KULLIYAH OF ISLAMIC BANKING AND FINANCE

IBF 7120

TRANSACTIONS IN ISLAMIC BANKING AND FINANCE

SECTION: 1

SEMESTER 1, 2021/2022

Individual presentation

Topic:

ANALYSIS OF FATWA COMPILATION & ANALYSIS: JURISTIC VIEWS ON SUKUK AL-IJARAH

PREPARED FOR:

Prof Engku Rabiah & Dr Farhah

Introduction

One of the objectives of Islamic Capital Market is to undertake the shariah-compliant way of investing. So, this will
lead to have an efficiency Islamic financial system and also, promotes to provide liquidity to market players via
secondary market. Getting such efficient Islamic financial system is crucial for the development of such a country and
to meet an investment and financing needs of those who needs to undertake transections based on Shariah
principles. One of component in Islamic capital market, called Sukuk, is fastest growing segments in direct financial
market (Chik, 2012). Malaysian security commission is the who offer the Islamic securities. In their guidelines states
that the Sukuk that issued based on the shariah principle and the concepts should accept by Shariah Advisory Council
(Securities Commission Malaysia, 2009). Furthermore, Sukuk al Ijarah is one most sukuk that contributes to the
economic welfare and also, the most accepted among Islamic scholars and the most popularly applied in the project
financing (Yahya, Hussin, & Muhammad, 2012). Since its initial introduction in 2001, Sukuk Ijarah has become one of
Malaysia's most popular sukuk structures on the global market. Therefore, this assignment wants to emphasise the
issues of sukuk ijarah because sukuk Ijarah contribute significantly to the country's economic well-being.

Sukuk Ijarah

Definition

Literally Sukuk ijarah comes from two words Sukuk which is a financial certification plus ijarah which is also, is a
contract b/w two parties or more, which one party represents lessor to lease out the asset to client at agreed lease
price and duration of the lease. Generally, Sukuk ijarah is the right to use the profits of the assets or a group of assets
is given to another person in exchange for the payment of rent. Ascarya and Yumanita (2008) said that sukuk ijarah
can be alternative source of long term and riba free financing, sukuk can be cheaper as a source of financing, sukuk
provide mechanism for financing through mobilization of Islamic dormant asset and the important thing is sukuk has
a wide array of Islamic concept to cater different needs of financing. Securities Commission Malaysia (2009) explains
that the issuer who needs financing will sell the asset to the client. Afterwards the same asset is leased back to the
issuer for a lease rental. As the Sukuk ijarah is the most contribute to increase the economic welfare is sukuk Ijarah.
Sukuk Ijarah is the most accepted sukuk among the Islamic scholars and the most popularly applied in the project
financing.

Structure of Sukuk ijarah

This is asset-based sukuk by following the illustration Malaysia global Sukuk ijarah.

The first stage is the contract of cash sell, SPV purchases the hospital (on behalf of the investors or Sukuk holders)
from the government. Next, the asset purchased by the SPV is funded by the issuance of sukuk certificate. This Sukuk
certificate represents the ownership in the asset and the lease, and the government receives cash proceeds. The
second stage is leasing contract between the government and the investors (the new owner of the Hospital). The
investors definitely lease the asset and collects rental payment for specific period of time. After the tenure of the
Sukuk finish, the government will buy back the hospital for the price has been purchased.

Issues of Sukuk al ijarah

It is undeniable that even though many people attempt to create a new instrument that applies to Islamic principles,
there are still those who create instruments that adhere to Islamic principles but do not include riba, gharar, or
maysir as part of their design. The irresponsible people simply want to conceal or hide the riba under the guise of the
Shariah. The following are the issues consist in Sukuk ijarah:

 The mechanism of sale and lease back

There is scholar who said that sukuk Ijarah is the modified of Bay al-wafa or Bay al- Istiglal or Bay al-Inah which those
types of Bay was tested by majority Muslim scholars (Al-Amine, 2001). For instant Bay’ al-wafa is Inter-conditionality
of two or more sale contracts is an issue in this case, which raises a shariah concern. The first sale cannot be made
contingent on the second sale. Without an express agreement, the original sale cannot be term conditions on a
return. Even though some of the jurists says the two parties can inter into two contracts at the same time such as the
spot sale and the future sale contract, but in this case of the second sale cannot be conditional on the completion of
the first. This contract of bai al wafa is recognized to be valid by the Hanafi school only. Furthermore, Mutmainah, L.
(2018) stated “Likewise to Bay al-Istiglal that selling the assets with promise conditions whereas the seller lease out
this asset, once he can pays back the price, he will get his asset and this is the end of sale and lease back contract”.
And also, he added “Bay al-Inah which consist of two sales in one transaction with spot price and others with the
deferred higher price. This transaction like the seller needs the remaining money from this transaction (seller sell the
asset to buyer and seller buys back by cash in lower price)”. Lastly, in my opinion for looking this issue is this
mechanism looks like Bay’ Wafa which is most of the scholars said as invalid contract because the owner of the asset
just needs money and he do not want lose the asset.

Hence, the comparisons between Ijarah and three types of Bay’ are viewed as an example of the practise of riba.
Since this concept has already been approved by AAOFI, even they are caught in this structure.

 Pricing of Sukuk ijarah

There is no alternative to the interest rate as a measure of profitability proposed by Muslim economists and shariah
scholars. As a result, LIBOR has become a standard practise in the International Financial Institutions (IFI). LIBOR can
be used as a benchmark, but it should not be used to determine a company's return. It is expected that sukuk Ijarah
holders will receive their return in the form of rent from the underlying asset. While this return is based on the actual
rental of an asset, in practise it is based on the actual interest rate (Mutmainah, L. 2018). As many scholars give
criticism of this practise is that profiting from interest should be as illegal as interest itself.

(Mohd Azmi et all., 2010) found the following:

The prohibition of riba is the primary reason for introducing a new benchmark as an alternative to an
interest-based benchmark for borrowing and lending. Shaykh Muhammad Taqi Usmani advocates that
Islamic banks and financial institutions should get rid of the interest-based benchmark as soon as possible. He
argues that using an interest rate as a benchmark for a halal business is undesirable and does not advance
the basic philosophy of Islamic economy, thereby making no impact on the system of distribution.

On the other side, (Ibn Ashur, Muhammad al-Tahir, 2006) stated “having a benchmark will also realize other
objectives of the Shariah in financial transactions such as transparency, the preservation of wealth and its fair
circulation in the hands of as many people”. In my opinion I will support the idea of having our own benchmark which
is promoting the transparency and helps regulators to ensure that there is not fraud or manipulation in the market.
As a result, a healthy market is created in accordance with the Shariah principles.

 Ownership of Sukuk ijarah

As we know the Sukuk investors under asset based sukuk ijarah are the beneficial ownership of the underlying asset
the asset ownership is transferred from the sukuk issuer. But this transfer does not involve legal ownership transfer
rather it is beneficial ownership only. Based on etymological sense, ownership is known as “milkiyyah” or “milk”,
which refers to the possession of a good and the ability to use it (Al-Fairūzabādī, 1953, 3/320). From a terminological
aspect, Ownership could be defined based on three forms of understanding, which are ownership as a legal nature
that has legal consequences ownership and as a legal relationship between the owner and the property and lastly
ownership defined based on legal consequences on the owned property ( Nik Abdul Ghani, N. A. R. (2018). The
juristic of Islam, had almost same opinion when it comes the ownership of the property. Hanafi sect
members Ibn al-Humam and Ibn Nujaym defined ownership as a legal authority originally allowed to an
individual, which allows the owner to dispose of the property if there are no restrictions. Furthermore, Al-
Qarafi from sec Malikis, also described as ownership as a legal ruling (i.e., authority) on a good or a usufruct
given to an individual, which obliges him to extract the benefit from the item owned and also receives
compensation if the item has been damaged by someone (Al-Muslih,1988, pp. 28-39). Also, Abu Shuja from
shaif’s school defined ownership as an exclusive legal ruling on a useable item (Nik Abdul Ghani, N. A. R.
(2018). The above definition describing the owner of such a property has the right to dispose it.

In Malaysia, the meaning of beneficial ownership related to securities provided by the Securities Industry Act 1991 is
probably the most useful. It provides definition as follows:

Beneficial owner, in relation to deposited securities, means the ultimate owner of the deposited securities
who is the person who is entitled to all rights, benefits, powers and privileges and is subject to all liabilities,
duties and obligations in respect of, or arising from, the deposited securities, and does not include a nominee
of any description.

This means that the beneficial owner is the real owner and has all the rights that come with owning a home, except
that the title isn't in his name. so, whenever there is a dispute between (legal and beneficial), the court’s decision in
determining of the asset will be the beneficial ownership as the legal owner just consider as a trustee. Based on that
we can describe the beneficial ownership has the right to enjoy and use subject “land” even though he/she it is not
registered his/her name. According to Bank Negara, a beneficial owner is the actual owner and enjoys all of the
benefits and advantages of the asset despite not having any legal title as stated in Bank Negara Malaysia (2013),
Islamic Finance Law Harmonisation Committee Report. As the common law in Malaysia is English law is also, stated
that the English law has distinguished the two types of ownership, i.e., legal, and beneficial ownership. In fact,
beneficial ownership is considered legally as a real right as it carries both personal and property rights as well,
whereby the beneficial owner has a direct interest in the property, which is a subject of ownership ( Nik Abdul
Ghani, N. A. R. (2018). In my opinion is same as many fuqaha expressed that such the owner of a property
has a fully right to despite while there is restriction at all.
Conclusion

The sukuk al-ijara structure is the most common sukuk structure. The popularity of this structure can be
attributed to a variety of factors; some commentators refer to it as the "classical" sukuk structure from which
all other sukuk structures have evolved, while others point to its simplicity and popularity among Shari'a
scholars as major factors. As the per discussion of Sukuk ijarah, there are many issues and our responsibility
as IBF students to make clear clarification about this. I will recommend that Muslim scholars should make a
good corporation as a result, it is not only a question of how to raise funds while remaining acceptable to
international financial institutions and every activity must compliance Shariah and Maqasid al shariah.
References

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