Definitions / brief overview
A ‘Sakk’ (singular of Sukuk) represents a document or certificate that represents the value of an asset. Each Sukuk pays a profit rate on a periodic basis (quarterly, semi-annual or annual basis) depending on the structure. Unlike the bond market interest (known as RIBA) is strictly forbidden. Sukuk are usually based on an asset in order to avoid Riba.
The key principle of buying Sukuk is that it can be repurchased after selling the Sukuk certificate. The buyer enters into a contract that he will get back the certificate with prearranged leasing fee. The issuer also entered into a contract to buy back the certificate at par on agreed terms and conditions.
International Sukuk are priced as a percentage of face value. For example, a price of 102.5 on $ 1mm face value Sukuk would cost $1.025mm. That price translates to a yield to maturity by taking into account the price, coupon, and the time to maturity. The YTM can be used as an expected annualized return on the Sukuk if it is held to maturity and if it doesn’t default.
Yields and price have an inverse relationship- so when yields are rising it means that the Sukuk price is falling. The difference between a Sukuk’s YTM and the equivalent maturity to swap YTM is known as the spread to swap. When the spread widens it means that the difference between the Sukuk yield and the equivalent maturity swap YTM has increased meaning that if the investor buys the Sukuk and pays fixed in swap, the investor would lock on a higher spread
Types of Sukuk
Sukuk Al Musharakah
Indicates a joint venture profit sharing financing structure whereby the issuer operates as an investor and capital provider. Profit is shared in a pre-determined manner. Losses are shared by the partners, proportionally to their capital contribution.
Sukuk Al Murabaha
A Sale contract, whereby the purchase price is determined on a cost plus a predetermined profit basis and such purchase price is payable either by installments or through a single payment. Proprietors wishing to acquire certain goods/commodities to be sold under a murabaha agreement may mobilize the cost of such goods/commodities through Sukuk issues. The Sukuk holders shall own such goods/commodities and shall be entitled to the sale price of the same.
Sukuk Al Mudaraba
Indicates a financing structure involving a contract whereby the issuer acts as the manager of the security holder’s capital. Profit is determined by mutual consent, whereas losses are Bourne by the owner of the capital, providing no negligence or violation of the terms of the contract.
Sukuk Al Istisna'a
Progressive payment facility where the price is paid by the financiers to the contract/supplier in accordance with the progress being undertaken or goods being manufactured for selling the project/goods to the buyer (borrower). The payment by the borrower to the financiers could be a lump sum or be paid over a period in various installments (similar to a murabaha contract). Al Istisna’a contract is a conditional sale contract where the borrower generally starts paying the installments even before the goods/project are transferred where as in a murabaha contract the goods already exist at the time of the draw down. Constructors, manufacturers, etc. wishing to construct/manufacture and deliver specific assets at a future date may seek the cost of such future delivery assets through Sukuk issues.
Sukuk Al Ijara
This is a lease compliant with Shari’a law. A hybrid between an operational lease and a finance/capital lease with certain ‘ownership’ risks, such as the obligation to undertake capital maintenance of the leased asset and the obligation to insure the asset remaining with the lessor. The lessor may appoint an agent, usually the lessee itself, to carry out these duties on its behalf under a servicing agreement. In a simple Sukuk-Al-Ijara the originator will sell certain physical assets to a special purpose vehicle (SPV). The SPV will finance this acquisition by cash raised by the issue of Sukuk notes. The SPV will then lease the same physical asset to a third party, often the originator itself or a third party connected to the originator. The lease rental payments will ‘mirror’ the coupon payments under the Sukuk and the cash flow from the lease rentals will be used to service the coupon payments under the Sukuk.
Noor Islamic Bank has a dedicated Sukuk trading desk. They are experienced traders who are highly actively deals in secondary market. They obtain significant balance sheet dedicated to local, regional and international Sukuk.