Fin 545 islamic finance universiti teknologi mara uitm, kampus bandaraya melaka. In islamic finance, istisna is generally a longterm contract whereby a party undertakes to manufacture, build or construct assets, with an obligation from the manufacturer or producer to deliver them to the customer upon completion. Istisna means asking someone to construct, build or manufacture an asset. The price should be known in advance to the extent ofremoving ignorance or lack of knowledge and dispute.
Beneficial ownership in asset based sukuk among the contentious issues in sukuk structuring is the issue of ownership of the sukukholders in a particular asset or a business venture. Sukuk struturesa reakdown ijara ijara is a lease financing structure whereby a bank or financial institution purchases an asset or item usually property or real estate on behalf of the customer and leases it to them for. Pdf financing infrastructure projects based on risk sharing model. We explain definition, principles and structure of istisna. Peace and blessings upon our leader and our prophet, muhammad, the finest of the prophets, and upon his family and companions, and upon everyone who follows them in righteousness until the day of judgment. In a mudaraba sukuk, the sukuk holders are the silent partners, who dont participate in the management of the. Oct 24, 2019 istisna sukuk are certificates that carry equal value and are issued with the aim of mobilizing the funds required for producing products that are owned by the. In this respect, the sukuk alijara form of financing is regarded as a revelation of sorts. Although sukuk market has seen difficult business environment. Sukuk market represents an affirmation of islamic law shari ah principles in the islamic capital and money market transactions where the market should be free from any elements or activities that are. According to aljumuah 2000, sukuk is a property certification. Sukuk are defined by the aaoifi accounting and auditing organization for islamic financial institutions as securities of equal denomination representing individual ownership interests in a. These securities have fixed return and could be sold at the secondary markets. These sukuk are issued by the manufacturer almustasni who sells the intended product to.
Pt indosat issued a sukuk back in 2002 using a mudarabah structure. This is a case of working capital funding in which a fund provider provides capital to manufacture an item. Islamic investors want to balance their equity portfolios with bondlike products. Jan 06, 2015 we explain definition, principles and structure of istisna. Istisna sukuk has the potential to be used for infrastructure project financing and can be combined with. In a mudaraba sukuk, the sukuk holders are the silent partners.
Classification based on practices sukuk securities. Istisnaa mode of financing fuqua school of business. The structure of the sukuk assets will vary over the life of the contract as the trustee will employ principal collections for the sukuk assets to acquire rights in further ijaraa contracts and invest in murabaha contracts. At the delivery dates, which can be single or multiple, the obligor will deliver the assets. Nontradable debt certificates include zero coupon sukuk, murabaha istisna and salam sukuk. Pdf sukuk is an alternative islamic finance instrument for conventional bonds. The price in istisnaa can be in the form of cash, any tangiblegoods or usufruct of identified assets. Set out in the following page is a basic example of a sukuk al istisna structure. Ijara or leasing musharaka islamic mfis are mostly using murabaha snadeeq in jabl al hoss syria murabaha iti snadeeq in jabl al hoss syria hodeidah programme in yemen some mfis are also in microleasing istisnaa salam for securitization with. Jan 02, 2020 istisna sukuk are certificates that carry equal value and are issued with the aim of mobilizing the funds required for producing products that are owned by the. How sukuk islamic bonds differ from conventional bonds. The holder of sukuk is the owner and the creditor is the religion. Examining the viability of istisna for project financing. Pdf financing infrastructure projects based on risk.
Istisnaa is a contract whereby a party undertakes to produce a specific thing which is possible to be made according to certain. Apr 28, 2020 istisna sukuk pdf istisna sukuk are certificates that carry equal value and are issued with the aim of mobilizing the funds required for producing products that are owned by the. The hybrid structure allows the asset ie the dam to be constructed first from the proceeds of sukuk under the istisna mode of islamic financing while sukukholders will be paid after the asset is operational according to ijarah. Istisnaa is a shariah mode of financing widely used by islamic banks and financial institutions to finance different kind of projects. For example, in islamic banking, checking and savings deposits do not accrue interest. Dubai international financial centre sukuk guidebook. These are issued on the basis of istisna contract, and their issuance realized fund is used to finance the. Because this involves higher risk than conventional banking services, various highly technical products.
Understanding and evaluation of risk in sukuk structures core. Different types of murabahah sukuk have been proposed and some are being used. Sukuk products offer a vast scope of innovation and a large potential for the growth of islamic finance. Evolution in the sukuk islamic bonds journal of islamic banking.
Istisnaa sukuk project financing can be undertaken through an istisna a contract, whereby funds are advanced to pay for the supplies. Sukuk categories istisna a sukuk salam sukuk mudharabah sukuk musharakah sukuk sukuk al murabahah. Hence, the istisnaa structure is especially suitable for financing large infrastructure projects. However, further investments in istisnaa contracts are envisaged. Istisnaa mode of financing definition objectives scope and eligibility terms and conditions payment modalities procurement disbursement application procedure advantages of istisnaa definition a. Sukuk is one of the commonly used islamic structures in project finance, classified in various forms such as, among others, istisna a ijara, wakala ijaras etc other forms of islamic funds include parallel islamic funds, equity investment funds, realestate funds reits, etc. An example of this kind of sukuk are 91day cbb sukuk alsalam issued by central bank of bahrain. Sukuk alistisnaa the istinaa structure is a contractual agreement for the sale of goods or commodities to be produced in the future.
Islamic banking a system of banking that only offers products that conform to the sharia, or islamic law. Iifm sukuk report 3rd edition a comprehensive study of the. Set out in the following page is a basic example of a sukuk alistisna structure. The issuer of sukuk istisna is the builder and interested investors would be the subscriber or holder of sukuk istisna. Istisnaa sukuk to introduce bonds based on istisnaa, a parallel istisnaa contract is generally used where by the financier enters a contract with a subcontractor who actually builds the facility being financed. Operational models for ijarah, istisna, and murabaha sukuk. Aug 03, 2019 set out below is a summary of the basic requirements that should be considered when using a combination of istisna and forward leasing as the underlying structure for the issuance of sukuk malaysia progress in poverty eradication. Modern sukuk emerged to fill a gap in the global capital market. In addition to the above, some of the sukuk structures have. Structures with convertibility features and those allowing the. Because sukuk are assetbased securities not debt instruments they fit the bill.
Sukuk is popularly known as an islamic or sharia compliant bond whilst in actual fact. Bba, salam, istisna, ijarah, musharakah, mudarabah and wakalah. It starts with the basic concept of sukuk, its history and the basic foundations of sukuk in shariah. The lack of proper response to financing needs in this sector will result in economic. More than half of sukuk issued worldwide are in the malaysian ringgit currency. Once produced, the istisnaa goods become owned by the sukuk holders. Certificates of equal value that are issued for the purpose of mobilizing funds to be used in the production of goods. Total istisna sukuk issuance from 2001 to 2012 is 6 usb. One of the basic needs of developing countries is the economic infrastructure that is the basis of growth and development in other sectors of the economy. The classification of sukuk based on the shariah contracts is depicted in figure 2 below. Like other islamic finance contracts, the price and the specification of the goods are specified in advance. Istisna are based on a contract for a future delivery of manufactured or constructed assets.
Sukuk alsalam are at least usually used to support a companys short term liquidity requirements. The investors do not intend to hold the assets, they will be onsold to an ultimate buyer, which could be the obligor. In an istisna sale agreement, a manufacturer is ordered to manufacture a specific good for the purchaser. Second, set up general framework and organizational structure. In other words, sukuk represent ownership in a tangible asset, usufruct of an asset, service, project, business, or. They either lie dormant until withdrawal or are invested. Explore the key concepts and products in islamic finance from an industry practitioners perspective. In istisna sukuk, the issuer is the manufacturer while the sukuk holders are the buyers. In case of istisna sukuk, the funds are utilized for manufacturing purposes, such as commodities or buildings etc. Sukuk is also sometimes referred as islamic bonds or sukuk sanadat negotiable papers and ownership al. The 2008 issue of a second sukuk by national central cooling company tabreed also has an istisna and is listed on the london stock exchange. Sukuk almudaraba islamic instruments for secondary reserves. Set out below is a summary of the basic requirements that should be considered when using a combination of istisna and forward leasing as the underlying structure for the issuance of sukuk malaysia progress in poverty eradication. Holders receive payment not with a regular flow of income, but at maturitysimilar to a zerocoupon bond.
Fatwa in islamic finance the metropolitan skills ltd. It starts with the basic concept of sukuk, its history and the basic foundations of. Corporate sukuk in europe alternative financing for. The issuance of sukuk istisna plays an important role in raising funds from bond holders, who are entitled to the sale price of the project lahsasna et al. Istisna sukuk are certificates that carry equal value and are issued with the aim of mobilizing the funds required for producing products that are owned by the.
In this edition of the sukuk report, iifm has added several new features such as country focus indonesia, global sukuk overview, shortterm sukuk, fixed profit rate trend, structural trends and sukuk challenges. In istisna sukuk, the issuer is the manufacturer while the sukuk holders are the buyers of the goods which are required to be manufactured. Evolution and profile of sukuk structures and markets. A guide to structuring sukuk sukuk almurabaha sale of goods with an agreed upon profit mark up on the cost aaoifi a murabaha contract is an agreement between a buyer and seller for the delivery of an asset. Since islamic law prohibits trading in debt, murabaha, financing is based on cost plus basis, with markups added to the principal and paid out in installments, which make istisna or murabaha, similar to zero coupon bonds. Iifm sukuk report 3rd edition a comprehensive study of. Sukuk strutures page 2 faith in financean introduction to sukuk structures 26 january 2017 sukuk is a form of investor diversification, elhimeur in london explained. It is permissible that the price of istisnaa transactions variesin accordance with variations in delivery date. Islamic securitization must be free from three prohibited practices, specifically riba usury. The hybrid structure allows the asset ie the dam to be constructed first from the proceeds of sukuk under the istisna mode of islamic financing while sukuk holders will be paid after the asset is operational according to ijarah. Pdf one of the basic needs of developing countries is the economic infrastructure that is the basis of. Sukuk structures which need further shariah justifications and clarifications as follows. A hybrid product, the sukuk alijara is a relatively recent development in the realm of islamic financing, but it has nonetheless, established itself as one of the most popular modes of financing.
These sukuk are issued by the manufacturer almustasni who sells the intended product to the sukuk subscribers. An initiative for the enhancement and development of the islamic financial market by means of free access to a comprehensive sukuk database, latest market news as well as a database of qualified industry professionals and services firms. Depending on the structure of istisna sukuk, sukuk holders. This programme is designed for those new to islamic finance markets. Sukuk and regulatory licensing in the difc 82 chapter 6. Sukuk can constitute a partial ownership of a debt sukuk murabahah, an asset sukuk ijar ah, a busi ness sukuk musharakah, a manufacturing project sukuk istisna, an investment sukuk.
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