Islamic Finance: Different types of investment Sukuk

The detailed discussion on leasing or Ijara Sukuk helped readers understand the definition and concept of an investment Sukuk issue and its mechanism.

Apart from Ijara Sukuk, there are other types of investment Sukuk and this article will hopefully shed some light on Murabaha Sukuk. First, let us examine whether there can be a Sukuk issue for the usufruct of an asset.

Investment Sukuk for the ownership of usufruct: Sharia allows that the owner of a usufruct (i.e., the lessee of an asset) can issue certificates of equal value of the usufruct relating to an existing asset. This can only be done if the lessee holds the right from the lessor to sub-lease the asset.

In this case, the lessee will collect the investment from Sukuk holders for payment of the entire head lease rent to the owner of the asset. Thereafter, the rent collected by sub-leasing the asset will be distributed pro-rata among the Sukuk holders who will be considered the owners of the usufruct of the asset (and not of the asset).

The sub-lease rent will be higher than the head lease rent to provide return to the holders of usufruct Sukuk.

Usufruct Sukuk can also be taken out for an identified asset to be delivered in future. This is akin to Ijara Mousufa Fel Zimmam or forward lease, whereby the return to the holders of this Sukuk will commence upon delivery of the asset to the sub-lessee.

Murabaha Sukuk:
These equal-value Sukuk are issued to collect funds that are then utilised to purchase an asset to be sold under Murabaha. First, the Sukuk holders assume the ownership of the asset bought with their money. They then become the rightful recipients of the proceeds from the sale of the asset.

While launching this type of Sukuk, the issuer (which can be an Islamic financial institution or a duly administered special purpose company) should adhere to the following established

Murabaha parameters:
The buyer should asked the seller to acquire the asset and submit a promise to purchase, stating a price at which he will purchase the asset from the seller.

The seller must pay the purchase price of the asset directly to the supplier and obtain physical or constructive possession of the asset. The supplier of the asset must not be related to the eventual buyer.

The seller's established ownership by way of title to the asset is a must.

The sale must be unconditional and the sale price should include the cost of the asset and seller's profit. The seller may include any direct expenses, such as freight, transportation, customs duty and labour to its cost.

The seller should not charge any fee relating to his commitment to sell the asset to the buyer on a deferred payment basis.

The seller must provide a break-down of the selling price to the buyer. Usage of the asset must not be repugnant to Sharia principles.

Asset

An asset that has earlier been sold on Murabaha (the proceeds of which continue to remain unpaid) cannot be sold again to the same buyer under Murabaha.

Obtaining the ownership title and physical or constructive possession by the seller prior to concluding the Murabaha sale is vital to clearly identify the transfer of ownership risk to the asset from the supplier to the seller. This presumes that the seller held legal title and ownership to the asset when it sold the asset to the buyer under Murabaha.

Murabaha Sukuk are not publicly tradable since their redemption is tied up to the phased receipt of the sale proceeds at the intervals agreed to with the buyer at the time of concluding the Murabaha sale.

Such Sukuk are ideal to replace conventional project financing since the entire plant and machinery relating to an industrial project can be sold through Sukuk and the cash flow generated by the project can be utilised to redeem them.

The writer is vice-president for structuring, documentation and product development, Dubai Islamic Bank