How do you structure sukuk?
How do you structure sukuk?
To structure sukuk, the entity seeking to raise finance (“originator”), will typically incorporate a special purpose vehicle (SPV), and transfer title to the assets it intends to finance through sukuk. The SPV will then issue sukuk and use the funds raised to pay the originator for the assets.
How does a sukuk work?
Unlike a conventional bond (secured or unsecured), which represents the debt obligation of the issuer, a sukuk technically represents an interest in an underlying funding arrangement structured according to sharia, entitling the holder to a proportionate share of the returns generated by such arrangement and, at a …
What is sukuk and its types?
Sukuk al mudaraba (sukuk based on equity partnership) The same type of contract applies to sukuk. The working partner is the sukuk obligator. The sukuk obligator, as the working partner, is generally entitled to a fee and/or share of the profit, which is spelled out in the initial contract with investors.
What is sukuk used for?
Bonds and sukuk are issued to investors and may be used to raise capital for a firm. Both are considered to be safer investments than equities. Sukuk investors receive profit generated by the underlying asset on a periodic basis while bond investors receive periodic interest payments.
Is sukuk debt or equity?
In theory, sukuk represent a form of equity as they represent certificates conferring ownership to holders of an asset or pool of assets or claim to its cash flows. In practice, they have become known as Islamic bonds with their investors holding debt.
How is sukuk calculated?
The general concept of pricing in sukuk is similar to bonds. Sukuk is using time value of money where the present value is the price of sukuk while sukuk will be redeemed at future value or face value at maturity and yields income. The coupon will determine whether the yields incomes are fixed or variable.
Are sukuk guaranteed?
However, with sukuk, the initial investment isn’t guaranteed; the sukuk holder may or may not get back the entire principal (face value) amount. That’s because, unlike conventional bond holders, sukuk holders share the risk of the underlying asset.
Is Sukuk debt or equity?
How many types of Sukuk are there?
two different categories
In the ICM, Sukuk can be classified into two different categories. The first classification is based on the type of structure such as asset-based or asset-backed, whereas the second classification is based on specific Shariah contracts such as murabahah and ijarah.
Who buys sukuk?
Banks are still the main investors in sukuk, with a vast majority of funding coming from these financial institutions. Corporate sources may account for ten to twenty percent of investment, with hedge funds and asset managers accounting for another twenty to thirty percent.
What do you need to know about a sukuk?
A sukuk whose underlying funding arrangement is based on ijara will necessarily require the obligor to have at its disposal suitable (halal) income-producing assets on which to base the transaction.
How does an asset-based sukuk structure work?
In an asset-based sukuk structure, the overriding reliance of investors is on the credit strength of the obligor rather than the underlying assets. 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.
Which is the most common sukuk structure in Islam?
As a consequence, since 2008, the Ijarah S ukuk structure has become the predominant structure with other structures, such as Wakalah Sukuk, also being increasingly utilised.
What are the different types of sukuk contracts?
Types of Sukuk. Sukuk al-Ijara. Ijara (lease) is a contract according to which a party purchases an d leases out equipment required by the client for a rental fee. The duration of the rental and the fee are agreed in advance and ownership of the asset remains with the lessor.