Types of Sukuk
The market for Sukuk is now maturing and different Sukuk structures have been emerging over the years; they can be of many types depending upon the type of Islamic modes of financing and trades used in its structuring. The AAOIFI issued standard for different types of Sukuk, classifying some of these Sukuk as tradable and others as non-tradable based on the type and characteristics of the issued Sukuk. The most important and common among those are Murabahah, Mudarabah, Mudarabah, Ijarah, Salam and Istisna’a. 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 Murabahah, Ijarah as well as Istisna’a.
In the case of Murabahah Sukuk, the issuer of the certificate is the seller of the Murabahah commodity, the subscribers are the buyers of that commodity, and they are entitled to its final sale price upon the re-sale of the commodity. Murabahah Sukuk cannot be legally traded at the secondary market, as the certificates represent a debt owing from the subsequent buyer of the commodity to the Sukuk holders and such trading in debt on a deferred basis is not permitted by Shari’ah.
Mudarabah Sukuk are investment Sukuk that represent common ownership of units of equal value in the Mudarabah equity; the holders of Mudarabah Sukuk are the suppliers of capital (Rabb al-mal) and own shares in the Mudarabah equity and its returns according to the percentage of ownership share. Mudarabah Sukuk holders have the right to transfer the ownership by selling the deeds in the securities market. Mudarabah Sukuk should not contain a guarantee from the issuer or the manager for the fund, for the capital or a fixed profit, or a profit based on any percentage of the capital.
Musharakah Sukuk are investment Sukuk that represent ownership of Musharakah equity. It does not differ from the Mudarabah Sukuk except in the organization of the relationship between the party issuing such Sukuk and holders of these Sukuk, whereby the party issuing Sukuk forms a committee from the holders of the Sukuk who can be referred to for investment decisions. Musharakah Sukuk are ideal for borrowing to finance large commercial ventures, such as a factory expansion or construction projects. A special purpose vehicle company (SPV) can purchase, commission or construct Musharakah assets owned, or to be bought or constructed by the issuing entity. The SPV pays cash towards the capital of the Musharakah and then leases the underlying Musharakah assets to the issuing entity, for a period equal to the maturity of the Sukuk, at agreed regular fixed or floating rentals. Upon default or maturity, the issuing entity issues a promise to Musharakah units from the SPV at an agreed price. Musharakah Sukuk can be treated as negotiable instruments and can be bought and sold in the secondary market.
Ijarah Sukuk represent ownership of equal shares in a rented real estate or the usufruct of the real estate. Holders of Ijarah Sukuk have the right to own the real estate, receive the rent and trade their Sukuk in the secondary markets; in exchange they bear all cost of maintenance of and damage to the real estate. The rental rates of return on those Sukuk can be fixed or floating depending on the agreement (Managing financial risks of Sukuk Structures by Ali Arsalan Tariq; 2004); it does not need to be linked to the period of taking usufruct by the lessee. The issuance of Ijarah Sukuk necessitates the creation of an SPV to purchase the assets, issue Sukuk to the investor, and make payment for purchasing the asset. Upon default or maturity, the issuing entity issues a promise to purchase the assets from the SPV at an agreed price.
Salam Sukuk are certificates of equal value issued for the purpose of mobilizing Salam capital. The issuer of the certificates is a seller of the goods of Salam; the holders are the buyers of the goods; they are entitled to the sale price of the certificates or the sale price of the Salam goods sold through a parallel Salam, if any. Investors pay in an advance funds to the SPV in return for a promise to deliver a commodity at a future date. SPV can appoint an agent to market the promised quantity at the time of delivery at a possible higher price. The profit of the holders of the Sukuk is the difference between the purchase price and the sale price.
Istisna’a Sukuk are certificates that carry equal value and are issued to mobilize funds required for production of goods products that will be owned by the certificate holders. The issuer of these certificates is the manufacturer; the subscribers are the buyers of the intended product, while the funds realized from subscription are the cost of the product. The Islamic bank funding the manufacturer during the construction of the asset, acquires title to that asset and up on completion either immediately passes title to the developer on agreed deferred payment terms or, possibly, leases the asset to the developer under an Ijarah Sukuk. Shari’ah prohibits these certificates to be traded in the secondary market.
In the case of Murabahah Sukuk, the issuer of the certificate is the seller of the Murabahah commodity, the subscribers are the buyers of that commodity, and they are entitled to its final sale price upon the re-sale of the commodity. Murabahah Sukuk cannot be legally traded at the secondary market, as the certificates represent a debt owing from the subsequent buyer of the commodity to the Sukuk holders and such trading in debt on a deferred basis is not permitted by Shari’ah.
Mudarabah Sukuk are investment Sukuk that represent common ownership of units of equal value in the Mudarabah equity; the holders of Mudarabah Sukuk are the suppliers of capital (Rabb al-mal) and own shares in the Mudarabah equity and its returns according to the percentage of ownership share. Mudarabah Sukuk holders have the right to transfer the ownership by selling the deeds in the securities market. Mudarabah Sukuk should not contain a guarantee from the issuer or the manager for the fund, for the capital or a fixed profit, or a profit based on any percentage of the capital.
Musharakah Sukuk are investment Sukuk that represent ownership of Musharakah equity. It does not differ from the Mudarabah Sukuk except in the organization of the relationship between the party issuing such Sukuk and holders of these Sukuk, whereby the party issuing Sukuk forms a committee from the holders of the Sukuk who can be referred to for investment decisions. Musharakah Sukuk are ideal for borrowing to finance large commercial ventures, such as a factory expansion or construction projects. A special purpose vehicle company (SPV) can purchase, commission or construct Musharakah assets owned, or to be bought or constructed by the issuing entity. The SPV pays cash towards the capital of the Musharakah and then leases the underlying Musharakah assets to the issuing entity, for a period equal to the maturity of the Sukuk, at agreed regular fixed or floating rentals. Upon default or maturity, the issuing entity issues a promise to Musharakah units from the SPV at an agreed price. Musharakah Sukuk can be treated as negotiable instruments and can be bought and sold in the secondary market.
Ijarah Sukuk represent ownership of equal shares in a rented real estate or the usufruct of the real estate. Holders of Ijarah Sukuk have the right to own the real estate, receive the rent and trade their Sukuk in the secondary markets; in exchange they bear all cost of maintenance of and damage to the real estate. The rental rates of return on those Sukuk can be fixed or floating depending on the agreement (Managing financial risks of Sukuk Structures by Ali Arsalan Tariq; 2004); it does not need to be linked to the period of taking usufruct by the lessee. The issuance of Ijarah Sukuk necessitates the creation of an SPV to purchase the assets, issue Sukuk to the investor, and make payment for purchasing the asset. Upon default or maturity, the issuing entity issues a promise to purchase the assets from the SPV at an agreed price.
Salam Sukuk are certificates of equal value issued for the purpose of mobilizing Salam capital. The issuer of the certificates is a seller of the goods of Salam; the holders are the buyers of the goods; they are entitled to the sale price of the certificates or the sale price of the Salam goods sold through a parallel Salam, if any. Investors pay in an advance funds to the SPV in return for a promise to deliver a commodity at a future date. SPV can appoint an agent to market the promised quantity at the time of delivery at a possible higher price. The profit of the holders of the Sukuk is the difference between the purchase price and the sale price.
Istisna’a Sukuk are certificates that carry equal value and are issued to mobilize funds required for production of goods products that will be owned by the certificate holders. The issuer of these certificates is the manufacturer; the subscribers are the buyers of the intended product, while the funds realized from subscription are the cost of the product. The Islamic bank funding the manufacturer during the construction of the asset, acquires title to that asset and up on completion either immediately passes title to the developer on agreed deferred payment terms or, possibly, leases the asset to the developer under an Ijarah Sukuk. Shari’ah prohibits these certificates to be traded in the secondary market.
