Back Next Sukuk al mudaraba sukuk based on equity partnership In simple mudaraba contracts, investors are considered to be silent partners rab al mal , and the party who utilizes the funds is the working partner mudarib. The profit from the investment activity is shared between both parties based on an initial agreement. The same type of contract applies to sukuk. The working partner is the sukuk obligator.
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Of particular significance is the prevailing view that sukuk al-istisna are not tradable during the construction period. Under an istisna, it is important that the price and specification of the good to be manufactured are agreed at the outset.
Accordingly, sukuk al-istisna often combines an istisna arrangement with a forward lease arrangement — whilst the istisna is the method through which the investors can advance funds to an originator, the ijara provides the most compatible payment method to those investors. The use of staged payments a common feature in istisna construction arrangements — see further below may however result in an unutilised amount of sukuk proceeds being held in the structure for a prolonged period during construction pending the achievement of the relevant milestones.
It should, however, be noted that this approach to investment of the unutilised sukuk proceeds has received some criticism. Set out in the following page is a basic example of a sukuk al-istisna structure. Figure 1: Structure of Sukuk al-Istisna Overview of Structure Issuer SPV issues sukuk, which represent an undivided ownership interest in an underlying asset or transaction.
Issuer SPV declares a trust over the proceeds and any assets acquired using the proceeds - see paragraph 3 below and thereby acts as Trustee on behalf of the Investors.
Trustee pays a price typically by way of staged payments against certain milestones to Originator as consideration for the Assets in an aggregate amount equal to the Principal Amount. DIFC Sukuk Guidebook 42 Trustee undertakes to lease the Assets to Originator under a forward lease arrangement known as ijara mawsufah f al-dimmah for an overall term that reflects the maturity of the sukuk. Originator as Lessee makes payments of: Advance Rental prior to the delivery i. These amounts may be calculated by reference to a fixed rate or variable rate e.
Provided that delivery of the Assets has occurred, upon: an event of default or at maturity at the option of Trustee under the Purchase Undertaking ; or the exercise of an optional call if applicable to the sukuk or the occurrence of a tax event both at the option of Originator under the Sale Undertaking , Trustee will sell, and Originator will purchase, the Assets at the applicable Exercise Price, which will be equal to the Principal Amount plus any accrued but unpaid Periodic Distribution Amounts owing to the Investors.
Trustee and Originator will enter into a service agency agreement whereby Trustee will appoint Originator as its Servicing Agent, on and from delivery of the Assets, to carry out certain of its obligations under the forward lease arrangement, namely the obligation to undertake any major maintenance, insurance or takaful and payment of taxes in connection with the Assets.
Such matters have to be carefully addressed in the documentation in order to ensure that the commercial deal is not disturbed: for example, by careful calculation of any termination payments that are triggered if a termination occurs pre-delivery i. Required Documentation The following documentation is typically required for a sukuk al-istithmar transaction: Document.
Types of Sukuk in Islamic Finance