul Sattar Abu Ghuddah, Sh. Mohammad Ali Taskhiri, Sh. Mohamed Mokhtar Sellami, Mohamed Hashim Bin Yahya. Refer to page 9 of IDB 2006 Offering Circular. With special thanks to Assoc. Prof. Dr. Mohamad Akram Laldin, Executive Director of ISRA.
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We also asked the scholars in our interviews why a guarantee in equity-based instruments is not allowed. Four scholars provided answers to this question, which are shown in Table 25. Scholar 1 In general because there is this basic fairness principle under Islamic law. We have this maxim Al-ghunmu bi al-ghurm and Al-kharj bi al-amn, meaning that if you dont take any liability then is not fair for you to actually charge an additional amount. This would be comparable with the prohibition of rib. If you give a loan, you are not taking risk on the capital, in a sense, because the borrower has to legally pay the full amount to the lender. This legal obligation means you are not taking any liability on the capital and so you are only entitled to get your principal amount. Since you do not take any liability on your capital, it is not fair for you to impose on the user of the capital to pay [something] additional. So in mushrakah, the moment the partner guarantees the capital, then by implication, it has turned into a loan contract. I give you $100,000 and you guarantee to pay $100,000; in substance it is actually a loan contract. If you charge additional profit, that would be considered rib. In investment you must take risk. If you give guarantee, it will be treated as a loan. You put an amount, and its guaranteed, and you will get additional money on this. We must apply the rule Al-kharj bi al-amn. You have to take risk. Its prohibited in Sharah for the issuer or arranger to give this guarantee. In uqd al-ishtirk, the partners are considered as trustees to each other. The same principle applies for waklah. A trustee will not be responsible for losses except due to negligence. Thus, guarantee in a trust contract clashes with the trustee principle. Based on the requirement of a partnership or shirkah contract, the law of al-ghunmu bi al-ghurmi applies. Therefore, when one of the parties promises to buy the portion in the deal, he is in fact, protecting his fellow counterparty from any potential loss (ghurm). This is simply prohibited and unacceptable.
Scholar 3
Scholar 4
Scholar 6
Table 26: Sharah Justification for Prohibition of Guarantee in Equity-Based Instruments
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The common Sharah reasoning cited by three scholars in Table 25 is based on the legal maxims, Al-kharj bi al-amn and Al-ghunmu bi al-ghurm. The first scholar provided a clear explanation of these legal maxims. She mentioned that in a loan contract there is a legal obligation on the borrower to pay back the principal. In other words, the inability of the borrower to pay back the loan (qar) does not affect his/ her obligation. Only if the creditor pardons the debt will the obligation be annulled. This legal obligation means that the lender does not take any liability on his principal. Thus if we have a guarantee in equity-based contracts, it means that one partner is not taking liability on his capital. The equity-based contract now becomes like a loan. Thus the partner that enjoyed the guarantee can only get back his principal and not any additional amount because any additional amount will be rib. Scholar 3 noted that a guarantee in an investment contract takes away the risk; thus it will be treated like a loan. This clashes with the principal of Al-kharj bi al-amn. Scholar 6 discussed the application of wad in light of the legal maxim Al-ghunmu bi al-ghurm. He said, When one of the parties promises to buy the portion in the deal, he is, in fact, protecting his fellow counterparty from any potential loss (ghurm). This is simply prohibited and unacceptable. If we refer to AAOIFI Standards, it discusses the effect of having guarantee in a waklah contract. Refer to Box 7:
2/2/2 .a guarantee given by a party acting as an agent in respect of an investments turns the transaction into an interest-based loan, since the capital of the investment is guaranteed in addition to the proceeds of the investment (i.e. as though the investment agent had taken a loan and repaid it with an additional sum which is tantamount to riba)
Box 7: The Effect of a Guarantee in an Investment Contract (Source: p. 60 of AAOIFI Shariah Standard No. 5, 2008)
If we diagnose the PU, it establishes the legal obligation of the buying partner to pay back the principal and profit. Regardless of whether the partner has the money to buy back or not, PU acts as a mechanism to establish this legal obligation. As a result, it behaves very similar to a qar. Recall the evidence from the interview conducted on the function of PU. 18% of the respondents said that the PUs function is to crystallize
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the obligation to pay. This obligation to pay means the sukk-holders are not taking any liability on the capital. This may render the transaction similar to a loan transaction, which entitles the sukk-holders to get back their capital only and nothing more. The way PU is currently priced, it includes not only the principal but also additional profit. This additional profit may be considered rib if we apply the maxim of Al-ghunmu bi al-ghurm. Furthermore, we can also relate PU to what Scholar 6 said: by way of the promise, the promisor is protecting the counterparty (i.e. partner) from any potential loss. We can relate this to the function of PU as recourse. Once the PU is at par, the sukk-holders will not be exposed to any fluctuation of the market value of the asset. Regardless of the market value of the asset, the obligor has promised to buy the asset at a predetermined price. This clashes with the principle of asset valuation (as highlighted by Scholar 2 in Table 22). Scholar 8 gave a simple example to illustrate this point in Table 22. He said, If the price of the undertaking was at the face value of $100 and the market price of the asset falls to $50, then it is almost like guaranteeing the $100, i.e., the face value. PU provides recourse to the obligor and takes away the asset risk from the sukk-holders. 21% of the respondents agreed that PU provides recourse to the obligor. This recourse means the liability is on the obligor, not the asset. In conclusion, if we analyze wad as a stand-alone component in equity-based ukk, it fulfills the Sharah requirement. However, when we look at the combined effect of wad and its price, it may be viewed as playing the role of a guarantee because it provides the investors with recourse to the obligor, regardless of the performance of the venture. Furthermore, it creates an obligation for the obligor to pay not only the principal but also the accrued but unpaid profit. If we compare EBS to lease-based ukk (LBS), for example, LBS requires the obligor to have a tangible asset before he can obtain funding. The requirement to have a tangible asset in order to issue the ukk is taken away in equity-based ukk, thus making it a very asset-light structure. Thats why we observe the increased popularity of EBS. It provides an easy unsecured funding avenue for issuers. Nonetheless, in these asset-light structures, the anchor was profit-and-loss sharing. However, with the application of an unconditional wad at par, this anchor (loss sharing) may have vanished. We should always keep in mind that this unconditional obligation to pay will be subject to court interpretation of the undertakings. Thus actual testing of default cases may bring new evidence that may change this view.
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4. CONCLUSIONS & RECOMMENDATIONS

This paper has provided empirical evidence from case studies on how wad is applied in pre- and post-AAOIFI equity-based ukk. We studied 11 pre-AAOIFI deals and 4 post-AAOIFI deals. Eight out of eleven pre-AAOIFI deals used wad, while another three deals (Hanco, East Cameron and PG Municipal) did not use wad, as they were asset-backed ukk. In the sample of the deals that used wad, three deals (PCFC, Rantau Abang and DP World) used PU and SU. The remaining five deals only used PU. For the post-AAOIFI deals, we studied Villamar, Sorouh, PLSA and Bin Ladin Sukk. In these deals, only Sorouh and PLSA used PU. Villamar did not have PU, while Bin Ladin used a third-party guarantee. With regards to the main trigger events for PU, both the pre- and post-AAOIFI ukk that used PU had maturity and default as the trigger events. With regards to price, the PUs in pre-AAOIFI equity-based ukk are priced not only at principal but also include expected profit (not realized profit) that has not yet been paid. On the other hand, the price for post-AAOIFI deals differed from pre-AAOIFI deals; Sorouh used a conditional PU priced at par while PLSA used a PU priced at market value or value to be agreed in future. Besides the case studies, we also conducted interviews with different market players (bankers, lawyers, rating bodies, regulators and Sharah scholars). The main question covered in the analysis is about the function of PU. The top two functions of PU identified from the interview are guarantee and recourse to the obligor. The scholars and the regulators had the highest percentage of respondents who viewed PU as a guarantee. Nonetheless, we should highlight that there are other Sharah scholars in the market who have different views on this subject. However, due to the time constraint we were not able to get their views through formal interviews. Thus readers should be mindful that there are other segments in the market with a different view and which have obtained Sharah approval from their respective scholars. To recap, in IDB 2005 Sukk, the scholars clearly stated that PU functions as a guarantee of capital and return. Nonetheless, in the deal, which was considered a ukk murabah, it was allowed because the obligor (IDB) and the issuer (SPV) were viewed as independent parties. The most common reason cited by the scholars who said PU functions as a guarantee is that the capital of the investors is not subject to market forces: regardless of the value
54
of the asset/venture, the investors will get their original value back if the PU is priced at par. This unconditional obligation on one partner to pay means that the investor is not taking any liability on his capital. This alters the equity-based ukk, making it loanlike. These scholars are of the view that the partner who enjoys the guarantee can only get back his principal without any additional amount because any addition will be rib. Notwithstanding the above, with ukk default cases kicking in, we will be able to empirically examine how extensive or strong is the effect of purchase undertaking. This may provide new evidence that can be used to conduct further Sharah analysis. Also, a more rigorous Sharah analysis can be conducted to analyze different types of wad that have been applied in ukk, namely: conditional PU priced at par, as in Sorouh; non-default-related PU priced at par, as in Tamweel ABS; and unconditional PU priced at par used in convertible and exchangeable ukk, for example. These different types of wad have different functions and effects. A thorough applied Sharah analysis would produce a good Sharah parameter that can be used by scholars in the application of wad in ukk. In addition, the independence of SPV (as issuer) and obligor is another area that can benefit from applied Sharah analysis. IDB 2005, Bin Ladin Sukk, Nakheel Sukk, Sorouh and Dar al-Arkaan would be good case study candidates for this research. Finally, another area that needs further clarification is the application of PU in shirkah al-milk and shirkah al-aqd. This is still an area in which scholars differ in their views. Applied Sharah analysis that discusses not only the issue of wad but also the damages that the investors are entitled to, would provide clarity to the market.
55
References
AAOIFI. (2008, February). AAOIFI Sukk Pronouncement. Retrieved December 2008, from AAOIFI: http://www.aaoifi.com/ AAOIFI. (2008). Sharia Standards. Bahrain: AAOIFI. ADIB. (2006, December 1st). US$5billion ADIB Trust Certificate Offering Circular. Retrieved January 15th, 2009, from IFIS Sukk Database: http://www.securities.com/ ifis/ ADIB. (2006, December 11th). US$800 million ADIB Trust Certificate Final Terms. Retrieved January 15th, 2009, from IFIS Sukk Database: http://www.securities.com/ ifis/ Bi, F. (2009, September 4th). Islamic Capital Market Respond to the Financial Crisis. Islamic Finance News . Kuala Lumpur, Kuala Lumpur, Malaysia: Islamic Finance News. Retrieved September 4th, 2009, from Islamic Finance News: www. islamicfinancenews.com Bin Ladin. (2008). SAR1.5billion Bin Ladin Sukk Murabah Offering Circular. Jeddah: SBG. Caravan I. (2004, February 15th). SAR98million Caravan I Sukk Ijarah Offering Circular. Retrieved August 5th, 2009, from IFIS Sukk Database: http://www.securities.com/ ifis/ Damak, Mohamed; Volland, Emmanuel ; Maheshwari, Ritesh ;. (2009). Sukk Market Declined Sharply in 2008 but Long-Term Prospects Remain Strong. Standard & Poors. DP World. (2007, July 2nd). US$1.5 billion DP Sukk Murabah Offering Circular. Retrieved January 15th, 2009, from IFIS Sukk Database: http://www.securities.com/ ifis/ Dusuki, A. W., & Mokhtar, S. (2010). Critical Appraisal of Sharah Issues on Ownership Issues in Asset Based Sukk as Implemented in the Islamic Debt Market. Kuala Lumpur: ISRA. East Cameron. (2006, July). USD166million East Cameron Sukk Mushrakah Offering Circular. Retrieved August 5th, 2009, from IFIS Sukk Database: http://www. securities.com/ifis/ Global Investment House. (2009). MENA Sukk Report. Kuwait: Global Investment House. Gold Sukk DMCC. (2005, May 3rd). US$200 million Gold Sukk DMCC Sukk Mushrakah Offering Circular. Retrieved January 15th, 2009, from IFIS Sukk Database: http://www.securities.com/ifis/ Hanco. (2004, February 2nd). SAR98 million Hanco Auto Backed Sukk Offering Circular. Retrieved January 15th, 2009, from IFIS Sukk Database: http://www.securities.com/ ifis/
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Haneef, R. (2009). From Asset-Backed to Asset-Light Structures: The Intricate History of Sukk. ISRA International Journal of Islamic Finance , 1 (1), 103-126. Hasan, A. (2008). Pengertian al-Waad, al-Wadan Dan al-Muwaadah. Muzakarah Cendekiawan Syariah Nusantara (p. 1). Kuala Lumpur: CERT. HM Treasury. (2008). The Development of Islamic Finance in the UK: The Governments Perspective. London: HM Treasury. HM Treasury; FSA;. (n.d.). HM Treasury. Retrieved June 18th , 2009, from HM Treasury: http://hm-treasury.gov.uk/consult_sukuk.htm Howladar, K. (2007). Risk and Ratings of Sukk. London: Moodys. Howladar, K. (2006). Sharah and Sukk: A Moodys Primer. London: Moodys Investors Service. Howladar, K., & Bhavani, D. (2008). Pre-Sale Report: Sun Finance Limited. London: Moodys . IDB. (2005, May 23rd). US$1 billion IDB Trust Certificate Offering Circular. Retrieved January 15th, 2009, from IFIS Sukk Database: http://www.securities.com/ifis/ IDB. (2003). US$400million IDB Trust Certificate Offering Circular. Jeddah: IDB. Kamal, H., & Al Sudairy, S. (2006). SABIC Sukk: The Debut in Saudi Arabia. Deal of the Year Handbook , pp. 19-21. Kamsani, F. R. (2005, Jan 11). Islamic Real Estate Finance & Middle East Opportunities. Singapore. KL Sentral. (2007, June 4th). RM720million KLSSB Sukk Mushrakah PTC. Retrieved January 15th, 2009, from SC Bond Issuance Information: www.sc.com.my KLSSB. (2007, June 4th). RM720 million KLSSB Sukk Mushrakah PTC. Retrieved August 5th, 2009, from Securities Commission Issuance Information Website: http:// www.sc.com.my Latif, Q., & Thakur, N. (2009). US$268million Sukk by Purple Island Corporation. IFN 2009 Issuers & Investors Asia Forum (pp. 39-41). KL: RedMoney Group. Leong, M. (2008). Rating Approach to Sukk: A MARC Perspective. Kuala Lumpur: MARC Mohamad Mokhtar, S. (2009, December). Function of Wad in Asset-Backed Sukk. ISRA Bulletin . Mohamad Mokhtar, S. (2008, May). True Sale and Bankruptcy Remoteness in Sukk. Islamic Finance News , 5 (18). Mohd Noor, L. (2008). Sukk Rating - General Approach, Criteria & Methodology. In RAM, Malaysian Sukk Market Handbook (p. 152). KL: RAM Ratings Services Bhd.
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Mokhtar, S. (2009). A Synthesis of Sharah Issues and Market Challenges in the Application of Wad in Equity-based Sukk. ISRA International Journal of Islamic Finance , 139145. PG Municipal. (2005, February 28th). RM80 million PG Municipal Sukk Murabah PTC. Retrieved January 15th, 2009, from SC Bond Issuance Information: www. sc.com.my PLSA. (2008, October 31st). RM415 million PLSA Sukk Murabah PTC. Retrieved January 15tth, 2009, from SC Bond Issuance Information: www.sc.com.my RAM Ratings. (2009, March). Projek Lintasan Shah Alams Innovative Project-Finance Sukk Structure. RAM Islamic Finance Bulletin , pp. 12-18. Rantau Abang. (2006, March 15th). RM3 billion Rantau Abang Sukk Mushrakah ICP/ MTN Retrieved January 15th, 2009, from SC Bond Issuance Information: www. sc.com.my Rantau Abang. (2006, March 14th). RM7 billion Rantau Abang Sukk Mushrakah MTN. Retrieved January 15th, 2009, from SC Bond Issuance Information: www.sc.com.my Sun Finance. (2008, August). AED5020 million Sun Finance Sukk Murabah Offering Circular. Retrieved August 5th, 2009, from IFIS Sukk Database: http://www. securities.com/ifis/ Thakur, N. (2007). Client Briefing: Innovation Islamic Finance- Convertible Sukk. New York: Clifford Chance. Thakur, Neeta;. (2007, October). Innovation in Islamic Finance: Convertible Sukk. London, UK: Clifford Chance. Usmani, M. T. (2007). Sukk and Their Contemporary Application. Retrieved November 20th, 2008, from http://www.isra.my/index.php?option=com_content&view=article&id=90&Itemid=64 Villamar. (2008, May 7th). US$190 million Villamar Sukk Mushrakah Offering Circular. Retrieved January 15th, 2009, from IFIS Sukk Database: http://www.securities.com/ ifis/ Wan, Karen; Boo Hock, Koo;. (2008). Credit Rating Rationale - PLSA. KL: RAM.
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RESEARCH PAPER (No: 20/2011)

APPLICATION OF WAAD IN EQUITY BASED SUKK EMPIRICAL EVIDENCE

APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

ISRA RESEARCH PAPER (NO. 20/2011) Shabnam Mokhtar

APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

Box 1: AAOIFI Pronouncement Regarding EBS

ISRA RESEARCH PAPER (NO. 20/2011) Shabnam Mokhtar

Chart 1: Growth of the Sukk Market

APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

Chart 2: Trend in Types of Sukk Issued (Source: Authors own)

ISRA RESEARCH PAPER (NO. 20/2011) Shabnam Mokhtar

APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

ISRA RESEARCH PAPER (NO. 20/2011) Shabnam Mokhtar

26/2/2002 23/4/2002 15/6/2002 22/8/2002 6/11/2002

No No Unknown No Unknown No Unknown Unknown Unknown Yes

27/3/2003 28/5/2003 10/7/2003 15/7/2003 20/7/2003

26/9/2003 2004 15/2/2004

Table 1: List of Equity-Based Sukk from 2001-2004

(Abdul Karim), (Kamsani, 2005).

APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

Type of Sukk Issued

Term Sheet Available

Explicit Purchase Undertaking at par

PG Municipal Assets Bhd Time Engineering (Musyarakah One)

Yes, but bay al-dayn

mushrakah (istithmr) mushrakah mushrakah mushrakah

1/8/2005 1/8/2005 8/8/2005

26.31 28.68 539.47

Yes Yes Yes, but involved bay al-dayn No

23/12/2005 Vastalux Sdn Bhd

Table 2: List of Equity-Based Sukk in 2005

ISRA RESEARCH PAPER (NO. 20/2011) Shabnam Mokhtar

Type of Sukk Issued

Explicit Purchase Undertaking at par

mushrakah ukk alwaklah bi alistithmr murabah (exchangeable)

No (assetbacked sukk) Yes

Cayman Islands Qatar

APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

Type of Sukk Issued

Explicit Purchase Undertaking at par

mushrakah mushrakah murabah mushrakah

177.63 1184.21 52.63 800

Yes Yes No Yes

Yes Yes Unknown Yes

Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia

mushrakah mushrakah mushrakah mushrakah mushrakah mushrakah

52.63 15.78 52.63 52.63 52.63 52.63

Yes Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes Yes

ISRA RESEARCH PAPER (NO. 20/2011) Shabnam Mokhtar

Type of Sukk Issued

Explicit Purchase Undertaking at par

Yes, but restricted PU Yes

Yes No (murabah + istin)

Table 3: List of Equity-Based Sukk Issued in 2006

Type of Sukk Issued

Explicit Purchase Undertaking at par

28/2/2005 19/5/2005 11/6/2005 1/8/2005 1/8/2005 23/12/2005

murabah mushrakah mushrakah mushrakah mushrakah mushrakah

21.05 200 500 26.31 28.68 26.31

APPLICATION OF WAD IN EQUITY-BASED SUKK: EMPIRICAL EVIDENCE

Type of Sukk Issued

Explicit Purchase Undertaking at par

Application of Wa'Ad in Equity Based Sukuk Empirical Evidence

Application of Wa'Ad in Equity Based Sukuk Empirical Evidence