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Sukuk
(Islamic Bond)
Hamad Rasool
Director : First WAPDA Sukuk Co. Director: First Credit Investment Bank. Director: WAPDA Finance

Defination
Sukuk is the Arabic name for a financial certificate, Islamic alternative to conventional bonds, Sukuk is a Trust certificate in which investor returns are derived from legal or beneficial ownership of assets.

Introduction

Growing Sukuk

Liquidity Management of Islamic Banking.

Islamic financial institutions are seeking to diversify their portfolio and increase their portfolio size of tradable instruments with fixed income profile The industry requires Sukuk funds for retail distribution Sukuk a Money Market instrument.

Islamic Inter-Bank or Short term Islamic Finance market can be developed through sukuks
The underlying assets are purely used as a means of transacting and do not constitute a Transaction specific pool of security
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Growing Sukuk

Sukuk are usually issued through special purpose vehicle (SPV) In Pakistan a Limited Liability Company has acted as the issuer and is registered with and regulated by SECP It is estimated that by 2006, close to US$ 25 billion of Sukuk would be outstanding and by 2008,approximately US$ 50 billion Sukuk will be outstanding. Bahrain Issues near about 24 Sukuk in a year Short and long term 5 10 Years Periods There are 77 Sukuk has been issued with the volume of USD

17,977.11 Millions

Advantage of Sukuk Issuance

Diversify funding source Create and enhance profile in international market Pricing benchmark Secondary liquidity Sizeable financing. Ease of clearing and settlement

Advantage of Sukuk Investor

Diversify Investment Provides Leveraging Capabilities Secondary Market Liquidity Ease of clearing and Settlement Investment available to Institutional and Retail investors Allows for many computation of Risk Credit /Mkt. /Duration etc
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Issuance of Sukuk- Factor to be considered

Identify investors Rating by a Credit Rating Agency Underlying Assets Secondary Market Considerations Applicable laws SECP rules Cost to the Issuers Drafting of Legal Documents Regularity Frame work

Parties Involved
Originator : Initial Owner SPV : Set up for Special Purpose Investors: Subscribers. Servicer: Servicer the assets. Receiving and Paying Agent : Banks Credit Enhancement provider : hedges, Guarantees, Takaful etc

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Parties Involved
Merchant Banker : Credit Rating Agency: Legal & Tax Counsel: Auditor

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Challenges of Market
Limited number of issuance that constrains active trading of these instruments in the secondary market Buy and Hold Strategy by major investors of sukuks Limited quality assets available for Ijarah securitization Limited Corporate Focus - Changing

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Ideal models for structuring of Sukuk Especially focused on Construction Industry.

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Sukuk Structure
Sukuk Structuring may based on following modes Mudarabah (Trust Financing/Trust Investment) Murabahah (Sale And Purchase) Musharaka (Partnership, Project Financing Participation) Istishna (Purchase by Order or Manufacture) Salam (In-front Payment Sale) Ijarah (Operating Lease Concept)

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Sukuk Al-Ijara based Model

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Sukuk al Istismar (51% Ijarah structuring)

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Global Sukuk Issues

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Global Sukuk Cumulative Issuance

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Global Sukuk Issuance

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Sukuk Issuing in Construction Industry

Name Emaar Amlak UEM Builders Aldar Com. RE Motorway Country UAE UAE Malasiya Behrain Kuwait Pak Volum $65 m $200 m $82 m $100 m $100 m $600 m Date July 2004 July 2005 Jan-2006 Oct 2005 May 2005 Jan-2005 Tenor 5 years 5 years 7 years 5 years 5 years 5 years

WAPDA, Penang Port and bridge , Sanctuary Building-U k, Sukuk, Zam Zam tower KSA etc also has been issued sukuk related to construction Industry list attached for further consideration)
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CASE STUDIES
Case study of Sukuk Relatively with Construction industry. WAPDA Sukuk for upraising Mangla Dam Motorway Sukuk

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WAPDA Sukuk

WAPDAs financing requirement: PKR 8,000 million to (partially) fund the Mangla Dam Raising Project

Key objectives for WAPDA were: To raise financing in a cost efficient manner Strengthen its presence in the local financial markets Diversify and cultivate WAPDAs investor base Undertake a landmark transaction which will catalyze the promotion of Islamic Financial instruments and lead the way for other public sector entities
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Transaction Structure

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Transaction Structure

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Offering Summery

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Motorway Sukuk

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Glossary

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