Understanding Islamic Finance - Doha Academy of Tertiary Studies

Sitara Musharakah TermFinanceSolidarity TrustCertificates IDBBahrain Monetary Agency(BMA)Sukuk and Securitization 409Corporate Pak Rs. 360M 5 years Shirkah-based profit/lossCorporate US$ 400M 5 years Based on performance ofmixed portfolio, IDB guaranteeSovereign US$ 100M 5 years Fixed, 4.25 %GoB – BMA Sovereign US$ 70M 3 years Fixed, 4 %BMA Sovereign US$ 80M 5 years Fixed, 4 %BMA Sovereign US$ 50M 3 years Fixed, 3 %BMA Sovereign US$ 80M 3 years Fixed, 3 %BMA Sovereign US$ 100M 5 years Fixed, 3.75 %BMA Sovereign US$ 250M 5 years 0.6 % above LIBORBMA Sovereign US$ 200M 5 years Floating rate referenceBMA Sovereign US$ 106M 10 years Fixed, 5.125 %1st Islamic Investment Corporate US$ 75M 3 years LIBOR-relatedBank, BahrainMalaysia Global Ijarah Sovereign US$ 600M 5 years 0.95 % above LIBORDubai Civil Aviation Sovereign US$ 1000M 5 years FixedSukukDurrat Real Estate Sukuk Sovereign US$ 120M 5 years 1.25 % above LIBORSarawak Ijarah Sukuk Sovereign US$ 350M 5 years 1.25 % above LIBORNakheel Sukuk Corporate US$ 3.52B 3 years 1.20 % above LIBORIjarah Sukuk, Pakistan Sovereign US$ 600M 5 years 2.20 % above LIBOR15.3.7 Issues in Terms and Structures of SukukNotwithstanding the exceptional growth of Sukuk in the last five years, there are someconcerns that have to be taken care of for more vigorous and sustained support for theemerging financial system. The first and foremost crucial issue is that of conclusively prefixedrates of return in almost all Sukuk, in some cases even without any provision for thirdparty guarantee. Profit rates in deferred-payment Murabaha and rentals in Ijarah are no doubtfixed, but while there could be default in receipt of Murabaha receivables, in leases there isthe possibility both of ownership-related expenses and default in receipt of the due rental.The loss of the cost of funds that cannot be recovered under Islamic finance and expensesthat could be incurred by the lessor as owner of the leased asset may not make it possibleto give a return to Sukuk holders that is fixed and guaranteed in all respects. This concernis particularly genuine in respect of sovereign Sukuk, as a guarantee by the sovereign itselfmay give rise to doubts about Sharī´ah compliance. Payment of rental is guaranteed in themain contract itself in the form of a contractual obligation on sovereigns to pay the rent.In this regard, the general public interested in Islamic finance and practitioners need to beeducated about the flexibilities and the limits of each mode/product so that the integrity ofthe system is not damaged. The Sharī´ah scholars are unanimous that any pre-fixed returnor guarantee of the investment by any of the partners in contractual Shirkah-based modesis not acceptable. According to the AAOIFI’s Standard on Sukuk, a prospectus to issue anycertificates (not only those which are Shirkah-based) must not contain any clause that theissuer is liable to compensate certificate holders up to the nominal value in situations otherthan torts and negligence, or that he guarantees a fixed percentage of profit. (An independentthird party can, however, provide such a guarantee free of charge and subject to relevant