Islamic Bond Issuance

[Sapphire Capital]

Islamic Bond Issuance - What Sovereign Debt Managers Need to Know

Andreas A. Jobst
International Monetary Fund (IMF) - Monetary and Capital Markets Department (MCM)

Peter Kunzel
International Monetary Fund (IMF)

Paul S. Mills
International Monetary Fund (IMF) - Western Hemisphere Department

Amadou N. R. Sy
International Monetary Fund (IMF) - International Capital Markets Department



International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1, No. 4, pp. 330-344, 2008
Islamic Law and Law of the Muslim World Paper No. 09-63

Abstract:
Recent years have witnessed a surge in the issuance of Islamic capital market securities (sukuk) by corporates and public sector entities amid growing demand for alternative investments. As the sukuk market continues to develop, new challenges and opportunities for sovereign debt managers and capital market development arise. This paper reviews the key developments in the sukuk market and informs the debate about challenges and opportunities going forward.

papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1430490_code915426.pdf?abstractid=1357371&mirid=3

[Sapphire Capital]

The key recommendations of AAOIFI relate to the role of asset ownership, investment
guarantees, and the shari’ah advisory and approval process in sukuk origination and trading.18
Under the new guidelines for sukuk:
i. Investors will be required to become legal owners (with all of the rights and obligations
that accompany actual ownership) of the assets underlying the sukuk transaction, rather
than nominal holders of the securities, which had previously effectively transformed
asset-based sukuk into asset-backed securities (ABS);
ii. Contrary to current practice, issuers or managers of sukuk cannot guarantee principal
investment to sukuk certificate holders by agreeing to purchase the underlying assets for a
fixed nominal value of those assets at maturity or in the event of default regardless of
potential profits or losses.19 It is permissible, however, that issuers agree to acquire the
assets for their net value or fair market value in accordance with existing shari’ah rules
governing Islamic lending contracts;
iii. Issuers and managers of sukuk must not offer loans to investors when actual earnings
from the underlying assets fall short of expected earnings. However, it is permissible to
establish a reserve account for the purpose of covering such a shortfall;
iv. Sukuk cannot represent either revenue streams or debt with the exception of either (i) a
trading or financial entity that sells all its assets or (ii) a portfolio that includes a standing
financial obligation, which is deemed incidental to a physical asset underlying the
transaction;
v. In lease-based ijara sukuk, it is permissible for the lessee to agree to repurchase the
contractual assets for their nominal value as long as the lessee is not also an investor or
agent;
vi. In addition to the issuance of a fatwa (religious approval) on the structure of sukuk, a
shari’ah supervisory board is also required to review all contracts and documentation
related to the actual transaction, which involves verifying that the manner of
implementation accords with shari’ah principles.