Murābahah Sukūk
Presented by:
Ali Saeedi
Member of the board
Securities & Exchange Organization
Contents
1. Islamic Instruments and Contracts,
2. Murābahah Contract,
3. Murābahah Sukūk,
4. Different Types of Murābahah Sukūk,
5. Comparison of Murābahah & Ijārah Sukūk,
6. Shari'ah Considerations,
7. Regulations Considerations,
Islamic Instruments and
Contracts
Behind Financial Instruments
Capital market: A market in which debt or equity
securities are traded.
Capital Market: A place for Contracts.
Financial Instruments: Designed on the basis of
different contracts,
e.g. Murābahah Sukūk based on Murābahah contract, …
Murābahah Contract Definition
Sale of goods with an agreed upon profit mark up on the cost. Murābahah sale is in two
types:
1- In the first type, the Islamic bank purchases the goods and makes it available for sale
without any prior promise by a customer to purchase it.
2- In the second type, the Islamic bank purchases the goods ordered by a customer from a
third party and then sells these goods to the same customer. In the latter case, the Islamic
bank purchases the goods only after a customer has made a promise to purchase them
from the bank.
Source: The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
Murābahah Sukūk
Murābahah Sukūk
• Murābahah Sukūk is securities in which the holders of which are the
common owners of a financial asset (a debt) based on the
Murābahah Contract.
• These securities have a fixed yield and available for sale in the
secondary markets.
• Originator (or any other part) should be able to pay the installments
via its own activities
• Rate of profit and maturity date should be clarified in the contract.
The Elements of Murābahah Sukūk
Investment
bank
Rating Agency
SPV
Originator
Sukūk
Special Purpose Vehicle (SPV, SPE, SPC)
SPV is a legal entity which is authorized to raise funds by issuing securities
through the conduct of transactions under the category of Islamic contracts.
Base on Iranian regulations, SPV is a financial institution.
SPV and originator should be independent and should not be affiliated by
originator:
1- In order to prevent the conflict of interests, (SPV should be the agent of Sukūk
holders and act on behalf of them),
2- In case of bankruptcy, all assets of the originator including, SPV would be at
risk (if SPV would be affiliated by originator),
3- To execute transactions correctly (true sale) from the Shari'ah point of view.
SPVs structure in Iran
Tehran Stock
Exchange
An Affiliated
Co. of SEO
Farabourse
CDS
Capital Asset
Management Co.
SPV1
SPV2
……………………..
SPVs Should be Independent from Originators
SPVn
Different Types of
Murābahah Sukūk
Various Types of Murābahah Sukūk
1. Murābahah Sukūk for Buyers Financing,
2. Murābahah Sukūk for Sellers Financing,
3. Mortgage Murābahah Sukūk,
4. Liquidity Murābahah Sukūk.
2 Common types of Murābahah Sukūk
Adopted by all Islamic schools of thought
Murābahah Sukūk for Buyers Financing
• SPV (as issuer) issues the Murābahah Sukūk, collects the funds of
the investors by investment banks services (the “Principal
Amount”), and on behalf of investors buys the commodity needed
by the originator from a commodity supplier in cash and sells it to
the originator in form of a Murābahah contract over an agreed
period of time and agreed rate of profit.
• Originator undertakes to pay to the SPV the price of the commodity
(Principal + Profit) on due dates.
Murābahah Sukūk for Buyers Financing
Regulator, Investment Banks, Rating Agencies, Auditors
Originator
(Buyer)
5. Selling Asset with Credit
Payment (Spot Delivery)
6. Sukūk Proceeds
(Deferred Price)
3. Spot Payment
Commodity
Supplier
1. Issuing Sukūk
SPV
4. Spot Delivery
Investors
2. Sukūk Subscription
Murābahah Sukūk for Sellers Financing
• SPV (as issuer) issues the Murābahah Sukūk, collects the funds of
the investors by investment banks services (the “Principal
Amount”), and on behalf of investors buys the commodity of the
originator and sell it to buyer in form of a Murābahah contract over
an agreed period of time and agreed rate of profit.
• Buyer undertakes to pay to the SPV the price of the commodity
(Principal + Profit) on due dates.
Murābahah Sukūk for Sellers Financing
Buyer
(Leasing Co.)
5. Selling Asset with Credit
Payment (Spot Delivery)
6. Sukūk Proceeds
(Deferred Price)
3. Spot Payment
Originator
(Seller)
1. Issuing Sukūk
Investors
SPV
4. Spot Delivery
2. Sukūk Subscription
2 other types of Murābahah Sukūk
Are not adopted by all Islamic schools of thought
Mortgage Murābahah Sukūk
• SPV issues the Sukūk, collects the funds of the investors then acts on their
behalf and buys from the bank (originator) mortgage facilities arising from the
Murābahah Contracts.
• The originator undertakes to collect on the due dates the mortgage facilities
assigned by the debtors and deliver them to the SPV. The SPV will give to the
holders of the Sukūk the funds received from the Bank through the customer.
• The investors may wait until maturity dates and enjoy the interest arising on
the Murābahah or otherwise sell the Securities in the secondary markets before
the due dates.
Mortgage Murābahah Sukūk (Cont…)
3. Spot Payment for Bank’s
Receivables/Debt
Bank
1. Issuing Sukūk
SPV
4. Selling Debts
Investors
2. Sukūk Subscription
Financial Facilities
Receivers
(Murābahah Based)
6. Paying Installments
If Bai al Dayn is accepted
Liquidity Murābahah Sukūk
• SPV collects the funds of the investors, then acts on their behalf and buys in cash
one of the Originators’ physical assets then sells the same asset at a higher price to
the originator itself on credit terms.
• The originator undertakes to give the credit price of the assets to the SPV on due
dates.
• The purchase and sale on credit terms (Bay al-inah) is prohibited by most of Shiite
and Sunni scholars.
Liquidity Murābahah Sukūk (Cont…)
3. Spot Payment
Originator
1. Issuing Sukūk
Investors
SPV
4. Spot Delivery
2. Sukūk Subscription
5. Selling Asset as Credit
Payment
Originator
6. Paying Profit
Investors
SPV
7. Sukūk Proceeds
(Deferred Price)
Comparison of
Murābahah & Ijārah Sukūk
Murābahah Sukūk & Ijārah Sukūk
• Ijārah Sukūk is most widely used among other Islamic financial
instruments; however, after global downturn in Sukūk issuance
in 2008, issuance based on Murābahah Sukūk increased by nearly
60.4%.
• Since, Murābahah Sukūk
can be used for working capital
financing, and also it is fixed income Sukūk, so it has some
advantages in comparison with the other types of Sukūk such as
Ijārah and Mudārabah.
Comparison
• Asset Backed & Asset Based
Murābahah Sukūk is asset based, but Ijārah Sukūk is asset
backed. In asset-backed Sukūk, investors are legal owners of the
asset but in asset-based, investors has beneficial owners or
owners of cash flow generated by asset.
• Debt or Equity Instrument
Murābahah Sukūk can be considered as a debt instrument, but
Ijārah Sukūk is none of them and both of them. Investors in
Ijārah Sukūk are owners of the asset and also based on the
nature of Ijārah contract which is binding, it is similar to debt
instrument. But in fact, Ijārah Sukūk can not be classified in
none of the two groups.
Comparison (Cont…)
• Risk Profile
Murābahah Sukūk is a debt instruments and risk of Sukūk does
not focus on asset risk, but rather on credit risk of the originator
& Ijārah Sukūk
• Underlying Asset
In Murābahah Sukūk, the underlying asset can be a consuming
asset such as materials and spare parts, or long term asset such as
real estate and machineries. In Ijārah Sukūk, the underlying asset
should have long term life cycle to be qualified for leasing.
Comparison (Cont…)
• Marketability
Based on different jurisdictions, Murābahah Sukūk can have
secondary market or not. Based on Shi'a and Shafei schools of
thought, debt sale is accepted, so secondary market is available
but scholars of other jurisdictions do not accept it.
If debt sale is accepted, marketability will exist, unless it will not
be a liquid security.
Shari'ah Considerations
Shari'ah Considerations
• From a Shari'ah angle, agency agreements (Wukālah) [between SPV
and investors], cash transaction and credit transaction of a tangible
asset [between SPV and originator] is accepted by all schools.
• But, there is a divergence of views on contracts for purchase of
debt (Bai al Dayn) [between investors].
• According to opinions of renowned Shi'a and Shafei scholars it is
permissible and according to opinions of Sunnite scholars it is
rejected.
Shari'ah Considerations (Cont…)
• If debt is discounted in a deferred payment [Bai al Dayn bi addayn], it
will be rejected by all schools.
• If debt is discounted spot by third party, it will be very controversial:
– Hanafiyah, Hanabelah, some of Shafe’iyah and some of Shi'a scholars do not
validate it,
– Most Shi’it scholars, some other of Shafe’iyah, Ibn Taymiyah and Ibn Qayyem
have validate it,
– The rest of Shafe’iyah validate it provided that:
a. Debtor is wealthy and confess to have such a debt or his debt is
proved by evidence.
b. Debt is confirmed (Mustaqar)
c. The substitute is delivered at the session of contract.
Shari'ah Considerations (Cont…)
• Why is it accepted by some schools?
• If investor A can discount debt, investor B can take his place in
secondary market, and if it is not permissible, both primary and
secondary transactions are not permissible.
• Why isn’t it accepted by other schools?
• They believe that discounting has the same nature of Riba, any
increase and decrease of debt [Qardh] is not permissible.
Murābahah is an exception.
Regulations Considerations
Regulations Considerations
1.
2.
3.
4.
Based on IFSB definition, “Sukūk are certificates with each sakk
representing a proportional undivided ownership right in tangible and
intangible assets, monetary assets, usufructs, services, debt or a pool of
predominantly tangible assets, or business venture”,
In asset-based instrument, originator typically transfers only the
beneficial ownership of asset, so investors have no recourse to
the assets.
Based on IFSB standards, asset-based Sukūk should have credit
rate,
Credit enhancement is needed (such as third party guarantee,
over- collateralization, excess spread, cash collateral),
Regulations Considerations (Cont…)
4.
5.
6.
7.
Tax regulation is very crucial, each transaction has its tax
expenses and if transaction would be taxable, cost of financing
will increase and instrument can not be used in practice.
Underling asset must be clearly identifiable (may be in a specific
project or investment activity) and Shari'ah complied.
The asset should be available when issuing the certificates or the
conditions for its delivery should prevail at the periods of time
fixed by the originator (unless it becomes Bay al-kali).
Types of acceptable assets: land; buildings and installations;
machinery and equipment; means of transport; materials and
goods.
Regulations Considerations (Cont…)
8.
In the event that asset is in the form of materials, Murābahah
Sukūk is short term instrument, but if asset is in the form of long
term asset, Murābahah Sukūk is long term instrument.
9.
Providing other documents and deeds relating to the asset should
be mentioned in regulations (such as: commodity standard
certificate, proforma invoice, warehouse receipt, …)
Regulations Considerations (Cont…)
8.
In the event that asset is in the form of materials, distribution of
specific series of Murābahah Sukūk in a step by step method
should be allowed in regulation, but intervals should be
determined in prospectus and should not be too long. Anyway,
total contract price should be mentioned and registered.
9.
Iranian capital market rules and regulations are available in the
following website (English Version):
http://rdis.ir/Rules.asp
Thanks For Your Attention