ISLAMIC

CAPITAL MARKET

Sukuk and Securitisation

Mahyuddin Khalid
Topic Outline

► Securitisation
► Bonds
► Sukuk
► Asset Backed Securitisation
► Asset Based Securitisation

2
Introduction

► In normal conventional market, security is a document, representing

receivable amounts owed by the issuer in favour of the holder.
► Normally the amounts secured by a security are interests bearing
loans.
► Different kinds of securities:
▷ Bonds issued by a company
▷ Bonds issued by a government
▷ Debentures
▷ Certificates
▷ Notes

3
Bonds

Bonds which is one of debt Instruments – are promissory notes that are traded in the market

Bonds are categorised by

Issuer Tenor Coupon type

4
Types of Bonds

Types of bonds (by issuer):

Government Corporate
Long Term Govt Bond Corporate Bonds

Short Term Treasury Bills Commercial papers

Types of bonds (by tenor):

Callable bond
Convertible bond
Callable by issuer at a predetermined price before maturity. Investor is normally paid higher than
Allows holder to redeem at face value or convert it to a predetermined number of stocks
straight bonds

Types of bonds (by coupon type):

Zero coupon bonds
Coupon bonds
Pay no interest on coupon payment. Only pay at maturity at the
Pay periodic interest based on coupons
face value. The purchaser will buy at discount.
Interest
Can be fixed or floating. Floating interests are determined in reference to
say KLIBOR + x%. If KLIBOR is 10% and x is 2 then for a bond of RM1000
the interest is RM120

5
Securitisation & Islamic Securities (sukuk)

Securitisation is a process of transforming an otherwise

illiquid asset into a liquid one. In more technical terms,
securitisation can be defined as the process of packaging
financial promises and transforming them into a form
whereby they can freely transferred among a multitude of
investors.

6
The goal of securitisation is to transform the promises of individuals
and corporations to make future payments into freely transferable
securities that are appealing to investors.

Prior to securitisation, the raw assets (financial promises that create

the financial rights and obligation) are often in the forms that may
not be desirable to the investors, may be because of the size of the
transactions or the portfolio risk involved.

Through securitisation and proper structuring, the transaction are

restructured into forms that are more acceptable and attractive to
investors in terms of cash flow and risk segmentation.

7
Securitization and Sukuk

► The funds raised through the issuance of sukuk should be applied to

investment in specified assets rather than for general unspecified purposes.
► This implies that identifiable assets should provide the basis for Islamic
bonds.
► Since the sukuk are based on the real underlying assets, income from the
sukuk must be related to the purpose for which the funding is used.
► The sukuk certificate represents a proportionate ownership right over the
assets in which the funds are being invested.
► The ownership rights are transferred, for a fixed period ending with the
maturity date of the sukuk, from the original owner (the originator) to the
sukuk holders (IFSB, Jan. 2009).

8
Securitization and Sukuk
In the modern Islamic
perspective, sukuk lies
in the concept of asset
monetization – or also
called securitisation -
that is achieved
through the process of
issuance of sukuk.
Tawriq
• Means to render something into
cash.
• It is about transforming a
deferred debt for the period
between the establishment of the
debt and the maturity period into
papers, which can be traded in
the secondary market.
Its great potential is in
transforming an asset’s
future cash flow into
present cash flow. Sukuk may be issued on
existing as well as specific
assets that may become
available at a future date.
Tasnid Taskik
• Means the transformation of • Means the process of dividing
illiquid debts into negotiable assets into papers (sukuk) or
papers (sanadat). certificates.
• Securitization of assets into
papers, securities, or certificates
with the features of liquidity,
tradability, and cash equivalence.
9
Benefits of Securitisation
Originators
• Transforms relatively illiquid
assets into liquid and tradable
capital market instruments
• Cheaper financing costs due to
higher rating via credit
enhancement
• Allows diversification of
financing sources
• Facilitates removal of assets
from the originator’s balance
sheet
Investors
• Provides a variety of product
choices at attractive spreads
that attract a diversified
investor profile
• Allows investment products to
be tailored to meet specific
investor needs
- variety and flexibility of
- maturity and payment
Capital Market
• The existence of secondary
securitisation markets for
benchmark purposes
• Facilitates and encourages
efficient allocation of capital
• Reduces risks within the
credit banking system
structures
10
Sukuk

Islamic Jurisprudence
Sukuk AAOIFI
Council

Sukuk (plural) and sakk

“Any combination of assets (or
(singular) means legal
the usufruct of such assets) can “Investment Sukuk are
instrument, deed, and check.
be represented in the form of certificates of equal value
written financial instruments representing undivided shares
which can be sold at a market in ownership of tangible assets,
price provided that the usufruct and services or (in the
Referred to any certificate composition of the group of ownership of) the assets of
representing a contract or assets represented by the particular projects or special
conveyance of financial rights, sukuk consist of a majority of investment activity”
obligations, or money tangible assets”
transactions that is Shariah
compliant.

11
What are Sukuk?

The origin of sukuk can be

Sukuk refers to an Islamic
traced to the Middle Ages
investment certificate, which
whereby sukuk were largely used
Sakk is believed to be the source allows investors to have rights of
by Muslims as papers
root of the European Check ownership of the asset, including
representing financial obligations
the cash flow and risks
originating from trade and other
associated with such ownership.
commercial activities.

Sukuk are asset-backed, tradable,

Sukuk offers risk diversification
and Shariah compatible trust
for Investors for their portfolios.
certificates

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Classification of sukuk

► Another form of classification which, in our view, is more precise and

relevant for the ICM is to divide ṣukūk instruments into:

Senior Unsecured Ṣukūk (also

known as Asset-Based Ṣukūk)

Subordinated Ṣukūk

Secured Ṣukūk and

Asset-Backed Ṣukūk
13
Type 1 Ṣukūk: Senior Unsecured Ṣukūk

► The bulk of the ṣukūk issued and traded in the market today, whether it is
ṣukūk ijārah, ṣukūk wakālah, ṣukūk salam, ṣukūk istithmār, ṣukūk murābaḥah or
others, are all senior unsecured ṣukūk.
► A senior unsecured ṣukūk entitles the ṣukūk holders to claim against the issuer
only and does not give them any security interest or collateral rights over any
assets of the issuer including the assets underlying the ṣukūk
► Given ṣukūk is being issued and traded in the fixed income capital market along
with conventional bonds, the majority of ṣukūk have been structured, from a
legal and economic perspective, as senior unsecured instruments which entitle
ṣukūk holders to have legal recourse only to the issuer as senior creditor and
not the underlying ṣukūk assets.
14
Subordinated Ṣukūk

► In selective instances, a few ṣukūk issues have been structured, from legal and economic
aspects, as subordinated instruments. Sukūk under this categorisation can be of any form
including ṣukūk ijārah, ṣukūk wakālah, ṣukūk muḍārabah and ṣukūk mushārakah.
► This means that the issuer of subordinated ṣukūk will first have to honour all payment
obligations that it owes to secured creditors (e.g. the holders of secured ṣukūk), other
senior ranking creditors (e.g. tax authorities) and senior unsecured ṣukūk holders
before honouring payment obligations to subordinated ṣukūk holders.
► Usually, a subordination structure is required by certain issuers who are looking to meet
certain capital or debt ratio requirements. In a subordinated ṣukūk, the ṣukūk holders
will: (i) have legal recourse only to the issuer but subordinated to all senior creditors;
and (ii) not have any recourse to the underlying ṣukūk assets.

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Secured Ṣukūk and Asset-Backed Ṣukūk

► In very few instances, some corporates have also issued secured ṣukūk and
asset-backed ṣukūk. Usually, issuers opt for these structures if (i) they require an
off-balance-sheet financing; and/or (ii) they are not able to obtain a good credit rating
without giving ṣukūk holders recourse to the underlying assets as collateral.
► The main differences between the senior unsecured and ṣukūk secured ṣukūk (like
project finance ṣukūk and covered ṣukūk) are: (i) the senior unsecured ṣukūk holders
will only have recourse to the issuer but not the underlying ṣukūk assets;
► and (ii) the senior secured ṣukūk holders will have recourse to both the issuer (in most
cases) as well as the underlying ṣukūk assets (in all cases). In asset-backed ṣukūk (ABS)
structures, the ABS holders will only have recourse to the underlying ṣukūk assets.
Again, the type of ṣukūk under this categorisation can be of any form including ṣukūk
ijārah, ṣukūk wakālah and ṣukūk salam.

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Reasons for Issuing Sukuk
Growing demand from investors to
place their funds in accordance with
Shariah compliant principles.
To facilitate the development of the
local, regional, and global sukuk
market, and to tap into a wider
investor base.
Governments or corporates are able
The funds collected also serves the
to raise funds for their working capital
purpose of liquidity management
or project financing for infrastructure
for financial institutions and individuals
and development projects under a
undertaking Shariah compliant business
Shariah compliant framework
because it complies with their internal
instead of debentures or loans with
monetary and regulatory policies.
high interest rates.
Sukuk are a means for the equitable
distribution of wealth as it allows all
investors to share returns from the
true profits generated from the asset.
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Sukuk vs. Bonds
Sukuk
• Sukuk are financial certificates
representing beneficial ownership of
real assets.
• It gives the investor proportional
beneficial ownership in the asset on
which the sukuk are based.
• The asset on which sukuk are based
must be tangible and in compliance
with the Shariah and Islamic
principles.
• In sukuk, the issuer is not a borrower,
but can either be:
• A buyer in a sale contract; A lessee in a
lease contract; A partner in a
partnership contract.
• Each sukuk represents a share of the
underlying asset.
Definition Bonds
Underlying Asset • Bonds are proof of debt and not a
share of ownership in the asset.
• It is a debt obligation from the issuer
to the bond holder.
Issuer Representation • Bonds are issued to finance almost any
purpose that complies with local
regulatory legislation.
Issue Unit • Bonds are debts, whereby Issuers are
the borrowers from the investors (bond
holders).
• Each bond represents a share of debt
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Sukuk vs. Bonds

Sukuk Bonds
The face value of sukuk is based on the Issue Price The face value of a bond price is based on
market value of the underlying asset. the issuer’s creditworthiness (including it’s
rating).

Returns are termed as dividends and will Returns Sharing Returns are termed as coupons.
depend on the underlying Shariah contract Bond holders returns can be ascertained
used. and they receive regularly scheduled (and
Sukuk holders receive a share of profits often fixed rate) interest payments for the
from the underlying asset (and accept a life of the bond regardless of Issuer’s loss
share of any loss incurred). or gain.
The amount of profit cannot be
ascertained, it could be fixed or vary as it
is based on the sharing of profit and loss.
The capital is not guaranteed for sukuk Capital Guarantee The bond principal amount is guaranteed
holders. upon and payable upon maturity date.
Upon maturity, Sukuk is valued based on
the market value, a pre-arranged figure
(agreed upon by the two parties) or a fair
value.

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Sukuk vs. Bonds

Bond Item Sukuk

Short, Medium and Long Term Tenor Short and Med-Term (≤5 yrs)

Debt Financing Category No debt but ownership of specific asset and

its cash flows
Not necessary, unless collateralized Underlying Necessary underlying asset, usually
tangible asset
Fixed in time, and amount Claim Ownership claim on specific asset and its
cash- flows
Depends on rating, yield environment and Pricing Use of indicative yields-benchmarked on
demand (book-building) reference rates
Fixed income (known/predetermined cash Total Returns No guarantee in returns
flows)
Unrestricted Funding Purpose Restricted for use in Shariah compliant
assets, in a predetermined manner.

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Sukuk Payment Structures
Payments on the sukuk are
structured in two forms:
Amortising Securities or Amortising Sukuk. Non-amortizing securities or non-amortizing sukuk.
The payments representing the amortising of
the invested capital together with the profits
(fixed or floating) derived from the
investments.
The payments of the derived profits (fixed or
floating) are made periodically during the tenure
of the sukuk,
While the payment that represents the invested
sum is scheduled at the end of period i.e. at the
final maturity date of the sukuk. 21
Sukuk Payment Structures

► However, there have been innovations whereby the

redemptions to the sukuk are in the form of exchangeable such
as equities or commodities.
► In the case of exchangeable with equity, the periodic payments
to the sukuk could be from the dividend income stream paid to
the equity.

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Tradability of Sukuk

Based on the Tradable sukuk are

Tradable underlying tangible very essential for
assets or Islamic financial
The sukuk can be Proportionate institutions to
classified as ownership of a enable them to
manage their
Non-trada business or
investment short-term liquidity
ble portfolio. requirements.

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Tradable Sukuk

AAOIFI Shariah Standard (17) on Investment Sukuk

• Sukuk, to be tradable, must be owned by sukuk holders, with all rights and obligations of
ownership in real assets, whether tangible, usufructs or services, capable of being owned and sold
legally as well as in accordance with the rules of Shariah,
• The Manager issuing sukuk must certify the transfer of ownership of such assets in its (sukuk)
books, and must not keep them as his own assets.

AAOIFI Shariah Standard (21) on Financial Papers

• Sukuk, to be tradable, must not represent receivables or debts, except in the case of a trading or
financial entity selling all its assets or a portfolio with a standing financial obligation, in which some
debts, incidental to physical assets or usufruct, were included unintentionally, in accordance with
the guidelines mentioned in.
• As per AAOIFI Sukuk based on ijarah, istisna’, mudharabah, or musharakah principles are tradable.
Non-tradable sukuk represent receivables of cash or goods. For example, sukuk of salam or
murabahah are non-tradable sukuk.

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Tradable Sukuk

In Malaysia, as per the resolution of the SAC of the SC, bay al-dayn is permissible and
it must be made in cash.

It recognizes:

Bay al-dayn or debt trading as one of the acceptable This enables tradability of
principles for sukuk issuances
debt and equity based sukuk
in the secondary market in
Shariah-compliant cash receivables arising from
contracts such as murabahah, bai bithamin ajil (BBA), accordance with Shariah
ijarah or istisna’ are converted into tradable debt
instruments.
principles.

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Sukuk Structure

From Shariah perspective, Islamic financing should only be raised for trading in specified and identified Shariah compliant assets

Issuance of Sukuk must be supported by an underlying asset

In general, trading of indebtedness is prohibited, unless it is traded at par

Malaysia – Trading of indebtedness is permissible at any value provided the

Middle East and some other jurisdictions - Only allow debt trading at par
underlying contract is Shariah e.g. Bay Bithaman Ajil / Bay Dayn

Return for investment in sukuk in most cases are linked to cash flows and performance of underlying assets

26
Factors for considering a Sukuk issuance

Economic Income per Muslim

Size Capita Population

Size of Islamic
Institutions
Banking

27
Economic size
► When the size of the economy is small, there would be no
incentives to issue Sukuk in the local market because it would
not attract multinational corporations and foreign investors.
► Small markets tend to be too volatile and this is unattractive for
international investors.

28
Muslim population
► The higher the percentage of Muslims in a country, the higher the demand for
Sharia-compliant securities, and hence the faster the development of Sukuk
market due to demand of the market

Size of Islamic Banking

► Islamic Banks serve as dealers and market makers in the Sukuk markets, and
are considered as the major investors in Sukuk certificates, which are
structured to comply with Islamic investment principles. Measurement of the
size of Islamic banking in a country with the ratio of Islamic banking assets to
the country’s total banking assets.

29
Institutions
► developed institutions of governance matter for financial and economic
development because they shape the structure of economic incentives in
society, facilitate investment in physical and human capital, and contribute to
the efficient allocation of resources in the economy
(Knack and Keefer, 1995; Mauro, 1995; Hall and Jones, 1999; Easterly and Levine,
2003; Dollar and
Income per Capita
Higher levels of income per capita should result in higher demand for financing
activities, and hence higher need for Sukuk securities. Moreover, less developed
countries are often characterized by weak creditor rights, inadequate corporate
governance, poor transparency, and volatile investment environments
(Eichengreen et al., 2004).
30
Definition of Assets according to shariah

Must exist physically (land, building, machinery)

Must be pure

Must have use (however restricted to halal use and not for example for operations of casino or alcohol sales outlet)

Must be owned by the seller

Must be free from encumbrances

Must be known by specifications, descriptions, location, etc.

31
Sukuk Must Comply to the Underlying Shariah Principles

Funds raised must be used for Shariah compliant (halal) activities.

Fund raised may be used to finance needed tangible assets. Specificity of assets is important, since Sukuk unlike
conventional bonds cannot be used for general financial needs of the issuer.

Income received by sukukholders (investors) must be derived from the cash flows generated by the underlying.

Sukukholders have a right to the ownership of the underlying asset and its cash-flows.

Clear and transparent specification of rights and obligations of all parties to the transaction, in particular the originator
(customer) and sukukholders.

No fixity in returns.

32
Shariah Contracts Underlying Sukuk

Sukuk can be structured in different ways depending on the underlying contract.

A sukuk can be structured based on any or a combination of two or more, of the Islamic contracts of transactions such as

The contracts of participation (uqud ishtirak) of The contracts of exchanges (uqud mu’awadat) such as
mudarabah and musharakah bai bithamin ajil, murabahah, salam, istisna’a, and ijarah.

The application of these contracts of transaction results in the sukuk backed or secured by such assets, thus having an
in-built security to the investments.

33
Type of Sukuk, Characteristics, and Underlying Contracts
Type of Sukuk
Pure Ijarah Sukuk
Hybrid/Pooled Sukuk
Variable Rate Redeemable Sukuk or
Musharakah Term Finance
Certificates (MTFCs)
Zero-coupon non-tradable Sukuk
Embedded Sukuk
Characteristics Underlying Contract
∙ Issued on stand-alone assets identified on the balance Ijara
sheet.
∙ The rental rates of returns on these Sukuk can be both
fixed and floating.
∙ The underlying pool of assets can comprise of Istisna’, Istisna’, Murabahah receivables
Murabahah receivables as well as Ijarah and Ijarah.
∙ The return on these certificates can only be a
pre-determined fixed rate of return.
∙ Redeemable in nature. Musharakah
∙ Has relatively stable rate as compared to dividend
payouts.
∙ The floating rate of return on these certificates would
not depend on benchmarking with market references
such as LIBOR but would instead be contingent on the
firm’s balance sheet actualities.
∙ The primary asset pools to be generated would be of Istisna’
the nature warranted by Istisna and installment
purchase/sale contracts that would create debt
obligations.
∙ Non-tradable
∙ These could be Sukuk whether zero-coupon, pure-Ijara pure-Ijara or hybrid
or hybrid.
∙ Has embedded option to convert into other asset forms
depending on specified conditions.
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Asset Backed Securitisations

► Asset Backed Securitisations creates new opportunities to

popularise mudharaba or qirad, and/or musharakah contracts,
► Ability to ring-fenced risks with more secured contracts such
as ijarah, murabaha, salam or other compounded contracts of
exchanges, whereby;
▷ Risks mitigated through secured cash-flow streams and with lesser
operational and credit risks,
► More shariah compliant due to Special Purpose Vehicle involved
in direct investments or business activities – avoidance of Bay
al-Dayn issues.

35
The Use of SPV

► SPVs can be created through a variety of entities, such as trusts,

corporations, limited partnerships, and limited liability
corporations.
► In some cases, it may be desirable to remove assets and their
corresponding liabilities from the balance sheet of the company,
and a sale of the assets to an SPV will accomplish this.
► The SPV usually is created so that it is “bankruptcy remote,”
which means that the assets sold to the SPV are not at risk if
the SPV or the company whose assets are being securitized
become insolvent.

36
SPV in Sukuk Structure

► Special Purpose Vehicle (SPV) is normally established based on the common law distinction between legal
and equitable right/ownership
▷ SPV is considered to assume legal ownership (right as recognized by court of law) of the underlying asset used in
sukuk or securitization for the benefit of the beneficiary (whose interest or right is recognized by the court of
equity)
▷ A split is thereby caused to the concept of ownership as a result of which the beneficiary is not empowered to take
or assumed all rights as an established owner of the asset as is required by Shariah law
▷ If he is truly to be considered as a true owner as per the Shariah provisions that will give him several rights that
include right of free disposal and possession without restriction.

► Characteristics of SPV
▷ Bankruptcy remoteness
▷ Thinly capitalized
▷ Formed for specific purpose; no other activates undertaken
▷ Do not add to the cost of transaction; capital and tax efficient

37
Asset Backed Securitisations
3

3
($)
Subscription for Certificates
SPV 7
(Mudharib)
1
4

Expenses for meeting

requirements
operational
Direct Investments
Mudharaba through ijarah,
or Musharakah murabahah or other
Certificates real estate businesses or
trading activities
2
5
6
Pool of Investors Cash-flow stream ($)
(Rabb al Mal or
Musharkah Profit Distribution
Partners) 38
Asset Backed Securitisations

3.
3a.
2.
Originator SPV Investors
4.
1.

1. Sale of asset to the SPV – True Sale

2. SPV issues asset-backed securities to investors
3. Proceeds from the sale of ABS go to the Originator
4. (Interest) & principal repayments to Investors

39
Asset-Backed Securitizations

True sale – legally belong to SPV

Non-recourse sukuk / ABS - credit risk

performance is determined solely by underlying
asset

Islamic Asset-Backed SPV – bankruptcy remote (independent)

Sukuk adds a new
dimension to ICM Correspondence of income streams with
products actual income and value of the assets

Ratings are primarily dependent on a risk analysis

of the assets or performance of assets

Unilateral purchase undertaking (if any) – at

market value

40
Asset-Based Securitizations

► Majority of sukuk issued has been on simple “ijarah” structure –

unsecured financing or known as asset-based securitization.
► Originator seeking financing “sells” the assets to SPV for a value
equal to financing required and lease it back
▷ SPV – subsidiary of originator
► Lease payments provide fixed income stream which may be
benchmarked to an index / LIBOR +;

41
Asset-Based Securitizations

► Conducted on non true-sale basis so repayment and

risk/performance is not asset backed but originator based
► Purchase undertaking of asset at maturity with pre-determined
value
► Ratings are primarily dependent on the riskiness of the
borrower/ sponsor/ originator/ lessee
► Assets only used to facilitate Shariah-compliance.

42
Asset-Based Securitizations

► Based on Ijarah:
Sukuk
Sale of asset
Sukuk
Sukuk proceeds Sukuk
Sukuk
Sukuk proceeds
Originator SPV

Asset repurchase
Periodic payments:
Lease flows and principal (via
Lease & repurchase payments
for assets amortisation/repurchase)

► Non-true sale – condition to repurchase at maturity

► Payment of rental / profit can be derived from ijarah or other sources

43
Asset-Based Securitizations

► There are also structures of sukuk al ijarah under an

Asset-Backed Scenario.
▷ True sale, though
▷ The ownership of the SPV is transferred to the originator or the lessor
at end of lease. Original underlying sale has been true sale.

44
Asset-Based Securitizations

Investors Asset Provider

2.

Certificates of
Investments 3. Sale & Purchase
of Asset (payment of
asset acquisition
1. Cost US$) Asset
Offer for Sale
of securities

$ SPV 4. Transfer of Ownership of

Asset to SPV

1st Transaction: SPV and Asset Provider Step 1

1st Relationship: SPV and Investors

Creation of Sukuk al Ijarah 45

Asset-Based Securitizations

SPV Project Owner

1. Execution of al
ijarah contract

2. Rental of Asset on fixed term and fixed

rental basis

ASSET

Ijarah Rental
Obligation
Certificates
3. Issuance of ijarah rental Obligations Promissory Notes to SPV
(evidence of
implying cash flow stream on asset. obligations)

Step 2
46
Asset-Based Securitizations

1.Regular Ijarah Rental

Payments
SPV Project Owner
3. Final Repayment
Representing Total
Settlement equal to
Initial Purchase Price
Of Asset by SPV

5. Asset transferred to Project Owner

Asset

Investment
Certificates
2. Scheduled Distributions of Coupon Payments to Holders
Holders
Of Investment Certificates issued by SPV
4. Payment of Final Amount being final settlement of
Obligations under Ijarah Contract

47
Asset-Based Securitizations

► Assets purchased by the SPV are funded by the issuance of

floating rate Trust Certificates, representing beneficial
ownership in the assets and having beneficial rights on the
lease;
► Upon maturity of the lease, SPV sells asset to the Project
Owner at the original price.
► Proceeds from this sale will be utilised to meet the final
payment to investors.

48
 Asset-Based Sukuk vs Asset Backed Sukuk

Asset based Sukuk Asset backed Sukuk

Feature Using Shariah compliant assets/business Asset backing Shariah compliant

ventures to facilitate issuance of Sukuk assets/business ventures which form
PRIMARY source of income /return to
investor. Issued in various Shariah
principles

Key Accounting Concept/ ON balance sheet (for originator/obligor) OFF balance sheet (for originator)
treatment True sale criterion: legal & off balance
sheet accounting

Funding Cost Market driven mainly depending on Mainly based on the strength of the asset
originator/issuer credit rating/standing cash flow

Rating Corporate rating of issuer/obligor Strength of cash flow

49
Rating of Sukuk

► The rating of sukuk represent the evaluation of default risk of

an issuer or sukuk.
► This is usually done by special companies called Credit Rating
Agencies (CRAs).
► The role of CRAs is very crucial as they measure the
creditworthiness and probability of default of the issuer or
sukuk.
► Their role is to provide an independent and reliable opinion
regarding the risk inherent in sukuk.

50
Main Factor of the rating of sukuk
► Identification and assessment of
the risk involved and their
mitigating criteria.
► Measuring the correlation of
the sukuk with the risk factors.
► Testing against a set benchmark
where available.
► Some famous CRAs for sukuk
rating are: Moody’s, Standard
and Poor’s (S&P), Fitch
(together they from ‘the big
three’ group covering almost
95% of the rating industries),
Malaysia Rating Corporation
(MARC) and Rating Agency
Malaysia (RAM) Rating Service
Berhad.
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Issues and Challenges in the Sukuk Market

Global Economic Conditions

• World economic play a vital role as catalyst in the Sukuk market.
• Deterioration of world economic will influence greatly on the primary and secondary sukuk
market.
• Eventhough Islamic system has some distinction features from conventional, yet the reality
on the ground proved that any movements in the conventional markets would have an
impact on the Islamic financial markets (albeit perhaps to a lesser extent).
Lack of Standardisation and AAOIFI Statement
• Lack of consensus among scholars, has lead to lack of uniformity of Sukuk and thus expose
to lots of issues regarding the permissibility of a Sukuk.
• This concern has been address by AAOIFI by issuing relevant Statements since 2008.
• Since then, players have tried to adopt the concept and the principle of the Statements in
dealing with Sukuk.

52
Issues and Challenges in the Sukuk Market

Default
• Theoretically speaking, Sukuk is more secure than conventional bond as they were
backed with real assets.
• However, recently they are cases of Sukuk default which have left investors nervous as
to whether they have a claim over the assets underlying the issuance or not.
• This is happen due to majority of sukuk in the market are asset-based as opposed to
asset-backed.
• Essentially, whilst from a Sharia’s perspective sukuk certificates represent an underlying
ownership interest in an asset, the commercial and economic reality is that most sukuk
that are issued are unsecured and equivalent to conventional bonds (i.e. corporate
credit-risk instruments).

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Reference

► Houcem Smaoui , Mohsin Khawaja, The Determinants of

Sukuk Market Development

54
Summary

Securitisation

In this
Bonds and Sukuk
chapter you
have learned Asset Backed
Securitisation
about:
Asset Based
Securitisation

55
Thank you

Mahyuddin Khalid 56