An Introduction to Islamic Finance by Zamir Iqbal & Abbas Mirakhor

Author:Zamir Iqbal & Abbas Mirakhor [Iqbal, Zamir & Mirakhor, Abbas]
Language: eng
Format: epub
Published: 2011-08-08T16:00:00+00:00

Salam Sukuk

Salam-based sukuk have proved to be a useful investment vehicle for short-term maturity, since the underlying commodity financing tends to be for short-term tenor, ranging from three months to one year. They can be based on either spot sale (salam) and/or deferred-payment sale (Bay’ al-Muajjil) or deferred-delivery sale (Bay’ al-Salam) contracts, whereby the investor undertakes to supply specific goods or commodities, incorporating a mutually agreed contract for resale to the client and a mutually negotiated profit margin. The Bahrain Monetary Agency (BMA) was one of the innovators and originators of early salam-based sukuk.

According to the structure promoted by BMA, an SPM is set up, which buys a commodity such as crude oil or aluminum on a salam basis, whereby the purchase price is paid entirely up-front with the proceeds from the sukuk certificates. The delivery of the purchased commodity is set at a specified future date and, subsequent to the salam contract, there is a promise by the beneficiary of the commodity to buy the commodity from the SPM on the due delivery date. The return on sukuk is determined by the pre-agreed cost of financing the purchase.

In addition to being short term, the salam sukuk has another special characteristic. Because it results in a pure financial claim and is somewhat de-linked from the risk/return of the underlying asset, the Shari’ah treats it as a pure debt security, which cannot be traded in the secondary market. To do otherwise would introduce an element of riba into the transaction. This feature adversely affects the transferability and negotiability of these certificates in the secondary market. As a result, investors have no option but to hold salam sukuk up to the maturity of the certificates.

Bai’ Bithamin Ajil Sukuk

Sukuk based on Bai’ Bithamin Ajil (BBA) is an innovation of the Malaysian market. The contract is based on a sale of an asset to investors, with a promise by the issuer to buy the asset back in the future at a predetermined price which also includes a margin of profit. Therefore, the issuer gets immediate cash against the promise to buy back at the purchase price plus a pre-agreed profit, which creates an obligation to be released over an agreed period. The issuer issues securities to the investors to reflect this financing arrangement. Investors expect to earn a return equal to the pre-agreed profit.

This structure is not very popular with Middle Eastern investors because of a debatable Shari’ah issue, which does not accept the tradability of debt. In addition, some BBA issuances in Malaysian markets are based on financial assets—which is also an objectionable practice in the eyes of Shari’ah scholars in the Middle East.

Muqaradah Bonds

Muqaradah bonds are based on the mudarabah contract whereby the capital is provided by a pool of investors against certificates or bonds for a specific project undertaken by an entrepreneur (mudarib) with the agreement to share revenues. In this respect, they bear close resemblance to revenue-bond financing in the conventional system, where bonds are generally backed only by the revenue generated by the project funded by the bond issue.

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