Razlan Bin Raghazli
International Centre for Education in Islamic Finance
July 08, 2012
June – August 2012
Sukuk Al-Ijarah as an Alternative for Project Financing
Overview of Malaysian Property Development
Nowadays, the funding from Islamic Finance Product is highly demanded not only from the consumer market, but also from the corporate organisation and public sector. According to the Bank Negara Malaysia Annual Banking Statistics 2007 (Malaysia, 2007), the Islamic Banking Assets in Malaysia reached USD6.5 billion with the average growth rate between 18% to 20% annually. Islamic Finance comprises of several products such as Mudharabah, Murabahah, Bai Al-Istina, and sukuk (Saad, Ramli, & Aminuddin, 2011). These products were selected based on the suitability to finance the underlying assets and to be structured according to the financier and obligator’s requirements.
Figure 1 : Common structure of sukuk al-jarah
Source : Malaysia International Islamic Financial Centre
Sukuk are defined by the Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI) as certificates in ownership in a pool of underlying assets. Sukuk Al-Ijarah are certificates that carry equals value Ijarah is a contract that may be executed for an asset undertaken by the lessor, to be delivered to the lessee according to the specification, even if the asset in not owned by the lessor (AAOIFI Shariah Standards 2010; Shariah Standard No. 9, paragraph 3/5, pg. 113). Sukuk Al-Ijarah in principle is represents a shares in leased assets (pro-rata ownership in sukuk holders and each shares entitles to economic benefits under the lease (Rabiah Adawiah; 2010). Sukuk Al-Ijarah is divided into Purchase Agreement and Lease Agreement which shall consist of servicing agreement and purchase undertaking (Mohd Zain, Hashim, Opir, & Sulaiman, 2011). Sukuk Al-Ijarah is issued for a real estate as the asset backed, which the issuers applied the sukuk proceeds to purchase real estate from the originator. The originator undertakes to purchase the real estate at maturity or upon settlement at the original purchase price, or the market value upon. The issuer is required under the shariah law to undertake the major maintenance of the assets and will often appoint obligator to carry out such activities on their behalf. One of the fundamental different between shariah compliance Sukuk Al-Ijarah and conventional bond structure is the requirement of tangible assets to underlie any sukuk issuance (Bashir, 2008). The most prominent characteristics of conventional bond may be summarised as follows: sukuk and their contemporary applications (Usmani, 2009). Bond does not represent ownership on the part of the bondholders in the commercial or industrial enterprise for which the bond were issued. Rather, they document the interest bearing coupon owed to the bondholders by the issuer. In other words, bond guarantee the return of capital when redeemed at maturity.
3.0Overview of sukuk al-ijarah for property development in Malaysia Malaysia has the world’s largest sukuk market, both local currency and USD-denominated combined. Malaysian corporate issued a total of RM32.3bln of sukuk in 2010, the same amount it was issued in 2009. (Kuwait Finance House. 2011). The history of sukuk al-ijarah in Malaysia was started in June 2002, by the issuance of Malaysia Global Sovereign Sukuk, issued by Malaysia Global Sukuk Inc. (Adawiah, 2010). The said sukuk was listed in Bahrain, Luxemborg and Labuan with a total size of USD600 million, and was rated as baa2 by Moody and BBB by Standard and Poors. The said sukuk was fully subscribed mostly from Middle East (51%), Asia (30%), Europe (15%) and United States of...