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Sukuk (Islamic Bond). Hamad Rasool Director : First WAPDA Sukuk Co. Director: First Credit Investment Bank. Director: WAPDA Finance. Defination.
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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.
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
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
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
Parties Involved • Merchant Banker : • Credit Rating Agency: • Legal & Tax Counsel: • Auditor
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
Ideal models for structuring of Sukuk Especially focused on Construction Industry.
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)
Sukuk Issuing in Construction Industry Name Country Volum Date Tenor Emaar UAE $65 m July 2004 5 years Amlak UAE $200 m July 2005 5 years UEM Builders Malasiya $82 m Jan-2006 7 years Aldar Behrain $100 m Oct – 2005 5 years Com. RE Kuwait $100 m May 2005 5 years Motorway Pak $600 m Jan-2005 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)
CASE STUDIES Case study of Sukuk Relatively with Construction industry. • WAPDA Sukuk for upraising Mangla Dam • Motorway Sukuk
WAPDA Sukuk • WAPDA’s 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 WAPDA’s investor base • Undertake a landmark transaction which will catalyze the promotion of Islamic Financial instruments and lead the way for other public sector entities