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Sudanese ExperienceSudanese ExperienceIn Sukuk IssuanceIn Sukuk Issuance

Presentation By:

Osman Hamad Mohd-Khair

General Manager

Sudan Financial Services Company

Bank of Sudan

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ContentsContents

IntroductionFirst Generation Of Islamic Products

Central Bank Musharaka Certificates (CMCs)Government Musharaka Certificates (GMCs)

Second Generation Of Islamic ProductsShort- term Salam SecuritiesIslamic Lease (Ijara) SecuritiesIslamic Development SukukGovernment Investment Certificates (GICs)

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A-Enable Islamic banks to provide attractive long-term investment opportunities to their investors, while playing at the same time an important role in effective mobilization of the idle savings to be utilized in the economic developmentb-These Islamic papers can be an effective

instruments for development of Islamic inter- bank market

Introduction

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One of the critical problems representing a pressing worry for many central banks working in an Islamic banking field is the concern of inventing non-interest bearing negotiable financial instruments for effective carrying out open market operations. However with regard to that issue Bank of Sudan took of lead in a joint effort with the committee for Shariah supervision, MOF and the IMF staff, after continuo's research for one & half years a roust work in that front culminated in innovation of two distinguished Islamic –based financial instruments namely Central Bank Musharaka Certificates (CMCs) and the Government Musharkah Certificates (GMCs) .They are not debt-based securities i.e. they are non interest bearing instrument but are profit and loss sharing certificates.

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Basic Basic ReqirementsReqirements for Success for Success of Securitizationof Securitization

Full compliance with Islamic ShariahAppropriate Laws that enable the Securitization and protect interest of investors & issuers Marketability of the instrumentsProfitability (yield / competitiveness)Low transaction costSecurityTransparency appropriate flow of financial data investors + historical financial statisticsOperational,standardization,systems and documentationsAppropriate accounting standardsGrading assets liquidity & risksStandardized service quality

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Existence of deep efficient active marketRegional co-ordinationProper credit- rating of banks, issuers and instruments

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CMCCMC’’s s 1-Objectives:

New instruments intended to regulate domestic liquidity in the banking system through OMOOffer banks an investment opportunity for their excess reserves

A-First Generation Of Islamic Products

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2- Description:Asset - based securities issued agaist BOS & government ownership in commercial banks CMCs nature is an asset securitizationSatisfy Sudan Islamic banking rules which prohibits ex ante guaranteed positive return on security

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3- Mechanism & Mode of Issue:No. of CMCs is arrived at by dividing the accounting or book value of the pool of investments on April 30,1998 by an arbitrary initial nominal value for each certificate which is equal to the fair market value defined as the book value of equity capital +reserves i.e. :LS (39,400,000,000 ÷ 10,000,000)=3940 certificates

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4- Charactcteristics of CMC’s:Issued in compliance with Sharaiah lawsFixed numbers of CMCsIssued in fully registered formOpen maturityTransferable –fully negotiableTradable- listed in KSEAccess is limited to commercial banks, gov. owend companies funds and insurance companiesBids are submitted per number of CMCs in “SD000”

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5- Standard Terms Of AuctionsCMCs are sold in a competitive uniform types of auction .Bids will be classified according to the high price and winning bids will be awarded in descending order to the lowest price to the point where the accumulated winning bids absorb the total amount offered for sale. The opposite will happen when purchasing CMC’s (See the table)

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Certificates Offered for Sale

80010,020,000200Bank F

100200350500600 (Cut-off price)

10.200.00010.100.00010,050,00010,040,00010,030,000

200100150150100

Bank ABank BBank CBank DBank E

Certificates Offered for Purchase

100200400500600 (Cut-off price)700

10,030,00010,040,00010,060,00010,070,00010,080,00010,090,000

100100100100100100

Bank ABank BBank CBank DBank EBank F

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What are GMCWhat are GMC’’ssGMCs refer to the insruments that enable the government to raise funds through issuance of securities.These securities are asset -based securities issued agaist certain % of government owenership in profitable and joint-venture enterprises .They are based on Musharaka contracts between government and investors and in a pool of assets

First Generation Of Islamic Products (Cont)

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Basic functionsBasic functions

Provide financing for budget deficit through non -inflationary instrumentsAtool for OMO to manage liquidityMobilize national savingsEncourage investment Development of money marketProvide the monetary authorities with an Islamic monetary insrument for management and execution of monetary policy

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Mechanism & mode of issueMechanism & mode of issue

The Number of GMCs (same as CMCs) is arrived at by dividing certain % of the book value of the pool of investments by an arbitrary initial nominal value of the certificate in Sudanese Dinar i.e: SD (14,674,203,239 ÷ 500,000)=29,349 certificates

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SALIENT FEATURES OF SALIENT FEATURES OF GMCGMC’’s s

Fixed –term securities (one year)Issued in fully registered form Listed in KSE (tradable)Transferable & fully negotiableAccess to GMCs is not limitedOwnership is trans and fully negotiable High rate of return (round 30%).

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Nature and legality of Salam securities:

Salam government securities are instruments Salam government securities are instruments representing assets ( which are sold for advance payments representing assets ( which are sold for advance payments against deferred delivery) and which are accounted as against deferred delivery) and which are accounted as aliabilityaliability ( of the seller ). The Government issues these ( of the seller ). The Government issues these securities to create new fields for the investment of surplus securities to create new fields for the investment of surplus financial resources in the society and to provide shortfinancial resources in the society and to provide short--term term financing for the expenditures and needs of various financing for the expenditures and needs of various investment projects. investment projects.

B-Second Generation Of Islamic Products (Salam/Sukuk)

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.The securities are kept until the delivery date. The Manager may be authorized to receive the commodities and to sell them to an independent party who does not own the commodity wholly or partially and who pledge to purchase the commodity at a price exceeding the forward buying price. The sale price is distributed to the holders of the securities according to ownership percentages after the Manager’s actual expenses and management commission are deducted based on an investment authorization contract . The expense and commission must not exceed certain percentage

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Definition Of A Salam ContractDefinition Of A Salam Contract

A Salam contract is a contract for the sale of a commodity accounted for as a liability in exchange for a price paid immediately upon signing of the contract. In other words, it is a contract concluded between two parties, in which one party pays the price in advance and the other party commits to deliver the commodity in the future.

There are three kinds of contract involved: -Forward purchase contractSale contractPledge to purchase contract

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ObjectivesObjectivesThe issuance of Islamic Salam securities is intended to :

1. Develop for the Islamic inter – bank market, individuals, companies, and financial institutions-high quality financial instruments for use in handling their short term monetary liquidity surpluses, some of which are currently invested outside the national economy.

2. Create an important instrument for successfully establishing an Islamic financial and money market. The monetary authorities, in collaboration with the Islamic countries, have already establish this Market (IIFM)

3. Provide a greater role for Islamic financial institutions to finance the government’s short – term needs.

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Ijara certificates (Sukuk)Ijara certificates (Sukuk)

Ijara is an Arabic term for leasing ,having its origin in Islamic Figh,and literally means to give something to rent Basic agreements in respect of sale ,purchase and lease of assets are as follows:

- Asset purchase agreement- Lease rental agreement-Assets sale agreement

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ISLAMIC LEASING SUKUK

(3_7 YEARS)

Incorporating a Special purpose Vechile (SPV)

Issue and offer participation sukuk to the market

The Mudarabah

Will purchase specified identified Trangible Assets

Central Bank is the Mudareb

Mudareb to collect the subscription

Mudareb will execute the sale contract

The Mudarabah

will lease the purchased tangible assets to interested parties on Ijara Liquation basis for rental rental income

At maturity to conclude a sale contract for selling leased assets

Mudarabah to be liquidated and sukuk redeemed

-Mudarabah To execute the contract

-To get collateral & security from the lessee

-To collect the periodical rented income

-Mudarabah To execute the contract

-to receive the sale price

Secondary market trading of issued sukuk

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Islamic Development SukukIslamic Development Sukuk

These types of Sukuk can be developed and offered to be utilized in the mobilization of short- term deposits for the development of long -term infrastructure projectsThe structure and mechanism for issuing such instrument is as follows:

1. To incorporate special purpose restricted Mudarabah(SPRM)

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2. To offer the Mudarabah participation Sukuk to the market

3. To receive the subscription capital of the mudarabah

4. To contract or build the specified infra-structure or equipment through istinaacontract with full specification

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5. To lease (Ijara wa lqtina) the finished contracted or built assets to (lessee)

6. To manage both the liability and assets of the mudarabah

7. To trade both the issued certificates (sukuk)in the secondary market

8. At maturity , to liquidate the mudarabah and redeem the issued Sukuk

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ISLAMIC DEVELOPMENT SUKUK(10_15 YEARS)

Incorporating a Special purpose Mudaraba

Issue and offer participation sukuk to the market

The Mudarabah

will bulid needed infr-structure projects on Istisna basis

Central Bank is the Mudareb

Mudareb to collect the subscription

Mudareb will execute the istisna contract with qualified contractorThe Mudarabah

will lease the built tangible assets to interested parties on Ijara Wa Iqtina basis for rental income

At maturity to conclude a sale contract for selling the leased assets

Mudarabah to be liquidated and sukukredeemed

-Mudarabah To execute the contract

-To get collateral & security from the lessee

-To collect the periodical rental income

-Mudareb To execute the contract

-to receive the sale price

Secondary market trading of issued sukuk

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Sudan Government Investment Certificates Sudan Government Investment Certificates ((GiCsGiCs))

The Government Finance Certificates (GIC) should:Raise short medium and long term finance to the budget (developmental projects: hospitals, roads capital goods etc.. ) Generate a stable and known return / cost to investors / government.Liquid (from shariah and operational perspectives)

Objectives

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Underwriter.Holding and fund management legal entity.An open-end fund.A pool of assets composed of appropriate Islamic financial contracts (vs. shares in companies in GMC type security).Securities (Certificates) issued against the fund's assets

Key Structural Elements

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The three most appropriate contracts are Murabaha Joa'ala, Ijara & Salam contracts or a combination of these contracts.

Almost all government procurements could be carried out using Murabaha contracts. Joa'ala contracts would be useful as a financing tool for many government development projects that are usually contracted to perivale companies (e.g. road construction equipments & machineries)The Ijara contract is highly flexible instrument that could be used to finance the acquisition of goods ( particularly large ticket – items )

Contract Choice for Financing the Government:

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1. An underwriter (e.g. BOS, SFSC, IB, other!) will finance government Procurement and capital spending through Murabaha, Joa'ala, Ijara , Salam And stisna contracts )

2. Majority (define?) of the contracts should be ljara to ensure the liquidity of the GFC from Shariah perspective.

3. The contracts will be transferred to an open-end fund (at SFSC).

4. The net asset value of the fund can be established on regular basis.

5. The return to the fund will be equal to the average return on the underlying Contracts.

GIC- design features

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6. Dividends will be divided among the issued GICs as per their share in the Fund.

7. Changes in the yield at the primary auction would reflect changes in the Average income earned by the fund, the market price discount or both.

8. The GICs can be traded in secondary market. The Market price reflect changes in average income earned the fund and the track record.

GIC- design features

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In Sudan we adopt multiple regulatory system for Issuance, regulation & control of Sukuk:

BOS MOF ( Sukuk Law of 1995) . High Shariah Supervisory Committee for Banks & Financial Institutions. Sukuk Regulation Committee. KSE.High Advisory Committee for Gov. Sukuk.Ministry of Justice.

Regulation & Supervision of Sukuk (Governance)

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As Mr. Johnnie puls it “but where problem exists , opportunities abound and aggressive and innovative financial institutions should find fertile grounds for offering Islamic securitization products”