FIQH MUAMALAT III MGA 4013

EQUITY BASED ISLAMIC BONDS: PUBLIC AND PRIVATE EQUITY INVESTMENT
Prepared for : MR. ABDULLAAH JALIL

4.0 INTRODUCTION
Islamic capital market (ICM) market transactions are carried out in ways that do not conflict with the principles of Muslims and the religion of Islam  ICM is a component of the overall capital market in Malaysia. It plays an important role in generating economic growth for the country

Cont…

The ICM functions as a similar market to the conventional capital market, and plays a complementary role to the Islamic banking system in broadening and deepening the Islamic financial markets in Malaysia.

2 ISLAMIC EQUITY FINANCE   Based on Profit Loss Sharing (PLS). A bond that represents common ownership and entitles the holders shares in a specific project.  . Comprise different forms of mudharaba (trustee financing) and musharakah (partnership).4.

. Although it is similar to shares.Cont…  Shares of profit are determined beforehand by a definite proportion of the total bond amount.   This structure normally bears a floating rate. it has a fixed maturity which is determined by the tenure or project completion date.

3.3 PUBLIC EQUITY INVESTMENT 4.  Showing the borrowing by the government from the country’s financial institutions  Required by the government to finance its recurrent expenditure or development expenditure for public projects. .1 Malaysian Government Certificates:  Issue Treasury Bills/ Government bonds on shariah basis.4.

Cont… Bank Negara Malaysia issued under the qard al-hasan contract  The return of dividend rate (if any) declared by the government  The dividend rate is determined by the Dividend Committee which comprises representatives from :  Treasury Office Bank Negara Malaysia The Economic Planning Unit The Islamic Bank. .

.4  PRIVATE EQUITY INVESTMENT Partnership in non-listed companies. The concepts of risk. Fiqh texts refer to the concept of ‘shirkah’ which is translated as meaning ‘sharing’ and is subdivided into two categories:     shirkatulmilk (the joint ownership of a particular property by two or more people) shirkatulaqd (joint commercial enterprise). and profit or loss sharing align the basics of the private equity markets with the Shariah ideals.4.

3 Secondary market A financial market in which securities that has been previously issued can be resold. . such as a bond or a stock.2 Primary market A financial market in which new issues of a security. are sold to initial buyers by the corporation or government agency borrowing the funds. The investment bank underwrites securities and then sells them to the public.0 CONVENTIONAL BOND MARKET 5. 5.1. such as KLSE.5. It could be an organized market. or over-the counter (otc) market in which dealers at different locations stand ready to buy or sell securities over the counter to whoever accept their price.1.

Transactions in unethical goods and services ii. Earning returns from a loan contract (Riba/Interest) iii. Compensation-based restructuring of debts .5.4 Why conventional bond is haram???  The Islamic finance paradigm is based on the following set of prohibitions: i.1.

Gambling and chance-based games (Qimar) vi. Trading in debt contracts at discount vii. Forward foreign exchange transactions . Excessive uncertainty in contracts (Gharar) v.Cont… iv.

 . The general guideline extending the opinions of the religious beliefs in the shariah to financial agreements and transactions.0 SHARIAH RULINGS ON ISLAMIC BONDS  Facilitate and provide guidance in the issuance of Islamic bonds.6.

1 ISLAMIC BONDS SHARIAH COMPLIANT  Sukuk as a method of raising funds needed for business and infrastructure projects. Investor purchases the certificates undivided share or interest in the underlying assets which back the sukuk issuance.   . These assets must be essentially tangible assets.6.

2 USES OF SUKUK FUNDS a) Project-specific Sukuk Money is raised through sukuk for specific project. . The bonds used for refinancing purpose and to finance infrastructure projects. b) Assets-specific Sukuk The resources are mobilize by selling the beneficiary right of the assets to the investors.6.

.Cont… c) Balance Sheet-specific Sukuk The balance sheet specific use of sukuk funds is the Islamic Development Bank (IDB) sukuk issued in August 2003. The IDB made its entrance resource mobilization from the international capital market by issuing US$ 400 million five-year sukuk due for maturity in 2008.

6.3 COMPARISON SUKUK AND BONDS Sukuk Asset-related expenses may attach to sukuk holders Bonds Bond holders are not concerned with asset-related expenses The sale of a sukuk represents a sale of a share of an asset Notwithstanding an obligor’s Creditworthiness. sukuk prices depend on the market value of the underlying asset The sale of a bond is basically the sale of a debt Bonds depend solely on the creditworthiness of the issuer .

Cont… Sukuk Sukuk represent ownership stakes in existing and or well defined assets The underlying contract for a Sukuk issuance is a permissible Bonds Bonds represent pure debt obligations due from the issuer In a bond. which implies a contract whose subject is purely earning money on money (Riba). the core relationship is a loan of money. Bonds. can be issued to finance almost any purpose which is legal in its jurisdiction The underlying assets monetized in a sukuk issuance must be Islamically permissible in both their nature and use .

. Used for enhancing public participation in big investment projects.6. THE CONCEPT IN EQUITY-BASED MUDHARABAH/ MUQARADAH SUKUK The capital provided by one party and labour by the other.3 1. The shares of profit are determined beforehand by a definite proportion of the total.

2. The MS holder is given the right to transfer the ownership by selling the deeds in the securities market at his discretion.1 SIGNIFICANT FEATURES OF MUDHARABAH 1. 3.3. Mudharabah Sukuk (MS) represent common ownership and entitle their holders share in the specific project. The MS contract is based on the official notice of the issue of the prospectus which must provide all information required by shariah for the Mudharabah contract.6. .

Permissible to create reserves for contingencies.Cont… 4) The Manager/SPV who receives the fund collected from the subscribers to MS can also invest his own fund -get profit for his capital contribution. by deducting from the profit. such as loss of capital. 5) .

whether explicitly or implicitly. The mudharib or the person who has received the fund is charged with the duty of running the affairs of the specific project. It is not permissible to guarantee him a fixed lump sum amount of profits. The mudharib is considered as the depository.2 DISTRIBUTION OF PROFITS 1.6.3. 3. 2. 4. . The prospectus should not mention.

Mudharib hands over the finished project to the owner .3 Steps Involved In The Structure of Mudharabah Mudharib enters into an agreement with project owner for construction/commissioning of project SPV issues islamic bond (sukuk) to raise funds Mudharib collects regular profit payments and final capital proceeds from project activity for onward distribution to investors.6. Upon completion.3.

Can be treated as negotiable instruments. Used for mobilizing the funds for establishing a new project or developing an existing one or financing a business activity on the basis of partnership contracts. .6.4 MUSHARAKAH SUKUK Any profit derived from the venture will be distributed based on preagreed profit-sharing ratio.

6. . the issue Proceeds received from the investors to the Musharakah The Musharakah appoints the Corporate as an agent to develop the land (or other physical assets) with the cash injected into the Musharakah and sell/lease the developed assets on behalf of the Musharakah.2 Steps involved in the structure of Musharakah Corporate (as Musharik) contributes land or other physical assets to the Musharakah SPV (as Musharik) contributes cash i.e.4.

.Cont… In return. the agent (i. the Corporate) will get a fixed agency fee plus a variable incentive fee payable The profits are distributed to the sukuk holders The Corporate irrevocably undertakes to buy at a preagreed price the Musharakah shares of the SPV on say semi-annual basis and at the end of the fixed period the SPV would no longer have any shares in the Musharakah.e.

Violating the provisions of Islamic Shariah: Present various types of risks. Determine the possibility of their potential invalidation. . Devising ways to limit this occurrence and finding ways to remedy it.5 RISK OF ISLAMIC BONDS 1.6.

3.Cont… 2. . Operational risks Circulation must be based on assets. The returns on these bonds are generated from these assets. Legal risks Results in a conflict between such systems and Shariah law To neglecting to implement Shariah law in the governance of states examined in a accurate scientific manner so that they may be resolved in a Shariahcompliant way.

. absence of structural features that are standard in conventional securities . Limited historical performance data on shari’ah-compliant assets.7.not normally contractually permissible in an Islamic.0 CURRENT ISSUES IN THE ISLAMIC BOND (SUKUK ) MARKET 1) Economic and financial challenges identification of underlying reference assets and security.

Islamic jurisprudence is neither definite nor bound by precedent and rulings in one jurisdiction may not be uniformly enforced in others. regulatory standards pertaining to shari’ah compliance vary considerably.Cont… 2) Legal and regulatory challenges The underlying reference assets and the transaction structure need to satisfy both commercial and shari’ah law. .

Cont… Sources: Malaysian Islamic Capital Market. Securities Commission. .

Cont…  This figure includes the approval of seven combination issuances (conventional bonds and sukuk) with combined issue size of RM89. The combination issuance of RM60 billion by Cagamas Bhd was not included for the purpose of this calculation due to uncertainty of the amount per multiple Shariah principles to be used.  .5 billion.

including airports. . Sukuk have confirmed their viability as an alternative means to mobilise medium to longterm savings and investments from a huge investor base. bridges and power plants. To generate strong interest by new issuers in Muslim and non-Muslim in this country. To help issuers and investors alike to participate in major projects.Conclusion Used the concept of Mudharabah or Muqaradah and Musharakah.

PREPARED BY:  NORZIANA BINTI AB RAHMAN 1050684(LEADER) SITI MARIAM BINTI ZAKARIA 1050702   SITI HASNAH BINTI ABU HASSAN 1050727 .