Islamic Financial Products and Processes

Sukuk – VENTURE Financing

Sukuk is the Arabic word and plural of the word Sakk which means certificate. Sukuk are the certificates of equal value representing undivided share of ownership in the assets and issued by the one who require financing in huge.

In the Sukuk period the Risks and Returns associated with such Assets belong to Sukuk holders which makes returns on Sukuk permissible for the holders.

Sukuk-Introduction

Sukuk-Introduction

Trade of such Sukuk is permissible, because it will be equivalent to the sale/ purchase of holder’s proportionate share in the assets.

However, trading of Murabahah and Salam Sukuk is not permissible.

Issuance of Sukuk

ABC

Ltd.

(Corporate)

ABC Ltd. wishes to purchase a new asset and plan to raise finance through issuance of Islamic Sukuk.

Supplier

ABC

Ltd.

Supplier of the Asset is identified and negotiations is finalized by ABC Ltd.

Supplier

ABC

Ltd.

Issuer

SPV (LLC 100% owned

ABC Ltd.)

SPV is created by ABC Ltd. as a limited liability Company.

SupplierSupplierSupplier

ABC

Ltd.

Payment made to SupplierTitle is

transferred to SPV

Payment made to SupplierTitle is

transferred to SPV

Payment made to SupplierTitle is

transferred to SPV

Issuer

SPV (LLC 100% owned

ABC Ltd.)

Investors

SPV issues certificates and receives proceeds which are used to purchase asset from the

supplier

SPV holds Asset as Trustee and leases the plant to ABC Ltd. as per rules of Ijarah

ABC

Ltd. SPV leases Plant to ABC Ltd. on Ijarah

Issuer

SPV Investor

SPV holds Plant/ Asset as Trustee

ABC Ltd.

(Lessee)

Issuer

SPV

Investors

Periodic Lease Rentals

Semi-annual coupon distribution amounts ABC Ltd. (Lessee) pays periodic rentals to SPV

amounts matching the coupon & tenor of the Sukuk

ABC Ltd.

(Lessee)

Issuer

SPV

Investors

Exercises the purchase undertaking. Asset transferred to ABC Ltd.

Pays the price at dissolution

Redeems the Trust Certificates at dissolution

ABC Ltd (Lessee) gives the SPV an irrevocable purchase undertaking to purchase the Asset at maturity.

Asset is transferred back on maturity, upon payment of the Price to the SPV / Sukuk Holders.

Rs.100,000

SUKUK

Pakistan Cotton Trading Ltd.Subscription Amount Rs.100,000,000Equity Participation 20:80Purpose Balancing , Modernization & Replacement

Issued For Ghulam MustafaIssued 1st June 2011 to 31st December 2012

Non- Transferable, Non-Endorsable, Non-Cashable, Non Collateralize

Rs.100,000

Conventional Bonds

Bonds are considered as an important part of overall financial system.

Dealing in Bonds is not permissible according to Islam because of two aspects.

1. Firstly, they represent a portion of Debt payable by the issuer. Earning any kind of profit on debt falls under the category of RIBA.

2. Islam prohibits trading of debts as it involves Gharar.

SUKUK VS BONDS

SukuksRepresents the direct pro rata ownership of the holders in the assets of the pool.

Sukuk holder generally earn return from income generated through the asset.

Conventional BondRepresentsa loan repayable to the holder in any case.

Earn Interest on loan

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