Asset based sukuk pdf

The debt management office dmo nigeria is a government agency established to centrally coordinate the management of nigerias debt. A sukuk is an islamic financial certificate, similar to a bond in western finance, that complies with sharia islamic religious law. Pdf a comparative analysis between asset based and asset. The holder then sells the asset to the issuer for the costplus profit a markup that both have agreed to upfront. This structure, most often, takes the guise of a salelease to the originator and is embedded with a binding promise waad mulzim from the. Here, the payoff share and the growth rate are agreed. They provide proportionate ownership in a designated asset or pool of assets. Sukuk are asset based securities whereas bonds are debt based. A sukuk structure that involves the issuer purchasing the underlying assets and then investing, trading or leasing them on behalf the investors sukuk holders, using the funds raised through the issued certificates sukuk. Corporate rating of issuer strength of asset cash flow sukuk investor only attains beneficial ownership full transfer of legal ownership of the underlying asset usually designed as on balance sheet for obligororiginator treated like a debt can either be on or off balance. In assetbacked sukuk there is a true sale between the originator and the special purpose. The aim of this financial institution is to sell the asset and obtain the value of the asset with the help of subscriptions so that the right of ownership can ultimately be transferred to the certificate owners.

It provides lower funding costs plus a marketbased. Asset backedsukuk involve granting the investor sukuk holder a share of a tangible asset or business venture along with a corresponding share of the total risk that is, a share commensurate with this ownership. There are also other diversified and mixed asset sukuk that emerged in the market such as hybrid sukuk, where the underlying pool of assets can comprise of. Sukuk al salam the salam based contract is usually used for shortterm financing of underlying assets and is based on spot sale salam andor deferred payment sale bai al muajjal or deferred delivery sale bai al salam where the investor undertakes to deliver a specific asset, which will be sold to the client at an agreed profit margin. It is found that asset backed sukuk structure is more compliant to shariah both in form and substance than asset based structure. Because sukuk are assetbased securities not debt instruments they fit the bill. Through a number of credit enhancement features purchase undertaking, liquidity facility, etc. A comparative analysis between asset based and asset backed.

Are sukuk holders treated differently from conventional bondholders. The basic idea of ijara sukuk is that the sukuk holders investors are the owners of the asset and are entitled to receive a return when that asset is leased. While second type of sukuk does not match to draft standards of sukuk that we can observe in asset backed sukuk, today it has become increasingly popular. It establishes the right to use an asset for a fee. To meet shariah requirements of transferring assets to sukuk holders in assetbased sukuk, the originator usually transfers the beneficial ownership to the issuer special purpose vehicles spv. What is the difference between assetbacked sukuk and. A guide to structuring sukuk development of sukuk as modern financial instruments the organisation of the islamic conference international islamic fiqh academy the fiqh academy, an academy for the advanced study of islam based in jeddah, saudi arabia, laid the basis for the development of the sukuk. In an asset based sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the underlying assets. Sukuk restructuring primarily aims at offering a debtor more latitude, in form and time, to settle his obligations. Asset based vs asset backed in an asset based sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the underlying assets. Whereas in an assetbased sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the. A comparative study of asset based and asset backed sukuk.

Apr 11, 2010 asset based sukuk are closer to debt because sukuk holders have recourse to the originator if there is a shortfall in payments. Becauseincometosukukholdersis generated by trading or real investment rather than mere lending, sukukholders earn profit rather than interest. Moreover, where the asset underpinning sukuk is located in the uk and. The financial times has described this as an ongoing debate over form versus substance in islamic finance, identifying two kinds of sukuk assetbacked sukuk and the more numerous, less strict, allegedly noncompliant asset based sukuk. This enables investors sukuk holders to have an undivided, beneficial ownership in the underlying assets, entitling them to a share of the revenues and proceeds upon disposition. Shortterm securities and longterm securities issued could be the following. Using data from our exclusive sukuk database, the above sukuk chart can be used to view issued sukuk based on their maturity and issued profit rates along with corresponding information covering issued amount and date as well as rating data.

In other words, sukuk represent ownership in a tangible asset, usufruct of an asset, service, project, business, or. Profits would be distributed as per pre agreed ratio between partners. A sukuk based on a debt can only be traded at face value v. A musharakah is a joint venture between two or more persons who contribute capital to fund a business venture. Assetbacked vs assetbased sukuk uae laws and islamic finance. While second type of sukuk does not match to draft standards of sukuk that we can observe in assetbacked sukuk, today it has become increasingly popular. Pdf the purpose of this study is to conduct a comparative analysis between asset based and asset backed sukuk structures from shariah perspective.

Whereas in an asset based sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the underlying assets, in an asset backed sukuk, the profit return and return of capital are ultimately based on the assets. The asset based vs asset backed sukuk has been vigorously discussed by islamic scholars, academics and practitioners in the islamic finance industry. Sukuk characteristics mainly argued that sukuks are equitylike islamic financing instruments or fund raising product like bond or even investment certificates having bond and stock like features representing undivided. A comparative study of asset based and asset backed sukuk from the shariah compliance perspective ahmed abdirahman herzi universiti sains islam malaysia keywords. An initiative for the enhancement and development of the islamic financial market by means of free access to a comprehensive sukuk database, latest market news as well as a database of qualified industry professionals and services firms. A murabahah contract is an agreement between a buyer and seller for the delivery of an asset. Critical assessment of the legal recourse for the case of sukuk. How sukuk islamic bonds differ from conventional bonds. What is the difference between assetbacked sukuk and assetbased sukuk. This allows the obligor to simplify its reporting and segregation in relation to the assets, as the obligor knows that the investors are really relying on the obligor credit strength alone.

Sukuk plural are unique fixedincome vehicles structured as asset, project or servicebacked entities. Assetbacked vs assetbased sukuk uae laws and islamic. To qualify for the listing of its sukuk, such entity shall meet the requirements prescribed in these rules and the commissions regulation on crossborder securities transactions. Sukuk structures a institute of islamic banking and finance, international islamic university malaysia. Asset based sukuk, on the other hand, involve the issuer purchasing the underlying assets and then investing, trading or leasing them on behalf the investors sukuk holders, using the funds raised through the. In this structure, there is a true sale transaction, where the originator sells the. What is the difference between assetbacked sukuk and asset.

Apr 27, 2010 different sukuk structures have been emerging over the years but most of the sukuk issuance to date have been ijara sukuk, since they are based on the undivided prorata ownership of the underlying leased asset, it is freely tradable at par, premium or discount. Asset backed vs assetbased sukuk abdul karim abdullah sukuk are islamic certificates of investment. Where the sukuk is rated, the letter issued by the credit. Assetbacked vs assetbased sukuk abdul karim abdullah sukuk are islamic certificates of investment. Differences between asset based sukuk and asset backed sukuk. Accounting for sukuk principles of islamic accounting. There are some contentious issues related to the contemporary sukuk from shariah perspective.

Whereas in an asset based sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the underlying assets, in an asset backed sukuk, the profit. It provides lower funding costs plus a market based. Sukuk islamic bond or shariacompliant bond is an islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets types of assets common types of assets include. The structure is based on a specific contract of exchange that ca n be made through the sale and purchase of an asset based on deferred payment, leasing of specific assets or participation in a jointventure business.

With sukuk, the future cash flow from the underlying asset is transferred into present cash flow. With its network of industry contacts and inhouse journalists provides the latest sukuk market insights and developments in the form of interviews, research and analysis presented within the sukuk articles section. They signify coownership of productive resources,knownasthe underlyingassets. Classification based on practices sukuk securities. Each sukuk has a face value based on the value of the underlying asset. Pdf critical assessment of asset backed and asset based.

Sukuk alijara leasebased sukuk the ijara contract is essentially a rental or lease contract. Different between assetbased and assetbacked sukuk prezi. An investor may pay that amount or as with a conventional bond buy it at a premium or discount. The defaults took place in the aftermath of the recent 2008 financial crisis and came as a surprise. Asset backed v asset based sukuk linkedin slideshare.

They can also be termed as fixed payoff securities. Asset backed sukuk are, thus, closer to equity than debt, and for that reason are not so popular in the market of sukuk offerings. Therefore, these asset based sukuk did not have a guaranteed return of the sukuk s face value at maturity without a transfer of the ownership of the asset to the holders of sukuk marc, 2010. Assets and liabilities are perfectly match funded with genuine risk transfer.

One issue relates to the sale of assets and its implications to risks and returns for investors and issuers of sukuk. The investors are also entitled to part of the profits generated by the asset. Critical assessment of asset backed and asset based sukuk and their recourse in case of default. Cis, sukuk would be treated like units in a hedge fund and could only be marketed in the uk to professional or similar investors, thereby prohibiting access to the retail market. Sukuk can be structured according to various contracts, including sukuk mudaraba, sukuk musharaka, sukuk murabaha, sukuk ijarah, sukuk salam, and sukuk istisna. Another form of sukuk alijara transaction involves certificates that confer rights to use a particular asset.

Then, the issuer uses the proceeds from the certificates to purchase the asset, and investors receive partial ownership of the asset. Doc differences between asset based sukuk and asset. Asset backed is where the money is invested in a portfolio of assets that are earning money. Modern sukuk emerged to fill a gap in the global capital market. Islamic investors want to balance their equity portfolios with bondlike products.

Dec 25, 2014 the most important characteristic of sukuk is that they represent a claim on an existing or welldefined asset. At present, the standard for investment sukuk issued by aaoifi provides for 14 eligible asset classes and only 7 are being used ijarah, musharakah, mudarabah, murabahah, salam and manfaa. Therefore, it is worth noting that one cannot assess the risks associated with each issue by merely understanding the sukuk underlying contracts such as mudharabah, musharakah or ijarah since the actual legal structure. In a nutshell, based on existing metaanalysis of sukuk, the synthesis summarizes a bundle of key thematic areas such as 2. It has been claimed that this issue was a crucial factor leading to sukuk defaults due to the. Assetbased vs assetbacked in an assetbased sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the underlying assets. Meanwhile, conventional bonds represent an obligation to make periodic interest payments and principal upon maturity. Ijarah sukuk are based on the principle of islamic leasing contracts. View and filter sukuk based on issued country and currency covering both shortterm and longterm.

Sukuk may be issued for existing assets or for assets that will exist in the. Therefore the sukuk note is not an asset backed bond hence it is bett er described as asset based issue. The basic idea of ijara sukuk is that the sukuk holders investors are the owners of the asset and are entitled to receive a return when that asset is leased in this scenario, the spv receives the sukuk proceeds from the investors. The main advantage of sukuk over traditional bonds is that their value increases in relationship to the assets backing. Pdf the main objective of this study is to elucidate and describe the significance of the asset based and asset backed on sukuk legitimacy. Evolution in the sukuk islamic bonds journal of islamic banking. The most important characteristic of sukuk is that they represent a claim on an existing or welldefined asset. Market demand, asset based, introduction sukuk is plural of sakk, legal instrument, is the arabic name for financial certificates, but commonly referred to as sharia. This allows the obligor to simplify its reporting and segregation in relation to the assets. Ijarah leasing means a contract whereby a lessor owner leases out an asset to a lessee at. The earnings are distributed to the investors the sukuk holders, and eventual repayment is at whatever the then market value of the assets is. Since interest bearing instruments are not permissible under islamic investment principles, the investment concept called sukuk was created as an alternative to traditional bonds. They signify coownership of productive resources, known as the underlying assets. Jun 03, 20 asset backed is where the money is invested in a portfolio of assets that are earning money.

Upon its issuance, the issuer sells certificates to investors. Assetbased sukuk are closer to debt because sukuk holders have recourse to the originator if there is a shortfall in payments. This article provides an overview of the market for. The determinants of sukuk market development houcem smaoui1 mohsin khawaja2 abstract. Different sukuk structures have been emerging over the years but most of the sukuk issuance to date have been ijara sukuk, since they are based on the undivided prorata ownership of the underlying leased asset, it is freely tradable at par, premium or discount. Hence, sukuk can be seen as more closely related to asset based securities. The issuance of sukuk requires an exchange of a shariacompliant underlying asset for financial consideration through the. Pdf a comparative study of asset based and asset backed. The aaoifi issued standard for different types of sukuk, classifying some of these sukuk as tradable and others as nontradable based on the type and characteristics of the issued sukuk. This means that the sukukalijara structure issue is inherently inflexible. Jun 18, 2015 in an asset based sukuk, although an asset may be used in the structure, it does not necessarily drive the return to the sukuk holders. In an assetbased sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the underlying assets.