CHAPTER 9

SUKUK MARKETS
B Y:
S I T I N U R S YA K I R A H S H A M S U L B A H R I N ( P 9 1 7 1 9 )
N U R S YA K I R A H M U S TA P H A K A M A L ( P 9 1 0 6 6 )
 CONTENTS

• DEFINITION, GROWTH & DEVELOPMENT

• CLASSIFICATION OF SUKUK

• SUKUK INSTRUMENT

• ISSUES AND CHALLENGES IN THE SUKUK

MARKET
 DEFINITION, GROWTH AND
DEVELOPMENT
• Certificates of securities, representing financial rights arising
from underlying trade and other commercial activities.

The Edge Markets,

21/2/2018, 18:44 pm
CLASSIFICATION OF SUKUK
 SUKUK INSTRUMENTS

Subordianated Secured Sukuk &

Asset-Based Sukuk Asset-Backed Sukuk
Sukuk

Perpetual Sukuk

Sukuk Sukuk Sukuk Wakala Sukuk Sukuk

BBA Istithmar h Sukuk Musharakah
Ijarah Salam Manfaa
Sukuk ( Blended- h
Assets Sukuk)
The Common Law Trust
Why use trust concept?
• SPV can execute sukuk related
document before sukuk investor
even come into picture.
• Allows SPV to declare a trust over
the trust assets in favor of sukuk
holder who will subscribe in the
future.
Use of SPV
• Act as trustee
• Will acquire the assets
• Lease them to the lessee in
sukuk ijarah
• Issue sukuk to raise funds
• Transfer the proceeds from
obligor to the sukuk holder
 TYPE 1 SUKUK: ASSET-BASED SUKUK
Sukuk Salam Sukuk BBA

• Built using principles of bay al-inah and bay

al-dayn.
1. Salam seller undertakes to supply
• Not permittted to be traded in secondary
commodity to the buyer at a future date
market, will resulted to riba.
2. Salam buyer pay full price in advance.
• Since 2010, moved from BBA sukuk
structures to Musharakah and Murabahah
structure due to the controversy.
 Sukuk Ijarah

1. SUKUK IJARAH STRUCTURE

• Rights to the lessee to

purchase the asset at the
end of the lease period.
• Prerequisites:
1. in line with Shariah
2. free from prohibited
elements
3. the underlying asset must
have beneficial usage to
the users
4. Use of sukuk proceeds
must be Shariah
compliant
2. SUKUK IJARAH: HEADLEASE AND SUBLEASE
STRUCTURE
• Another variation of the
original sukuk Ijarah.
• There is no sale of asset, but it
is lease to the SPV by
originator then it is leased
back to the originator
• To avoid ijarah al-inah,
scholars imposed requirement
that the period of the
headlease should be longer
than the sublease.
Sukuk Istithmar (Blended-Assets Sukuk)

• It is type of blended assets

sukuk; Physical assets and
Receivable.
• Hybrid Sukuk structured.
• Sell price?
1. Receivable or other forms
of debt : at par
2. Receivable and physical
assets under single
portfolio : at any price
• 51% vs 1/3
 SUKUK WAKALAH

Exhibit 9.7 Case Study of Khazanah Nasional Berhad’s SGD 1.5 Billion Dual-Trance Sukuk
Wakalah 2010

The transaction overview of the issue is as follow :

Sukuk Issuer Dangan Capital Berhad
Sukuk Obligor Khazanah Nasional Berhad

Currency / Format SGD 1.5 billion / Reg. S

Structure Sukuk Wakalah

Sukuk Rating AAA (RAM) (stable)
Sukuk Asset i. Tangible Asset Component (at least 51%) Shariah-compliant shares
ii. Murabahah Receivables Component (not more than 48%) of Shariah-
compliant commodities

Tenure 5 year 10 year

Amount SGD 600 million SGD 900 million
 SUKUK MANFA’AH

• Is based on rights
attached to certain
income generating
activities.
• Developed in 2006 for
Saudi Basic Industries
Corporation’s
(SABIC) SAR 3
billion Sukuk.
• Underlying assets :
marketing & sales
activity
 SUKUK MUSYARAKAH

• The Sukuk were

classified as asset-
light sukuk (do not
require any physical
assets at the time of
issuances).

• Asset-light sukuk
include sukuk based
on;
1. Mudarabah
2. Musyarakah

• The instruments was

severely criticised by
Shariah scholar of
AAOIFI in 2008.
 TYPE 2 SUKUK: SUBORDINATED
SUKUK

• Subordinated sukuk essentially renders the rights of the sukuk

holders as subordinated to the rights of secured sukuk and senior
unsecured sukuk holders.

• This means that the issuer of subordinated sukuk will first have
to honour all payment obligations that is owes to the holder of
secured sukuk and senior unsecured sukuk before honouring
payment obligations to subordinated sukuk holder.
 PERPETUAL SUKUK

The duration of sukuk is

perpetual in nature.
• Tier 1 perpetual Sukuk

Because the fund raises

through this type of sukuk
are considered as Tier 1
capital for banks under the
Basel III requirements.

 Abu Dhabi Islamic

Bank (ADIB) became
the first issuer to tap the
global sukuk market
with a USD 1 billion
Tier 1 perpetual sukuk.
 TYPE 3 SUKUK: SECURED SUKUK &
ASSET BACKED SUKUK

• The rights of the sukuk holders are • The originator will sell the income-
secured by the assets backing the sukuk. generating assets to SPV (true sale)

• If the obligor defaults under the sukuk, • Legal beneficial rights of the
the sukuk holders will have full recourse underlying asset (originator  SPV)
to the assets (right to liquidate & recover
the amounts due under the sukuk)
• If the assets are performing  sukuk
holders will receive their payments
• Sukuk holder will have no further recourse
to the originator or manager/ services.
• Not performing  sukuk holders will
have no recourse to the originator
• The underlying assets are crucial for the (liquidating them in the market)
structure.
 ISSUES & CHALLENGES IN THE SUKUK
MARKET
• Rating of sukuk

•The rating of sukuk is based on the following main factors:

1. Indentification & assessment of the risk involved and their mitigating criteria
2. Measuring the correlation of the sukuk with the risk factors
3. Testing against a set benchmark where available

• MARC
 It has an in-house shariah panel
 The general components of MARC’s rating are; transaction structure, main parties, cash flow, legal & shariah
analysis

• RAM
 Treat them as representing Shariah compliance instrument
 RAM categorises sukuk into three main types:
 Asset backed sukuk = performance &credit quality
 By corporates / financial inst = the rating of the issuer
 Project finance sukuk = underlying projects & its cash flow
 Valuation of sukuk

The most common & well known approach for valuing

sukuk is :
1. Present Value (PV) method

2. Relative price approach

3. Arbitrage-free pricing

Sukuk Default

A sukuk default may occur in either of two situations:

1. A schedule payment and/or the face value have not been made
by the sukuk issuer ; or

2. A clause in the sukukcontract is violated.

THANK
YOU