010 Islamic Investment-Stock Sukuk

June 22, 2018 | Author: fadzst_69 | Category: Islamic Banking And Finance, Bonds (Finance), Debt, Securitization, Investing



Topic 12ISLAMIC INVESTMENT 1/29 ECON 3430 - Islamic Banking and Finance 2. CAPITAL MARKETS 2/29  Capital market involves long-term investment; maturity of greater than a year  Issued by large corporations and governments  2 major instruments: Debt-based vs Equity-based instruments 1. Role of investors: capital provider vs owner 2. Payment: fixed payment vs profits 3. Default: priority claimant vs residual claimant Shari’ah principles on equity investment 1. Prohibition of riba (no guaranteed fixed return), gharar (excessive uncertainty) and maysir (gambling/game of chance) 2. Primary business activity must be halal 3. Majority of assets must be illiquid 4. Non-permissible income must be below a specified benchmark 3 •The market offers a deep pool of Shariah approved equity securities with accompanying benchmark indices, Islamic bonds and Islamic unit trusts •Other conventional products such as warrants, call warrants, crude palm oil, future contracts and asset back securities are also deemed to be Shariah approved. •The growing popularity of such securities has led to the introduction of the KLSI (Shariah index) in 1999 Shari'ah Compliant Stocks in Bursa Malaysia (As of November 2011) Screening Methodology for Shari'ah-Compliant Stocks Currently there is no international Shari'ah standard for stock screening Different funds or fund managers utilise different standards based on their respective Shari'ah councils In Malaysia: list issued by Shariah Advisory Council of Securities Commission, Dow Jones-RHB Islamic Malaysia Index and FTSE Bursa Malaysia, namely FBM Hijrah Shariah Index and FBM EMAS Shariah Index At global level: there are Dow Jones Islamic Market Indexes, FTSE Global Islamic Index Series, S&P Islamic Index Series, MSCI Islamic Index Series Screening Methodology for Shari'ah- Compliant Stocks • Various types of screening criteria depending on SAC decisions 1) Securities Commission of Malaysia: central level; screening based on core activities and benchmark of tolerance for mixed activities 2) Pakistan uses Meezan Bank Islamic Fund criteria: screening based on permissibility of underlying businesses and balance sheet composition benchmarks 3) Dow Jones Islamic Index and FTSE: screening based on primary business activities and acceptable financial ratios  (and more…) Shari'ah stock screening  Rules to ensure that ordinary shares are Shari'ah compliant  In general, the stock screening process are divided into two stages: 1. Evaluation in terms of company activities, products and industry 2. Computation of a set of financial ratios & compare them against specified benchmarks 7 8 Shari’ah benchmark for listed shares 1a. Primary Activities Criteria 1. Conventional finance (riba) 2. Gambling/gaming (maysir) 3. Prohibited goods & services – Pork, alcohol, prostitution 4. Conventional insurance (gharar) 5. Entertainment deemed non-permissible 6. Tobacco manufacturing or sale 7. Stock-broking or share trading in non-Shari’ah approved securities 9 Shari’ah benchmark for listed shares 1b. Mixed Company Criteria [applied to revenue & profit before tax ] – 5% Benchmark • Clearly prohibited activities – conventional banking, gambling, liquor, pork – 10% Benchmark • umum balwa (prohibited element affecting most people & difficult to avoid) • e.g. interest income from fixed deposits in conventional banks, tobacco-related activities – 25% Benchmark • maslahah to the public • e.g. hotel and resort operations, stock-broking 2. Financial filters is also used to refine the selection  Use of selected financial ratios and compare them against their respective benchmarks to weed out non-Shari’ah compliant stocks  In general these ratios can be categorized as liquid assets, interest income and leverage  Ratio benchmark ranges from:  Liquid asset: 17% to 49%  Interest income: 5% to 15%  Leverage: 30% to 33%  Data are taken from:  Balance Sheet  Income Statement  Macroeconomic date (in the case of DJI) 10  Securities Commission of Malaysia applies additional criteria to companies which are involved in multiple industries, i.e., companies whose business activities comprise both Shari'ah permissible and non-permissible elements.  Analysis is done at the holding company, subsidiary company and associate company levels. Criteria include: 1. Core activities of the company are activities not against the Shari'ah principles as mentioned earlier 2. Haram element is small compared to core activities, i.e., compared against benchmark 3. Public image/perception of company is good 4. Core activities of the company are important and of public interest (maslahah) to the Muslim ummah and the country 5. Proportion of haram element is small and in matters such as umum balwa (common plight), ‘uruf (customs) and rights of non-Muslim community which are accepted by Islam 11  It maybe possible that a company is in industries which are Shari’ah compliant but the revenue from the subsidiary whose activities are not Shari’ah compliant may lead the company to be considered as non-Shari’ah compliant 12 Consequences of non-standardization 1. Slow development due to lack of confidence in shari’ah- compliancy of products 2. Lack of generally accepted operational standards : criteria for determining shari’ah-compliancy of the stocks need to be improved and unified across jurisdictions 3. Weak regulatory environment 4. Fund managers cannot benefit from economies of scale: Islamic capital markets are segmented across countries and regions, thus reducing the effective available size and risk–return spanning possibilities to investors Islamic Investment: Sukuk Definition of Sukuk  Literally means ‘written document’: A document or certificate which represents the value of an asset  “investment Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or in the ownership of the assets of particular projects or special investment activity[…]” (AAOIFI Standard 17)  Technically defined, sukuk are “financial securities of equal denominations representing undivided ownership interests in a portfolio of eligible existing and/or future assets, usufruct, services, and business activities” (Ali, 2008, p. 4)  It is an ownership claim to an asset or a pool of assets, but not a financial claimto a cash flow or receivables as in conventional bond  Sukuk holders receive returns from the underlying assets SUKUK-DEFINITION 16/29  AAOFI defines 14 types of Sukuk, the main ones are: i. Ijara Sukuk (leasing) ii. Certificates of ownership of usufructs (e.g. Sukuk Manfa’at Al-Ijara) iii. Salam Sukuk (deferred commodity delivery) iv. Istisna’a Sukuk (manufacturing or project finance) v. Mudarabah Sukuk (partnership/finance trusteeship) vi. Murabaha Sukuk (purchase order) vii. Musharaka certificates (Joint Venture) Salient Features of Sukuk 17/29  Asset-backed, stable income, tradeable, shariah-compliant trust certificates  Not simply a claim to cash flow but an ownership claim  Return derives from yield generated by client’s lease of the asset  Shariah legitimacy of sukuk lies in the fact that they do not take advantage of interest rate movements  Sukuk are directly linked to real sector activities: will not create short-term speculative movement of funds and potential financial crises  Investing in sukuk involve funding of trade or production of tangible assets SUKUK-BONDS COMPARED 18/29 SUKUK BONDS Represent ownership stakes in existing and/or well defined assets Represent pure debt obligations due from issuer Underlying contract for sukuk issuance is a permissible contract such as a lease or any of the other categories defined by AAOIFI Core relationship is a loan of money, which implies a contract whose subject is purely earning money on money Underlying assets monetised in a sukuk issuance must be Islamically permissible in both their nature and use Bonds can be used to finance almost any purpose which is legal in its jurisdiction Asset-related expenses may attach to sukuk holders Bond holders are not concerned with asset- related expenses Sukuk prices depend on market value of underlying asset, apart from obligor’s creditworthiness Price depends solely on issuer creditworthiness Sale of sukuk represents a sale of a share of an asset Sale of bond is basically the sale of a debt 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sukuk Conventional Types/RM Billion 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sukuk 38.46 54.71 71.06 88.37 88.37 120.12 146.44 199.45 211.37 248.47 294.19 Conventional Bond 224.91 245.94 236.01 276.28 284.20 297.83 306.10 358.04 374.59 395.36 469.18 263.37 300.64 307.07 364.65 372.57 417.95 452.54 557.48 585.96 643.83 763.37 Malaysia: Amount of sukuk and conventional corporate bonds outstanding, 2000 to 2010 Issue-Secondary Marketing (Bay Ad-dayn) 20/29  Tradability of bonds in secondary market is a key feature of bonds -To provide liquidity options to the investor -Without a liquid secondary market, bonds are not attractive to investors  With this debt-based bond, object of trade is debt (dayn) -The debt is the right to future cash payments or the financial claims -Controversy on permissibility of bay-ad-dayn Securitization 21/29 issuer lender owes BHD 10K IOU paper Break up payments into periodic payments Can sell to C,D,E (LIQUIDITY POTENTIAL) IOU- financial liquidity -securitizing the debt (A) (B) Issue-Secondary Marketing (Bay Ad-dayn) 22/29  Tradability of bonds in secondary market is a key feature of bonds -To provide liquidity options to the investor -Without a liquid secondary market, bonds are not attractive to investors  If the sukuk is asset-based (debt), object of trade is debt (dayn) -Controversies regarding the permissibility of bay ad-dayn Sukuk Asset Based (Debt) Murabahah, salam Asset Backed (Equity) Mudharaba, musharakah 23 Classification of Sukuk Key difference is the concept of true sale  Asset-based sukuk allows inclusion of the actual asset which may NOT be legally recognized to be owned outright by the sukuk holders  Asset-backed sukuk:  grants sukuk holder a share of the asset or business venture, and a share of risk commensurate with the true sale ownership of the asset  There is a true sale between the originator and the special purpose vehicle (SPV) that issues the sukuk and sukuk holders do not have recourse to the originator  Assets are owned by the SPV, returns are derived from assets, and asset prices may vary over time  The majority of sukuk issues, however, are not asset backed 24 Asset-based versus Asset-backed Sukuk Issue-Secondary Marketing (Bay Ad-dayn) 25/29  Fiqh views in relation to trading of debt (bay’ al-dayn) 1. Bay’ al-dayn at par value  Unanimously agreed as permissible  Represents the contract of hiwalah (transfer of debt) 2. Bay’ al-dayn at discount to issuer  Unanimously agreed as permissible  Principle of dha’ wa ta’ajjal (incentive to expedite payment of debt) between original buyer and seller Issue-Secondary Marketing (Bay Ad-dayn) 26/29 3. Bay’ al-dayn at discount to third party (securitization)  Disagreement among fiqh scholars  Middle Eastern view – unlawful – tantamount to riba  Malaysian view – lawful – extend application of dha’ wa ta’ajjal to third party  Most common case of secondary trade Types of Sukuk 27/29 Different sukuk structures: Ijarah sukuk Ijarah Sukuk 28/29  According to AAOIFI, this specific sukuk are “ certificates that carry equal value and are issued by either owner of a leased asset or an asset to be leased by promise, or by his agent, the aim is to sell the asset and to recover its value from subscription, in which case the owners become owners of the asset”  In essence, lessor chooses to sell leased asset to a number of individuals, then the ijarah certificate should be issued to represent the individuals’ proportionate ownership in the assets  Holder of this certificate will assume rights and obligations of owner or lessor to the extent of the number of certificates he holds Company SPV (Issuer/Lessor) Sukuk Primary subscribers/ Investors Secondary market Figure 1: Ijarah Sukuk Structure 1 – Sale and Leaseback Trading of Sukuk 2. 1. 3. 1. Company sells leased assets to SPV for an amount required in the financing exercise 2. SPV does not hold any cash, thus issue sukuk to raise the required funds. The sukuk- represents investors’ proportionate ownership of the leased asset 4. The company will pay the rentals periodically with a payment of maturity or to incorporate the principal with rentals periodically, hence leasing to own Company (Mudarib) SPV(Rab-al-mal representing Investors) Investors Figure 2: Mudaraba Sukuk 1. Company and Investors enter into a Mudaraba Agreement 2. SPV (managed by Trustee) issues Sukuk evidencing proportionate participation in underlaying Mudaraba venture 3. Investors make proportionate payments to account of Mudaraba capital 1. SPV issues sukuk to investors while using the gathered proceeds to make payment to account for mudharaba agreement. 2. Any profits arising from the mudharaba project should be divided according to predetermined ratio or the originator simply take the mudharib fee. 3. Losses will be borne by investors. Company SPV (representing Investors) Investors Figure 3: Musharaka Sukuk 1. Company and Investors enter into a Musharaka Agreement. 2. SPV (managed by Trustees) issues Sukuk evidencing proportionate participation in underlaying Musharaka venture 3. Financier makes proportionate payments to Musharaka Like Ijarah,and Mudhrabah Sukuk, Musharaka Sukuk represents participation certificate where the investor becomes a proportionate owner in the business activity. 1. Company invites investor to a partnership in a specific project. 2. Share profits and Losses Primary Subscriber Syarikat Need fund/ cash SPV / Sukuk Issuer 2. Fund 1. Asset sale 4. Sukuk BBA 5. Proceed 3. Sell back Secondary Market 6. Sell BBA Sukuk ( Bai’ ad-Dayn) Figure 4. ABBA Sukuk ABBA Sukuk 33/29 1. SPV sells the asset to the investors with the price of RM300 million in cash after having beneficial ownership over the asset. 2. Such fund of RM 300 million is given to the company for a particular project to which this Sukuk is issued. 3. The investors sell back the asset with RM 300 million and expected return in deferred within the period of 5 years – BBA Murabahah 4. SPV issues sukuk BBA on behalf of investors in receiving payment made in part by the SPV and the company. 5. Payment will be made in deferred, thus investors will receive their capital and profit expected within those 5 years. 6. Along that 5 years period, the investors are free to keep and accept the payment in deferment on behalf of SPV or sell it in the secondary market to get the immediate cash. If it is sold, it will use debt selling concept (bai’ ad-dayn) 34 Issuer Assets Financier (1) Identify assets to be acquired by the financier (2) Financier purchased the asset under the BBA principle at a cost of RM100 mil (3) Sells assets at a price higher than (2) say at RM124 mil ABBA bonds (4) Issue ABBA bonds as evidenced of indebtedness Al-Bai’ Bithaman Ajil Bond (ABBA) Eg. PLUS RM5.1 billion Sukuk in 2002 3 rd Party Company SPV Sukuk Investors Figure 4: Istisna’a Sukuk 1. 3. 2. 1. Istisna’a purchase agreement between 3 rd party and SPV. 3rd party is responsible for delivering the goods. 2. SPV issues Sukuk to investors. These sukuk are not negotiable and cannot be traded until the asssets are manufactured or constructed. 3. Proceeds of Sukuk to purchase the Istina’a assets. 4. SPV enters another istisna’a agreement with company where the SPV is responsible of delivering the specified asset to the company at a profit (parallel istisna’a). 5. The company does not pay lump sum. Pays profit portion on periodic basis and pays principal at maturity.
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