Capital Markets - The Islamic Way

Transcription

1. Capital markets the Islamic way : the Sukuk phenomenon Alberto G. Brugnoni
2. Capital markets the Islamic way the Sukuk phenomenon Introduction Ø  An historical perspective: the IFSI as the continuation of a millennium-long wave Ø  A general consideration on today’s IFSI Ø  A distinguishing feature of IFSI: funding of trade in, or production of, real assets
3. Capital markets the Islamic way the Sukuk phenomenon IFSI market size $ 500bn to ... $ 1000bn REGIONAL AND GLOBAL GROWTH TOTALS $m 2007 2006 % change GCC 178,129 127,826 39.35% Non-GCC MENA 176,822 136,157 29.87% MENA Total 354,951 263,984 34.46% 4,707 3,039 54.90% 119,346 98,709 20.91% 21,475 20,300 5.79% 500,481 386,033 Sub-Saharan Africa Asia Australia/Europe/America Global Total Source: Maris Strategies & the Banker
4. Capital markets the Islamic way the Sukuk phenomenon ... and its returns on Assets Rank by RoA Institution Return on assets Rank by RoA Sudan 37.27 12 AREF Invst. UAE 35.10 13 Bank al-Jazira Kuwait 33.51 14 Bank Perusahaan Iran 21.03 15 Country Institution Country Return on assets Kuwait 13.24 SA 13.21 Malaysia 13.19 Sheikan Ins. Sudan 13.06 16 National Inv. Pakistan 12.78 20.58 17 Arabia ACE Bahrein 12.59 Sudan 18.72 18 Arabia ACE SA 12.59 First Takaful Kuwait 16.90 19 Markaz Kuwait 12.01 9 Al-Madina Kuwait 16.52 20 Al-Ain Ahlia Ins. UAE 11.93 10 Al-Safat Inv. Co. Kuwait 15.49 21 Int.Inv.Group Kuwait 11.53 11 Unicorn Bahrein 13.62 22 Ithmaar Bank Bahrain 10.82 1 El-Nilein Ins. 2 Tamweel 3 Int. Leasing 4 Karafarin Ins. 5 Islamic Ins. Sudan 20.91 6 First Invest. Co. Kuwait 7 United Insurance 8 Source: The Banker
5. Percentages of SCA to total assets Rank Country 1 Iran 2 SCA in $m SCA/ Assets Rank Country SCA in $m SCA/ Assets 154,616 100% 12 Qatar 9,459 25% Saudi Arabia 69,379 31% 13 Sudan 4,467 100% 3 Malaysia 65,083 25% 14 Bangladesh 4,331 58% 4 Kuwait 37,684 37% 15 Egypt 3,852 6% 5 UAE 35,354 29% 16 Jordan 2,635 100% 6 Brunei 31,535 100% 17 Indonesia 2,223 3% 7 Bahrain 26,251 31% 18 Switzerland 813 0.07% 8 Pakistan 15,918 25% 19 Algeria 564 100% 9 Lebanon 14,315 75% 20 Yemen 339 100% 10 UK 10,420 0.10% 21 Tunisia 279 100% 11 Turkey 10,065 Palestine 219 100% Source: The Banker 100% 22
6. Sukuk : a traditional instrument … Ø  In classical period sakk (sukuk) meant any document representing a contract or conveyance of rights, obligations or monies done in conformity with the Shariah (Sukuk al- Bada’i, Imam Malik ...) Ø  Empirical evidence shows that Sukuk were extensively used during medieval Islam for the transferring of financial obligations originating from trade and other commercial activities Ø  Sakk is at the origin of the European root cheque/check
7. Capital markets the Islamic way the Sukuk phenomenon ... fit for a contemporary use ... Ø  Malaysia re-introduced Islamic bonds in the 1990’ and they were termed as Bai bi-thaman Ajil Bonds Ø  In the Middle East, Bahrain re-introduced the Sukuk alIjara instrument to the Islamic market in September 2001 and Malaysia pioneered the global Sukuk al-Ijara issue in June 2002 Ø  The Middle Eastern Islamic bond market evolved gradually with the support of top-tier issuers like the Islamic Development Bank, the States of Qatar and Dubai, the Republic of Pakistan ...
8. Capital markets the Islamic way the Sukuk phenomenon ... with a contemporary added value Ø  The essence of this product, in the modern Islamic perspective, lies in the concept of asset monetization - the so called securitization - that is achieved through the process of issuance of sukuk (taskeek) Ø  His great potential is in transforming an asset’s future cash flow into present cash flow
9. The legitimacy of Sukuk Ø  Qur’an - Sura 2:282 Ø  The Islamic Jurisprudence Council decision n° 5/1988 to uphold the issuance of sukuk: - representation of assets in a note or bond - salability of the written note or bond Ø  AAOIFI’s “Shariah standards on investment Sukuk”, Bahrain May 2003
10. Sukuk : a definition Ø  Sukuk are asset-backed trust certificates evidencing ownership of an asset or its usufruct Ø  These certificates are, in turn, based on Islamic traditional financial structures that have been in use for the last 1500 years Ø  Sukuk are not a completely new asset class. They are securities that employ existing financial engineering techniques (securitization structures) that create ‘assetbacked’ bond that are also Shari’ah-compliant
11. Sukuk share similarities (?) with bonds … Ø  Marketability: sukuk are monetized real assets that are liquid and (easily?) tradable Ø  Rateability: sukuk are easily analyzed and rated by international and regional agencies Ø  Enhanceability: different sukuk structures may allow for credit enhancements or wraps that broaden their appeal to risk-averse investors Ø  Versatility: structuring across legal and tax domains of products that meet diverse financing need
12. ... and differences as well Ø  Sukuk represent actual and legal ownership stakes in assets and services and are not monetary documents relating to receivables Ø  The Sukuk holder share the return and bear the losses and he is not a creditor Ø  Sukuk are valid only if issued after receipt of the value of the sukuk and the employment of the funds Ø  Sukuk are issued and traded according to shari’a nominated contracts Ø  The prospectus document should provide complete transparency. Inherent right to information
13. Capital markets the Islamic way the Sukuk phenomenon A primary condition : tangibility Ø  Existence and identification of suitable assets Ø  Returns and cash flows must be linked to assets purchased or those generated from an asset once constructed (project finance) Ø  Borrowers to raise compliant financing will need to utilize assets in the structure. Borrowers that provide the assets are commonly referred to as originators Ø  This requirement has consequential effects for derivatives
14. Capital markets the Islamic way the Sukuk phenomenon More on tangibility Ø  Equity. It is an asset: equity financing is Shari’ah compliant and fits well with the risk/return concepts Ø  Receivables. Their trading for anything other than par is not permissible. However, some Shariah boards have accepted that, as long as such receivables are a small (?) portion of the overall income flows, their presence is acceptable in Sukuk Ø  Malaysia does not place receivables in the category of money and hence allows Sukuk to be 100% backed by receivables. This is a major difference with GCC countries
15. Asset-backed Sukuk Ø  Sukuk can be consider to be asset-backed or assetsecured, and therefore sharia compliant, only if the key securitization elements are in place Ø  These elements should ensure that the Sukuk holders have beneficial title and realizable security over the assets with no encumbrances (no claw back clauses ...). The SPV role Ø  The credit risk ratings of these Sukuk depends solely on the underlying assets. The standard methodologies on securitized assets apply
16. Unsecured Sukuk : are they Sharia compliant? Ø  Such analysis becomes irrelevant if the legal structure does not support Sukuk holders’ rights to the underlying assets and to their cash flows Ø  In fact, an analysis of the commercial terms and legal structures shows that for some Sukuk performance is not governed by the assets and that the credit risk is really that of the originator Ø  The ratings of these Sukuk depends on the riskiness of the originator
17. Sukuk asset classes Sukuk may be issued on existing as well as specific assets that may become available at a future date . This ‘non-exhaustive’ list includes: Ø  Sukuk al-ijarah: securitization of existing tangible leased assets Ø  Sukuk ijarah mowsufa bi-thima: mobilization of the acquisition cost of tangible to-be-leased assets Ø  Sukuk manfaa ijarah: securitization of the usufruct of existing leased assets
18. Sukuk asset classes Ø  Sukuk manfaa ijarah mowsufa bi-thima: securitization of the usufruct of assets to be acquired and leased Ø  Sukuk milkiyat al-khadamat: pre-sale of the cost of services and their expected benefits Ø  Sukuk al-salam: pre-sale of future delivery of goods or commodities Ø  Sukuk al-istisna’a: mobilization of the cost of construction and manufacturing of specific assets
19. Sukuk asset classes Ø  Sukuk al-murabaha: mobilization of the acquisition cost of goods to be sold under a murabaha Ø  Sukuk al-musharaka: sale of capital participations into a partnership Ø  Sukuk al-mudharaba: mobilization of funds from capital providers Ø  Sukuk al-wakala: mobilization of capital to acquire certain goods that are entrusted to an agent
20. Sukuk asset classes Ø  Sukuk al-muzra’a: mobilization of funds for the cultivation of land Ø  Sukuk al-musaqa: mobilization of funds for the irrigation and maintenance Ø  Sukuk-al-muqarasa: mobilization of funds for the maintenance of land and crops
21. Sukuk al-Ijara Ø  Ijara (lease) is a contract according to which a party purchases and leases out equipment required by the client for a rental fee Ø  Sukuk al-Ijara are securities representing the ownership of defined and known assets that are tied up to a lease contract
22. Sukuk al-Ijara structure Sukuk holders 2 .Sukuk proceeds 4.Periodic rentals and capital amount payments 1.Title to asset Obligator as seller 2.Sukuk proceeds 4.Periodic rentals and capital amount distributions Obligator leases back assets as lessee SPV Issuer/Lessor 3.Lease agreement
23. Sukuk al-Ijara structure 1 .  The Originator/Obligator seeking financing make a true sale of its asset to the Sukuk SPV for a value equal to the financing provided 2.  The SPV issues Sukuks and ... 2.  ... with the proceeds pays the Originator/Obligator 3.  The Originator leases the asset back and ... 4.  ... makes lease & repurchase payments to the SPV 4.  The SPV distributes these periodic rentals among the Sukuk holders
24. Sukuk al-Ijara : beware! Ø  It is an asset-backed Sukuk if there is a correspondence of the income streams with the actual rental and the market value of the asset Ø  It is an unsecured Sukuk if this correspondence does not exist. In this case the asset only exists to facilitate its Shari’ah compliance
25. Sukuk al-Ijara characteristics Ø  Risks related to lessee and market Ø  Returns not always predetermined Ø  Full negotiability Ø  Highly flexible Ø  Sukuk holders bear responsibility to the property
26. Sukuk al-Musharaka Ø  Under a Musharaka contract the parties agree by mutual consent to share profits and losses in a joint business Ø  All providers of capital are entitled to participate in management but are not necessarily obliged to do so Ø  The profit is distributed among the partners in preagreed ratios and the loss is borne by every partner in proportion to their respective capital contributions
27. Sukuk al-Musharaka structure Originator / Corporate 1.Physical asset contribution 3b.Periodic profits +incentive fees 0&5. Musharaka Arrangement +Undertaking to buy Musharaka shares of the SPV on a periodic basis Investors Musharaka 2b. Sukuk proceeds 3a.Periodic profits 2a. Sukuk proceeds SPV 4. Periodic distribution of profit
28. Sukuk al-Musharaka structure 1 .  The Originator/Corporate contributes some specific assets and management skills 2.  a&b The Sukuk issuer (usually a SPV) contributes the investor’s Sukuk proceeds 3.  a&b The Originator/Corporate runs the JV, operates the assets and invests the funds. It distribute the profits 4.  Sukuk holders are entitled to the Issuer’s rights in the JV whatever they are 5.  The Corporate irrevocably undertakes to buy at a pre-agreed price the Musharaka shares of the SPV
29. Sukuk al-Musharaka : beware! Ø  The precise description of the profit distribution and business plan is key part of the offering documentation Ø  Should the cash flows generated by the assets under the business plan of the JV not be sufficient to fund these payments, the Issuer may have the option to call the purchase undertaking
30. Sukuk al-Musharaka characteristics Ø  Documents of equal value issued with the aim to establish/develop a project on the basis of a partnership contract Ø  The certificate holders become the owners of the project as per their respective shares Ø  Full negotiability
31. Sukuk al-Mudharaba Ø  In a Mudharaba agreement one of the two parties provides the capital (rabb al-mal) and the other (mudharib) the work Ø  The profit is to be shared between them according to a pre-agreed ratio Ø  Losses are borne by the capital providers (rabb almal) only
32. Sukuk al-Mudharaba structure Project 3 . Capital proceeds and profits collection 4. Project handed over upon completion 3. Capital proceeds and profits distribution SPV as mudharib Project owner Primary subscriber 1. Agreement 2. Sukuk issues and Sukuk proceeds Secondary market
33. Sukuk al-Mudharaba structure 1 .  Mudharib enters into an agreement with project owner for construction/commissioning of the project 2.  SPV issues Sukuk to raise funds 3.  SPV collects regular profit payments and final capital proceeds from project activity for onward distribution to investors 4.  Upon completion, mudharib hands over the finished project to the owner
34. Sukuk al-Mudharaba characteristics Ø  The issuer of the Sukuk is the mudharib whereas the subscribers are the rabb al-mal Ø  They have the right to receive their capital at the time the Sukuk are surrendered and an annual proportion of the realized profits as agreed but bear the losses Ø  A Sukuk holder is entitled to all rights, which have been determined by Sharia upon his ownership of the Mudharaba bond
35. Sukuk al-Murabaha Ø  Murabaha is basically the sale of goods at a price comprising the purchase price plus a margin of profit Ø  The margin of profit must be negotiated and agreed upon by both parties to the transaction
36. Sukuk al-Murabaha structure Investors 6 .Sale price + profits 2. Sukuk issues and Sukuk proceeds 3. Spot payment Issuer SPV Commodity supplier 3. Commodity 1.Master agreement 4. Murabaha Commodity 4. Deferred payment 5. Commodity ‘Borrower’ 5. Spot payment Commodity buyer
37. Sukuk al-Murabaha structure 1 .  A master agreement is signed between the SPV and the ‘borrower’ 2. SPV issues Sukuk to investors and receive proceeds 3. SPV buys commodity on spot basis from the supplier 4. SPV sells the commodity to the ‘borrower’ at the spot price plus a profit margin payable on installments 5.  The borrower sells the commodity to the commodity buyer on spot basis 6. The investors receive the final sale price and profits
38. Sukuk al-Murabaha characteristics Ø  The Sukuk holders become owners of the Murabaha commodity Ø  The issuer of the certificate is the seller of the Murabaha commodity Ø  The Sukuk murabaha are not negotiable under Shari’a ... Ø  ... unless they are a small part of a package Ø  The Malaysian exception
39. Sukuk al-Istisna ’ Ø  Istisna’ is a contractual agreement for manufacturing goods and commodities Ø  It allows cash payment in advance and future delivery or a future payment and future delivery
40. Sukuk al-Istisna ’ structure Sukuk holders (investors) 1.Sukuk proceeds 5. Distribution of returns 4.Monthly Payments 2.Payments Contractor/builder End buyer SPV 3. Title to assets 4. Title to assets
41. Sukuk al-Istisna ’ structure 1.  SPV issues Sukuk to investors and receive proceeds 2. Sukuk proceeds are used to pay the contractor/ builder to build and deliver the future project 3. Title to assets is transferred to the SPV 4. Property/project is leased or sold to the end buyer. The end buyer pays monthly installments to the SPV 5.  The returns are distributed among the Sukuk holders
42. Sukuk al-Istisna ’ characteristics Ø  Issued with the aim of mobilizing the funds required for producing products owned by the certificate holders Ø  The issuer of these certificates is the manufacturer (supplier/seller) Ø  The subscribers are the buyers of the intended product Ø  The certificate holders own the product and are entitled to the sale price of the certificates
43. Legal environment Ø  Most GCC have a Civil Code and commercial disputes tend to fall before a commercial court Ø  As in any new jurisdiction, there may be a lack of precedent and uncertainty regarding matters of law. The legal framework in many countries remains untested. No precedent with regards to bankruptcy practices Ø  Country’s domestic risks: political risks, legal uncertainties and the efficiency of the local financial markets Ø  Many of existing transactions are governed by UK or New York laws due to their creditor friendly nature
44. Legal environment and Sha ’riah Ø  While Shari’ah is acknowledged as one source of law, it is not the law enforced in the courts. Shari’ah takes usually precedence only for personal matters Ø  The only operational Shari’ah court exists in Saudi Arabia. It is unlikely that such court would be familiar with complex financial structures which first require all documents to be translated into Arabic Ø  The problem of Shari’ah a non-compliance: the secondary market issue
45. Rating Sukuk Ø Two Aspects Of Rating Sukuk: Sharia compliance and Transaction Security Ø The determination of the bond’s legal enforceability Ø Sharia boards disagreement not to affect the obligation’s enforceability but perhaps its liquidity
46. Capital markets the Islamic way the Sukuk phenomenon What lies ahead ?