Dubai Sukuk Stds (Draft)

Sharia and Fatwa Supervisory Board DFM Standard For The Board Secretariat Issuing, Acquiring and Trading
Sukuk
DFM Standard For Issuing, Acquiring and Trading Sukuk

Exposure Draft
Consultation Period:
6th January 28th February 2013 DFM invites you to comment on the draft DFM Standard for Issuing, Acquiring and Trading Sukuk Email your comments to: sharia@dfm.ae before 28th February 2013
Contents
introduction .................................................................................................................................... 3 definitions....................................................................................................................................... 5 WHAT IS SUKUK? ........................................................................................................................... 5 SUKUK ASSETS .............................................................................................................................. 5 SUKUK UNDERLYING CONTRACTS ................................................................................................... 6 THE FORBIDDEN FINANCIAL INSTRUMENTS....................................................................................... 7 THE PARTIES TO SUKUK ................................................................................................................. 8 REDEMPTION & TRADING OF SUKUK ................................................................................................ 9 TYPES OF SUKUK ........................................................................................................................... 9 general principles and sharia parameters ............................................................................... 11 THE GENERAL PRINCIPLES FOR ISSUANCE OF SUKUK ..................................................................... 11 SHARIA RULES FOR THE ISSUANCE OF SUKUK............................................................................... 13 a. the special purpose vehicle ...................................................................................... 13 b. stipulating an incentive for the sukuk manager ..................................................... 14 c. giving prizes on investment sukuk .......................................................................... 14 sharia rules of sukuk .................................................................................................................. 15 IJARAH SUKUK ......................................................................................................................... 15 SUKUK OF OWNERSHIP OF LEASED OR TO BE LEASED ASSETS .................................................... 16 SUKUK OF USUFRUCTS ............................................................................................................. 17 SUKUK OF OWNERSHIP OF USUFRUCTS OF SPECIFIED ASSETS .................................................... 18 sukuk of human labor (service ijarah sukuk) ................................................................... 19 PARTICIPATION SUKUK ............................................................................................................. 20 mudaraba sukuk: general rules ......................................................................................... 20 sukuk of musharaka in profit ............................................................................................. 21 FINANCE SUKUK ....................................................................................................................... 24 a. salam sukuk ................................................................................................................ 24 b. murabaha and bay bethaman ajel sukuk ................................................................ 24 c. istisna sukuk.............................................................................................................. 24 d. funds sukuk ................................................................................................................ 24 sukuk guarantees ........................................................................................................................ 26 GENERAL RULES .......................................................................................................................... 26 THE PROMISE TO PURCHASE ......................................................................................................... 26 GUARANTEES IN INVESTMENT SUKUK ............................................................................................ 27 THE OBLIGATION TO LIQUIDATE THE SUKUK ASSETS AND REFUND THE CAPITAL .............................. 27 UNDERTAKING OF PURCHASE AT PRICE EQUIVALENT TO THE REMAINING UNPAID FIXED RENTAL (THE NON-MANAGING LESSEES UNDERTAKING) .................................................................................... 27 LENDING UNDERTAKING BY THE INVESTMENT SUKUK MANAGER ..................................................... 27 LENDING UNDERTAKING BY THE INVESTMENT SUKUK MANAGER ..................................................... 27 GUARANTEE OF A CERTAIN DETERMINED PROFIT FOR THE SUKUK HOLDERS .................................... 28
Introduction
All praise is due to Allah, Lord of the Worlds; and His blessing and mercy be upon his last Messenger, his family, his companions and upon all who rightly follow them, till the Day of Judgment. One of the most important features of Islamic finance is that it is based on collecting funds from their owners through Mudaraba or Wakala Bilistithmar1, then investing the same through Sharia compliant financing and investment contracts, which may be simple or compound. In all cases, immediate money is not offered to finance-seekers in exchange for future money, rather the dealings are conducted on assets, usufructs and financial rights. For instance, financial instruments had started dealing with shares at first, but the beginning of this century witnessed dealings in new financial instruments called "Sukuk." A valid question may arise on the difference between shares and Sukuk. It can be said in this regard that shares are usually confined to being common rights in the ownership of the assets of a specific legal company, and they remain in use as long as the company itself remains in existence. Sukuk, on the other hand, although they represent common rights in the ownership of assets, they are not necessarily limited to the assets of a specific company; besides, they are issued for a specified period after which they can be redeemed. When Sukuk first appeared in the beginning of this century, they were considered a substitute to bonds and for that reason Sukuk borrowed from bonds some mechanisms, procedures and terminologies which were not contradicted to Sharia rules. This standard aims at setting the rules and parameters with respect to the issuance and tradability of the Sukuk, keeping in mind their Sharia origin which is to be duly observed through the use of the mechanisms, rules and parameters endorsed by Islamic law. This way, Sukuk become a genuine Islamic financial instrument as dictated by their Sharia origins. In fact, Sukuk have made quantum leaps in terms of variety, volume and revenue, and they have drawn the attention of both the Islamic and international markets. Their issuing has also been closely monitored by Sharia bodies to ensure the compliance of their structure and execution with Sharia rules. Considering the novelty of Sukuk in the market, there are certain challenges facing them, such as the absence of an integrated secondary market due to the relatively limited number of Sukuk issuances in comparison with the market of conventional financial instruments. Some of the other challenges relate to the absence of a new Sharia standard for acquiring of and trading in Sukuk, that broadly facilitates the
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Other Islamic financial modes include: Musharaka, Diminishing Musharaka, Restricted and Unrestricted Mudaraba, Restricted and unrestricted Investment Wakala, Bay Bithaman Ajil, Murabaha for the purchase order, operating and financial lease (Ijara Muntahia Bittamlik), Istisna and Salam Sale.
issuance of Sukuk, opens the doors to more useful financial innovations and creates potentials for Sukuk investors so they can own and trade in Sukuk with full comfort and assurance that their investment is in compliance with Sharia. As we follow the current situation of the Islamic Sukuk market, we notice that the issuance of Sukuk had witnessed considerable development till 2007, after which it shrank in 2008 due to the decline in economic growth. But it improved again to the extent that the value of issued Sukuk in 2011 was worth $70bn. Thus, we should expect a prosperous future for Sukuk in the coming years if we are able to offer the appropriate standard which bridges all gaps to embrace the expected improvement in the economic situations. It is also expected that new companies will play valuable roles in this market and improve its efficiency, thus making Sukuk an excellent instrument for treasury operations and trading. Investment Sukuk, which are better alternative to conventional bonds, are constantly and largely evolving for the use of investors who seek Sharia compliant investment products. The development of the Sukuk sector however calls for sincere efforts to be exerted by the Muslim scholars and whoever is interested in the Islamic financial thought, in order to innovate and come up with new Islamic financing instruments that serve both the Islamic and world communities, and so enable these communities to benefit from the fairness of Islamic finance and its efficiency in achieving constant and balanced growth. Hence the interest of Dubai Financial Market was towards the establishment of its own standard for acquiring of and trading in Sukuk. In order to prepare this standard, the Sharia and Fatwa Supervisory Board of Dubai Financial Market has reviewed and studied the existing Sharia Sukuk standards and the relevant fatwas that were issued by the reliable fatwa bodies, and then it prepared this new standard. This new standard, which was prepared by the Sharia and Fatwa Supervisory Board, aims at subjecting Sukuk to the principles and rules of Sharia, which assures Sukuk holders and enables Islamic finance industry to achieve more progress in the future. Just Allahs pleasure is our ultimate goal; and His Favor only destines the success.
Definitions
What is Sukuk? 1. Sukuk: Plural of Sakk, lexically means a certificate, a deed or security2. In Islamic Finance terminology Sukuk refers to certificates or legal instruments (securities) of equal value, owned either by a defined person (whose name appears thereon; nominal Sukuk) or by their bearers. They represent undivided shares in ownership of assets: tangible assets, usufructs, debts, money, services, financial rights or a mixture of some or all of these kinds, but subject to certain conditions (the Sukuk assets) upon issuance and after subscription. Sukuk holders share the profits and losses of the Sukuk underlying assets. Sukuk are tradable instruments so long as they do not represent debt or money alone. They shall not be deemed as debt for their owners on their issuer at issuance time; their issuance shall strictly be on the basis of one of the Sharia contracts, and the rights and obligations of all contractual parties are well defined in the prospectus. Moreover, Sukuk have the following characteristics: 1.1. They are either nominal or for-the-bearer certificates, issued with equal value as evidence of ownership for their holders in the underlying assets. 1.2. They are issued, based on a Sharia contract with all of its rules, conditions and legal effects. 1.3. The holder shares the proportion of the Sukuk he holds, the profit and the liquidation value of the assets they represent. In case of loss, he is also liable for loss to the proportion of the Sukuk he holds based on the Fiqh maxim "liability is an obligation accompanying gain 1.4. Sukuk ability for redemption and trading is subject to the conditions pertaining to the tradability of the assets they represent. 1.5. It represents property rights in assets that are either existing at the time of issuance or to be acquired with the issuance proceeds; however, unlike bonds, Sukuk do not represent interest-bearing loans from their holders to their issuer. On the contrary, Sukuk represent undivided shares in the ownership of assets, and they entitle their holders to the return generated from the investment of their issuance proceeds.3 1.6. Sukuk are issued for a limited period, and they can be redeemed during or at the end of this period. Sukuk assets Sukuk assets are what the Sakk represents of tangible assets, usufructs, debts, money, services or a mixture of some or all of these kinds but with certain conditions.
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From the word Sakk were developed later the English word (check) and the French word (cheque) and their likes.
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It is one of the common mistakes to term Sakk a bond. A bond represents a financial right in a certain amount of money that is payable in the future. This amount comprises the money paid to purchase the bond and the interest calculated on term. Therefore, bond and its likes, e.g. treasury bills, are prohibited Riba-bearing financial instruments.
Sukuk underlying contracts Sukuk are issued on the basis of a Sharia contract that has fulfilled its elements and conditions and produced its legal effects. Sukuk contracts are not limited in number since permissibility is the original ruling in initiating contracts and making conditions so that it is the claim of prohibition that needs to be supported with evidence. Contracts, however, can be divided into financing contracts and investment contracts. Financing contracts are the ones that lead to the creation of debt liability towards one of the contractors, like the creation of monetary debt in Murabaha, or goods as in Salam and Istisna. Conversely, Investment contracts do not result in creation of debt liability upon any of the contractors as in Musharaka, Mudaraba and Wakala bilistithmar (agency in investment). Sukuk underlying contracts include: 1. Investment contracts: 1.1. Musharaka4
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Partnerships: (1) Partnership in ownership is based on Wakala and Kafala between partners. It is formed when two or more jointly own something by virtue of inheritance, gift, bequest or other means. It may be formed compulsory; without it being intended by the partners as when two inherit something, or it may be initiated by the partners as when they jointly buy something or accept a gift, donation or a bequest. The partners in this partnership are like foreigners so that no party has the authority to act on behalf of the other unless with delegation of power; however, one may guarantee the other. (2) Contractual partnership: This partnership is formed by the contractual agreement of partners whose number may increase over time- on the basis of Wakala or Wakala and Kafala combined. It is of four types. (3) In a Partnership: An agreement between two or more parties to combine their assets for the purpose of making profit. Profit sharing is as per agreement and liability for loss is as per their shares in the capital. (4) Mufawada Partnership: Mufawada literally means equality, and it is derived from Tafweed which means authorization to act. Technically, it refers to a partnership in which the parties are equal in the funds contributed by them, their right to act and their liability and profit. It is based on Wakala and Kafala combined. (5) Abdan Partnership (vocational or professional partnership): An agreement between two or more parties to provide services pertaining to a profession or a vocation and to share the profit according to an agreed-upon ratio. (6) Wojoh Partnership (Partnership in creditworthiness or reputation): A bilateral agreement between two or more reputable parties to conclude a partnership without a capital so they buy assets on credit on the basis of their reputation for the purpose of making profit. When they sell the assets they repay the debt and share the balance as profit in proportion to their debt liability.
1.2. 1.3. 1.4. 1.5. 1.6.
Mudaraba Wakala Bilistethmar Muzaraa Mugharasa Musaqah
2. Financing contracts: 2.1. Bay Bethaman Ajel (Musawama sale) 2.2. Murabaha 2.3. Istisna 2.4. Salam 2.5. Ijarahh (The two types of Ijarahh) 3. The prospectus: Sukuk prospectus represents an invitation from the issuer to the subscribers. It includes all information about the Sukuk issuer, the use of the Sukuk proceeds, the assets in which the proceeds will be invested, the assets manager, the Fatwa and Sharia Supervisory Board, the methodology of Sharia auditing, the controls to protect the interests of the subscribers and so on and so forth. 3.1 The act of subscription represents an offer, while the issuers approval of the subscription represents an acceptance, 3.2 However, if it is expressly stated in the prospectus that it is an offer, then in this case the prospectus will be considered as an offer and the subscription becomes an acceptance. The forbidden financial instruments 1. Bonds: Bond is a certificate or a deed (security) that represents a guaranteed interest-bearing debt owed by its issuer (the debtor) to its bearer. A bond thus represents a financial right for its bearer (the creditor). Its amount is guaranteed by the bond issuer to be repaid at a specific future time, and it comprises both the amount paid in the purchase of the bond and the interest calculated on its term. Bonds include government bonds, treasury bills, corporate bonds (Loan instruments) and all financial instruments that are based on lending with interest. All these are Reba-bearing financial instruments and thus they are forbidden to deal with. For their prohibition consideration should be given to their essence and nature and not to their terminology. Terming bonds as investment certificates does not change the prohibition of their acquisition and trading. Similarly, terming Sukuk that have fulfilled all Sharia conditions as Islamic bonds does not render them prohibited, yet the name (Islamic bonds) itself is not accurate in economic sense. 2. The stocks of companies whose primary activity is prohibited. 3. The stocks of companies whose primary activity is permissible but: 3.1. Its interest based lending or borrowing exceeds 30% of its total assets, or 3.2. Its income generated from unlawful sources exceeds 10% of its total income.
4. All kinds of financial derivatives. 5. Securities that are based on contracts that have not fulfilled their Sharia elements and conditions, or that involved prohibited elements or contracts like the buy-back sale, the sale whose two counter values have been both postponed, sale of debts for less than their nominal value, forward currency exchanges and fictitious sales of Murabaha, whose Sharia conditions have not been observed. The parties to Sukuk A. The issuer of the Sukuk 1. The issuer of the Sukuk is the party who uses the realized fund. Sukuk issuer could be a firm, a government or a financial institution. The issuer may delegate for Issuance of the Sukuk an intermediary institution (special purpose vehicle, SPV). 2. The issuer of the Sukuk could be the same seller of the leased asset or the asset to be leased, the seller (lessor) of the usufruct of the asset in a lease contract or the seller of the service in a service lease contract. Sukuk issuer could also be the seller in a Salam contract, the buyer in an Istisna contact where the Sukuk holders are the manufacturer or the buyer in a Murabaha contract where the Sukuk holders are the seller. 3. The issuer of the Sukuk could be a special purpose vehicle (SPV), which is established as agent and trust in favor of the Sukuk holders. In this case the SPV is the party that gives the offer while the Sukuk holder is the one who accepts that offer. 4. The issuer of the Sukuk representing ownership of the leased assets (already leased or to be leased later), or also the Sukuk representing ownership of the usufruct of the assets or services, is the seller of these assets, usufructs (the lessor) or services. The Sukuk holders are the buyers of these Sukuk assets, while the funds mobilized through the subscription are the purchase price of these assets. 5. The issuer of Musharaka, Mudaraba or Investment Agency Sukuk is the partner, the Mudareb or the investment agent respectively. The Sukuk holders are respectively the partners, capital providers or the principals. The funds mobilized through the subscription are the Sukuk holders share in the Musharaka capital, the Mudaraba capital or the entrusted capital of the investment agency. 6. The issuer of Istisna Sukuk is the seller of the manufactured asset, while the Sukuk holders are the buyers of this asset and the fund mobilized through the subscription is the purchase price of this manufactured asset. 7. The issuer of Murabaha Sukuk is the seller of the Murabaha asset, while the Sukuk holders are the buyers of this asset and the fund mobilized through the subscription is the purchase price of this asset. 8. The issuer of Muzaraa Sukuk: 8.1. The issuer of Muzaraa Sukuk could be the owner of the land (the principal owner or the owner of the usufruct of the land). The subscribers are the cultivators on the basis of a Muzaraa contract. The realized fund is the cultivation cost.
8.2. The issuer of these Sukuk could also be the cultivator (the worker), the subscribers could be the owners of the land (investors whose subscription amounts are used to buy the land) and the Sukuk holders are entitled to a share of the produce of the land as per agreement. 8.3. Holding the title to the Sukuk assets by the Sukuk holders may be direct or through an agent or a trustee, who may be an individual or a special purpose vehicle, SPV. B. Sukuk holders 1. They are the owners of the Sukuk assets. They hold all varieties of Sukuk certificates. C. Sukuk Manager The Sukuk manage may be: 1. A Mudareb managing the Sukuk holders assets against a share in the realized profit, 2. An investment agent managing the Sukuk holders assets against a determined fee that could take the form of fixed amount or a percentage in the assets value, with or without an incentive, 3. A managing partner managing the Sukuk holders assets against a regular share or a higher share in the profit. Redemption & Trading of Sukuk 1. Redemption of Sukuk means distribution of the Sukuk assets on the Sukuk holders, or selling the Sukuk assets to the Sukuk issuer or someone else, then distributing the sale proceeds on the Sukuk holders in proportion to the number of Sukuk held by every one of them. 2. Trading of Sukuk is the sale of the Sukuk underlying assets to a third party so that he replaces the old Sukuk holder in the ownership of these assets. Types of Sukuk 1. Sukuk of ownership of tangible assets: 1.1. These Sukuk represent for their holders a common share in the ownership of assets that are either ascertained or established as a liability by description. This ownership grants these Sukuk holders the right in owning the funds realized from the sale of these assets or the sale of their usufructs. 2. Sukuk of usufructs: 2.1. These Sukuk represent for their holders a common share in the ownership of usufructs of ascertained assets (lease of ascertained assets) or assets established as a liability by description (forward lease). 2.2. They grant their holders the right in reselling the usufructs they represent through subleasing so that they can claim the rents from the sub-lessees. 3. Sukuk of lease of services: 3.1. These Sukuk represent for their holders a common share in the ownership of
services that could be either ascertained or established as a liability by description (from a specific or nonspecific service provider). The provider of these services commits himself to provide them to others against a determined fee, whether in person or through what he undertakes to provide of facilities, means, equipment, devices or other things. Examples of these services include medical and educational services, means of transportation, legal or financial consultations and geometric designs. The fund mobilized through subscription is the purchase price of these services, whether for a certain period or a certain work. 3.2. These Sukuk grant their holders the right of subleasing the service against a determined fee, which constitutes the return of these Sukuk. 4. Mudaraba (Muqarada) Sukuk: 4.1. The underlying contract of these Sukuk is Mudaraba where Sukuk holders provide the Mudaraba capital and the Mudareb invests it in a certain venture or project against a percentage in the return of that investment. The Mudareb is not liable for the damage or loss of the Mudaraba assets as long as he is able to prove that such loss or damage has not been the result of a misconduct, negligence or breach of the Mudaraba contract and conditions. 4.2. The issuer of these Sukuk is the Mudareb, while the Sukuk holders are the capital providers and the fund realized from issuance of the Sukuk is the Mudaraba capital. The issuer of these Sukuk may also be a special purpose vehicle (SPV), which is established as agent and trust in favor of the Sukuk holders, while the Mudareb is the other party in this Mudaraba contract. 4.3. Mudaraba Sukuk represent at issuance undivided shares in the Mudaraba capital, then after issuance they represent undivided shares in the Mudaraba assets purchased with the capital. The holder of these Sukuk has the right to dispose it of or the assets it represent by all legal means. 5. Musharaka Sukuk: 5.1. The underlying contract of these Sukuk is Musharaka, and the underlying asset of this Musharaka is a stand-alone asset or a share in an existing-Musharaka asset. The latter occurs when the Sukuk issuer securitizes his share in a Musharaka he previously signed with a third party, so the Sukuk holders replace him in that share and become its owners, and the Sukuk manger manages this share for them. As a result they become entitled to the profit according to the agreed-upon profit ratio and also liable for loss in proportion to their share in the Musharaka capital. 5.2. The issuer could also be a party willing to set up a certain project on a land he owns so he wishes to issue Musharaka Sukuk in order to help develop this project on the land. Alternatively, he may have insufficient capital to finance a project he wants to set up, so he issues Musharaka Sukuk to raise the needed capital. In this case the Sukuk issuer owns a share in the project proportionate to his contribution, while the Sukuk holders own the remaining share each in proportion to the Sukuk he holds.
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6. Salam Sukuk: 6.1. Salam Sukuk represent prior to the possession of the Salam asset undivided shares in the ownership of that asset. After procession they represent undivided shares in the selling price of the Salam asset. 7. Murabaha and Bay Bethaman Ajel Sukuk: 7.1. These Sukuk represent after the purchase of Murabaha asset and prior to its sale undivided shares in that asset. After its sale, they represent undivided shares in the selling price of the Murabaha asset, which has become a debt on the buyer.
General Principles And Sharia Parameters5

The General Principles for Issuance of Sukuk 1. Sukuk must be issued on the basis of a Sharia (financing or investment) contract which must fulfill the following: 1.1 The pillars and conditions of contracts. 1.2 Its legal effects and consequences. 1.3 Its implementation is meant to meet its Sharia objective. 5 The Sakk issuer is the one who utilizes the issuance realized fund. He could be the Mudarib, the investment agent, the managing partner, the seller in Salam, the Mustasni (the buyer in Istisna), the buyer in Murabaha, the Muzari, the Musaqi or the Mugharis (the farmer in the agricultural partnerships). The issuer may be the one who initiates the offer by virtue of the prospectus so that the subscription of the Sukuk holders is deemed the acceptance to the offer, and consequently the Sukuk underlying contract is initiated. The issuer may also be the Sukuk holders through their representative or a special purpose vehicle (SPV) acting as agent and trust in favor of the Sukuk holders. It also utilizes the Sukuk issuance realized fund and accepts the offer through the signing of the Sukuk underlying contract. However, it is permitted for the Sakk to be issued by a party like the Mudarib, so he expresses the offer of a Mudaraba whose terms and conditions comply with Sharia, and requests from the capital provider to provide the capital. Nevertheless, the offer may originate also from the capital provider, and the acceptance from the Mudarib, and thus Mudaraba is concluded. In either case, Mudaraba capital shall b divided into equal units and certificates of equal value shall be issued against them so that every certificate represents for its holder a share in the capital of the project for whose financing the Sukuk are issued, and when assets are purchased with the capital then the certificate represents a share in these assets. As for the mechanism and the procedures, they are part of the legal system. For example, the very idea of SPV has originated from the British Law, while the Latin laws do not recognize it so they consider other means to issue Sukuk.
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1.4 It is free from conditions that contradict its essence and Sharia objectives. 2. The activities: Issuance and trading of Sukuk in not allowed if their issuance realized fund is meant to be used in unlawful activities, or if some of the Sukuk assets were unlawful. 3. Issuance, trading or redemption of Sukuk must not involve or boil down to the sale of spot money against deferred but more money. Examples are: 3.1 When the transfer of ownership of assets from the seller in the Sukuk of tangible assets or the Sukuk of usufruct of asset is fictitious, i.e. it does not involve real and legal transfer of ownership. 3.2 When the assets sold to the Sukuk holders in Sukuk of ownership of leased, or to be leased, tangible assets are unsalable according to the official laws, or when they remain as the property of the seller appearing in accounting terms on the balance sheet, and not off the balance sheet. 3.3 When the investment Sukuk documents state that the Sukuk issuer (as Mudareb, managing partner or investment agent) is indebted for the Sukuk sale proceeds to the Sukuk holders, and not managing the Sukuk assets on a trust basis. 4. The return on the Sukuk must reflect the outcome of Sukuk assets investment, and it is not a financial liability upon the Sukuk issuer in return of his use of the Sukuk proceeds. 5. The Sukuk funds mobilized through subscription must be used for the same purpose stated in the prospectus in accordance with Sharia rules and precepts throughout the duration of the investment. 6. The prospectus and documents of the Sukuk must include a clause to the appointment of a Sharia committee responsible for supervising and auditing the project or the venture where the Sukuk issuance proceeds are invested. This committee shall accordingly submit periodical reports to the Sukuk holders, and it has the right to summon the Sukuk holders or their representatives to take the appropriate action in case of a flagrant infringement of Sharia rules, procrastination or refusal of the project or venture manger to follow the Sharia committees instructions or to remedy any violations. 7. Sukuk may be nominal, i.e. carrying the name of the Sakk holder, and their title is transferred by registration in a special record or by writing on them the name of every new holder. Sukuk may also be for their bearer, so title is transferred then by virtue of changing hands. 8. Sukuk and Ienah: the mere purchase of the leasable assets (the Sukuk assets) from their owners by the Sukuk holders then leasing them back on Ijarahh Muntahia Bettamleek against fixed and variable rents cannot be deemed as unlawful Ienah should the following be observed: 8.1 The sale is genuine, and it transfers both title and liability. 8.2 The Sukuk holders are genuinely liable for the burdens and expenses that are associated with ownership, like insurance premiums, major maintenance and taxes.
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8.3 The Sukuk holders have the absolute right in the disposal of the Sukuk without any restrictions. 8.4 The Sukuk assets are saleable according to the official laws. 8.5 The sale and lease contracts are not linked together, and the lease is not stipulated in the sale contract. 8.6 A lapse of no less than one year from the lease of the assets to their title transfer to the lessee. 9. Sukuk and Wafa sale and loan with interest: 9.1 This transaction (the purchase of the leasable assets -the Sukuk assets- from their owners by the Sukuk holders then leasing them back on Ijarahh Muntahia Bettamleek against fixed and variable rents) cannot be deemed as Wafa sale; a sale which includes a stipulation in the very contract to return the sold asset to its original seller upon his repayment of the same price, so that the buyer can benefit from this sale contract by utilizing the sold asset for his own benefit, either by leasing it to the seller or to a third party, before returning it back to its original seller. 10. This transaction cannot be deemed as a loan with interest on the account that: 10.1 Both title and usufruct are correlated in the sense that leasing an asset after its purchase to the original seller is similar to reselling it back to him, because a usufruct of an asset cannot be segregated from the asset itself, hence the transaction will be similar to buying an asset for cash price then selling the same to the original seller for a higher credit price. 10.2 Sharia recognizes the complete ownership that involves both title and usufruct of the asset, as well as the incomplete one that involves the usufruct only or the title only. Segregation between the title and the usufruct is feasible in contracts like sale and bequest. However, the subject matter of the sale contract corresponds to the complete ownership of both title and usufruct, while the subject matter of the lease contract corresponds to the incomplete ownership of the usufruct only and not the title. 10.3 Sukuk holders take full responsibility of the leased assets since they are the owners of these assets. Sharia Rules for the Issuance of Sukuk A. The Special Purpose Vehicle 1. It is permissible for the issuance of Sukuk to be handled by a special purpose vehicle acting as the Sukuk holders trustee in holding title of the Sukuk assets, and as their agent in directing the Sukuk issuance realized funds towards investing them in what they were issued for. It may also initiate the offer in the Sukuk issuance agreement on behalf of the Sukuk holders. 2. The special purpose vehicle cannot be owned by the Sukuk issuer, who utilizes the realized fund, if this shall result in breach of Sharia rules, like in cases that involve sale of the Sukuk assets by the Sukuk issuer to the SPV as in Sukuk of the ownership of the tangible assets that are meant for leasing, or in Sukuk of ownership
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of usufructs. If the Sukuk issuer owns the SPV, then the Sukuk issuer will be effectively selling to himself. However, on the other hand, SPV can be established by the Sukuk issuer to function as his agent when no breach of Sharia rules is involved, like when the Mudareb sets up an SPV to initiate on his behalf the offer in Sukuk issuance. B. Stipulating an incentive for the Sukuk manager 1. It is permitted to state in the prospectus and its documents that the Sukuk manager is entitled to all or part of the profit that exceeds a certain level as an incentive for his good management, in addition to the fees or profit share he is originally entitled to. 2. The Sukuk managers incentive is to be worked out for the Sukuk term upon the maturity of the Sukuk; however, it is permitted to advance to the Sukuk manger some payments on the account of the incentive during the Sukuk terms and prior to their maturity. These advance payment shall be offset against the realized incentive upon the maturity of the Sukuk. C. Giving prizes on investment Sukuk It is not permitted to issue Mudaraba, Musharaka or Wakala Bilistethmar Sukuk where the Mudareb, the managing partner or the investment agent undertakes to offer on lot basis, on certain conditions and from the profit generated from the Sukuk assets (assets of Mudaraba, Musharaka or Wakala Bilistethmar) prizes to the Sukuk holders. However, if the price for these prizes is paid from Sukuk mangers own funds then this is allowed but on the following conditions: 1. Giving prizes from the fund providers profit is not the primary objective of the Sukuk issuance. The following clues may suggest such an objective: 1.1 When the Sukuk managers fees or profit share is higher than normal market fees or profit share for such manger. 1.2 When the value of the prizes is too big to be paid for from the Sukuk managers normal fees or profit share so that it would not serve his interest to pay for the prizes unless his fees or profit share was high enough. 2. Distribution of prizes is based on pure donation so that prizes are not distributed on regular basis and are not customarily considered as commitment on the Sukuk manager that if he stops giving prizes clients stop buying the Sukuk. 3. It is recommended to link the distribution of prizes to the performance of the Sukuk assets and the realized profit, and also to determine the value of the prizes in accordance to the Sukuk mangers realized share in the profit. 4. The Mudarebs profit share is commensurate with the market rate for a Mudarebs profit share. If, therefore, the Mudarebs profit share has excessively exceeded the market rate then the Mudaraba is deemed fictitious and the prizes distributable to the Sukuk holders are deemed to have been paid for from their own share in the profit and thus, a part of the Sukuk holders profit share will have been allocated to only some of the Sukuk holders, which is a kind of gambling.
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Sharia Rules Of Sukuk

Ijarah Sukuk 1. The objective of Ijarah Sukuk is to convert the Ijarah underlying usufruct into securities (Sukuk) so that they can be traded in the secondary market. 2. Each Ijarah Sakk represents a common share in the ownership of the usufructs of the tangible assets before these usufructs are sold to a third party. However, after the sale of these usufructs the Sakk represents the rent, which becomes a receivable payable by the lessee and thus, subject to Sharia rules of sale of debt. 3. Ijarah Sakk does not represent a certain amount of money, nor does it represent a debt liability upon a particular party of natural or juristic personality, rather it is a security representing a common share in the ownership of usufruct of an a tangible asset, like a real estate property or a vessel. 4. It is permitted to issue and trade in the Sukuk that represent ownership of leased, or to be leased, tangible assets provided these assets have fulfilled their relevant Sharia conditions, and they are among the leasable assets, like a real estate property or a vessel and the likes. The Sakk must also represent ownership in income-generating real tangible leased or leasable assets. 5. It is permitted for the Sakk owner to sell the Sakk in the secondary market to any buyer at any agreed-upon price, whether it is equal, higher or less than the Sakk issuing price, based on the market factors of offer or demand. 6. The Sakk owner is entitled to his share in the return, i.e. the rent, according to the rent payment schedule outlined in the prospectus and the lease contract, after deduction of the Sakk corresponding share in the applicable expenses as outlined in the Ijarahh contract. 7. Being the owners of the usufruct, it is permitted for the holders of the Sukuk of the ownership of tangible assets, or the holders of the Sukuk of the ownership of usufructs, to issue Ijarah Sukuk representing undivided shares in the usufructs they came to own by virtue of owning the tangible assets or usufructs of the assets for the purpose of subleasing the same with the permission of the original lessor. However, this is circumscribed with the issuance of the Sukuk being prior to signing the lease agreements with the new lessees, whether the lease is for a rent equivalent, higher or less than the first rent. In case signing the lease agreements was prior to the Sukuk issuance, the Sukuk become untradeable, because they represent then debts liabilities on the new lessees and thus, their tradability is subject to the rules pertaining to sale of debt. 8. It is not permitted for the seller of the usufruct, be him the issuer of Sukuk or the manger of the Sukuk, to guarantee the face value of the Sakk or its return. Moreover, the owners who lease assets are liable for them in case of full or partial damage. 9. The leased assets may be already owned by the Sukuk issuer, or they may be a liability upon his part, i.e. he will come to own them based on a sale or Istisna or any other contract. Nevertheless, Sukuk holders own the usufruct of these assets once the lease contract is signed and thus, they become entitled to the rent payable in the sublease contract. However, these Sukuk of forward lease are not tradable unless the assets have been delivered. 10. Sukuk of ownership of tangible assets and Sukuk of ownership of usufructs of tangible assets are issued on the basis of a valid sale contract that transfers the
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ownership from both Sharia and legal perspectives. This ownership however is either complete or incomplete; the former involves title of both the corpus and the usufruct (Sukuk of ownership of tangible assets), while the latter involves title of the usufruct only and not the corpus (Sukuk of ownership of the usufruct of tangible assets). However, in this sale contract it is a must that: 10.1. The sale is genuine and genuinely transferring to the Sukuk holders the complete or the incomplete ownership of the asset form both Sharia and legal perspectives, and thus bestowing on the Sukuk holders all privileges of ownership to conduct all legally valid acts on the asset itself or its usufruct with no restriction whatsoever. 10.2. The object of sale (the Sukuk assets) is among the saleable assets, and its title can be transferred from both legal and Sharia perspectives to the Sukuk holders or the agent that represents them. As a result, the following will take place: 10.2.1 The assets (sold assets) become no longer the property of the seller, and in his financial statement they appear off balance sheet. 10.2.2 The right of Sukuk holders attaches the assets (the assets) to which they hold title (the Sukuk assets) and not the liability of the Sukuk holders who sold the assets. 10.2.3 The Sukuk holders shall have the right to conduct on the Sukuk assets all the legally valid acts like sale, lease-back to the seller and the likes, with no restrictions. 10.2.4 The purchase undertaking given by the lessee of the Sukuk assets shall bind the promising party only so that the Sukuk holders are not obliged to sell to him these assets. 10.2.5 The sale undertaking given by the Sukuk holders as owners of the assets shall bind them to sell the assets to the lessee, who is not obliged to buy them. 10.3. It is not permitted to have two promises; one from the lessee on purchase and the other from the Sukuk holders on sale, if the object of promises, the time for their execution and the remaining conditions are the same. Sukuk of ownership of leased or to be leased assets 1. The Sukuk of ownership of the leased assets or the asset to be leased represent the right of their holders in the ownership of the assets. They grant them the right over the fund realized from the sale of these assets or the sale of their usufructs. 2. The assets represented by the Sukuk of ownership of tangible assets must be owned by their seller when selling them to the Sukuk holders. When selling them on Istisna or Salam, the assets must have been established as liability by description on the seller. 3. The title to these assets must be transferred to the Sukuk holders by virtue of a valid title-transferring sale, and the Sukuk holder must come to possess them physically or constructively. 4. The holders of these Sukuk shall become liable for the assets represented by these Sukuk (their damage and loss) each in proportion to the number of the Sukuk he holds, and they shall enjoy their gains and privileges (proceeds, returns, rents and profits) according to the terms outlined in the prospectus and the issuance contracts. 5. It is permitted for the holders of these Sukuk, with the observance of the above conditions, to lease these assets after they come to own and possess them, or even
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to lease them on forward lease basis, i.e. before possessing them, regardless of whether the lease is to their original seller or to a third party, and whether it is operating lease or Ijarah Muntahia Bittamlik. 6. It is permitted to appoint the seller of the assets represented by the Sukuk as Mudareb against a share in the profit, or as an agent on behalf of the Sukuk holders to manage these assets against fixed fees plus a good management incentive. 7. It is permitted for the seller then lessee (operating lease) of the assets represented by the Sukuk to unilaterally undertake to redeem the Sukuk upon their maturity by means of purchasing the assets (Sukuk assets) on the price agreed upon at the time of executing the purchase. Alternatively, the price could be a market price, a fair price, or equivalent to the net value of the assets or their face value. However, this undertaking binds him alone and not the Sukuk holders, and it can be issued by a third party on any price. 8. It is permitted to trade these Sukuk, for they represent claims to tangible assets (already leased or to be leased at a later stage). When traded, the title to these assets represented by the Sukuk is transferred from the seller to the buyer along with their rights and obligations. 9. As owners of the assets represented by the Sukuk, the Sukuk holders have the right to conduct on these asses all valid acts, in accordance with the Sharia-compliant issuance contracts and in ways that do not harm others rights. 10. It is permitted for the Sukuk holders to undertake to gift or sell on a determined price the assets represented by the Sukuk to the lessee of these assets, regardless of whether the lessee is the original seller or a third party. 11. It is permitted for the lessee of the assets represented by the Sukuk to undertake to purchase these assets in case he has defaulted on meeting his financial commitments toward the Ijarah agreement. The purchase price in this case could be any price agreed upon at the time of executing the purchase; the market price, a fair price or equivalent to the net assets value or the face value. Sukuk of usufructs 1. These Sukuk represent their holders right in the ownership of the usufructs of assets that will be either sold or leased. They also give their holders the right to claim the proceeds realized from the sale or lease of the assets usufruct. 2. The usufruct represented by the Sukuk must be owned by its seller when it is sold to the Sukuk holders, so that he either owns the asset whose usufruct is to be sold or the usufruct alone and not its underlying asset. If the usufruct is already sold to a third party then issuing Sukuk against this usufruct is not allowed since the usufruct no longer belongs then to its seller. 3. The usufructs represented by the Sukuk may be usufructs of assets that are established as a liability by description on the sellers part to deliver on the date determined in the lease contract. 4. The ownership of the usufructs represented by the Sukuk must be transferred from the seller of these usufructs to the Sukuk holders, who buy them through a lease contract. 5. The holders of these Sukuk shall become solely liable for the damage or loss of these usufructs, each in proportion to his share in these usufructs, and they shall enjoy their gains and privileges (proceeds, returns, rents and profits) according to the
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terms outlined in the prospectus and the relevant Sukuk contracts. 6. It is permitted for the Sukuk holders to sell the whole usufruct (its whole duration) represented by the Sukuk through a usufruct-selling contract, or part of it (part of its duration) through a lease contract. 7. It is permitted to appoint the seller of the assets usufructs represented by the Sukuk as an agent on behalf of the Sukuk holders to manage these usufructs against fixed fees plus an incentive corresponding to the amount in excess of a certain rent limit, or to appoint him as Mudareb against a share in the profit. 8. It is permitted for the seller of the usufruct through Sukuk issuance to unilaterally undertake to purchase at a determined price the remaining usufruct (the duration of the usufruct) upon the maturity of the Sukuk. 9. It is permitted to trade Sukuk of usufructs of assets, for they represent the Sukuk holders claims to usufructs ownership. When traded, the title to these usufructs represented by the Sukuk is transferred from the seller to the buyer along with their rights and obligations. 10. The holders of Sukuk of usufructs of assets have the right to sell or lease these usufructs. Restriction to this right is not permitted unless if in accordance with the issuance contracts and in ways that do not harm others rights. 11. It is permitted for the Sukuk holders to undertake to gift or sell on a determined price the assets usufructs represented by the Sukuk to the original seller of these usufructs or to a third party. The sale is executed then on the remaining duration of the usufruct. However, this sale is not perceivable if the Sukuk holders have already sold or leased the usufruct, because the Sukuk would represent then the price of the usufruct or the rent, which is a debt liability upon the lessee. Sukuk of ownership of usufructs of specified assets 1. These are Sukuk issued by the owner of a particular asset with the aim of leasing the asset or selling its usufruct for a specified period and receiving the rental from the revenue of subscription so that the ownership of the usufruct of the assets passes to the Sukuk holders. 2. These are Sukuk issued by the owner of a usufruct of a specified asset (the lessee) through leasing the asset with the aim of subleasing the same and receiving the rental from the revenue of subscription so that the usufruct of the assets passes into the ownership of the holders of the Sukuk. 3. These Sukuk are issued on the basis of a sale of the right of the usufructs, not the corpus of its underlying specified asset, for a specified time period. This right attaches the asset and not the liability of the seller who issues the Sukuk, and it reflects an incomplete ownership for the Sukuk holders. 4. It is a condition in all sale contracts, which transfer the ownership of the assets or the assets usufructs, and in the lease contracts which give Sukuk holders the direct right of utilization that: 4.1. The contracts are genuine so that they transfer the ownership of the assets, the usufructs and the rights of utilization to the Sukuk holders. They shall also give Sukuk holders the absolute right to conduct on them all the legally valid acts. They shall not include any conditions that contradict the nature of these contracts or their Sharia objective, rendering otherwise the contracts fictitious or conducive to Riba or Inah.
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4.2. The sale or lease contract is capable of producing its legal effect so that the object of the contract (the sold or leased asset) admits all acts of disposal, including transferring its title from its seller to the Sukuk holders and from both legal and Sharia perspectives. 5. Based on the above: 5.1. The ownership of the underlying Sukuk assets and usufructs should be removed from the books of the seller, so that on his financial statement they appear off balance sheet, and become the property of the Sukuk holders rendering them the right to conduct on them all valid acts. 5.2. The right of the Sukuk holders in the assets or the assets usufructs and their utilization, which are acquired by the funds realized from subscription, attaches these very assets and not the liability of the Sukuk issuer who sold or leased these assets. Sukuk of human labor (Service Ijarah Sukuk) Sukuk of service Ijarah give their holders the right to own a service provided by the Sukuk issuer (the service provider) and to sell this service and claim its price from its buyer or user. The services represented by these Sukuk may be obtained from a specified service provider or from an unspecified one. A. Sukuk of services provided by a specific provider 1. These Sukuk are issued with the aim of purchasing a specific service from a particular provider (like the service of tuition from a particular provider) with its price being paid with the funds mobilized through subscription. The services purchased become the property of the Sukuk holders so they have the right to sell them to a third party (the service receiver) against an agreed-upon price or fee. B. Sukuk of services provided by unspecific provider 1. These Sukuk are issued with the aim of purchasing a service established as liability by description without specifying its provider, with its price being paid with the funds mobilized through subscription. The services purchased become the property of the Sukuk holders so they have the right to sell them to a third party (the service receiver) against an agreed-upon price or fee. 2. The ownership of these services is immediately transferred from their provider to the Sukuk holders through a sale or lease contract. Alternatively, the owner of services, who has not utilized them yet, may sell them to the Sukuk holders against a determined price or fee. However the services sale or lease contract must fulfill its all Sharia rules and conditions. 3. Since services Sukuk represent ownership rights in the services, their holders shall share these Sukuk risks, each to the proportion of the Sukuk he holds, and they shall also enjoy the Sukuk gains and privileges according to the terms outlined in the prospectus and the issuance contracts. 4. It is permitted for the seller of the services to undertake to purchase the unutilized services, or the remaining period of the services, at a fair price, market price, any price agreed upon at the time of executing the purchase or at the face value. Similarly, it is permitted for the Sukuk holders to undertake to sell at any of these prices the unutilized services or the remaining period of the services to the seller of the services who manages the Sukuk on behalf of their holders.
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5. It is permitted to trade the Sukuk that represent specific services before and not after the sale or the full utilization of these services, for they represent ownership rights over these services. When traded, ownership of these services or the remaining period thereof is transferred from the seller to the buyer along with its rights and obligations. As for Sukuk of forward services they are also subject to the same rules. 6. If only part of the services represented by the Sukuk has been sold or utilized then the ratio of this part to the unsold one must be taken into consideration for the tradability of these Sukuk, so that the selling price of the later part is not equivalent to the face value of the Sukuk, since this may render the very transaction fictitious. 7. The holders of services Sukuk have the right to dispose of the unutilized part of the services or their remaining period. Restriction to this right is not permitted unless if in accordance with the issuance contracts and in ways that do not harm others rights. 8. It is permitted for the services Sukuk holders to undertake to gift, sell or lease to the original seller the remaining unutilized services, or the remaining duration of the services, for the price referred to in clause (4). The sale, however, is not permitted if the services have already been utilized or sold to others for the Sukuk represent in this case the due price or fee of the service, which is a debt liability upon the other. 9. It is permitted for the seller of a service for a specific period of time to undertake to buy the remaining period of the services at a price determined in the very sale undertaking, provided it is reasonable for such remaining period. This is in order for the sale not to be fictitious like when the service of a ten-year period is sold for one thousand, then bought when only one year is remaining for one thousand as well. Participation Sukuk Mudaraba Sukuk: General Rules 1. Sukuk holders provide the capital to be invested by the Mudareb. 2. The Mudareb is responsible for returning the Mudaraba capital and the realized profit unless he proves that the Mudaraba assets have been damaged or lost for reasons that were beyond his control, and which he neither could anticipate nor avoid. 3. The realized profit shall be distributed between the Sukuk holders and the Mudareb according to a ratio agreed upon in advance and stated in both the prospectus and the Mudaraba contract. 4. The loss that is not attributable to the Mudareb shall be borne by the Sukuk holders, while the Mudareb shall lose his efforts in this case. 5. If the Mudaraba is restricted and not absolute, then the Mudareb is bound by the restrictions incorporated in the Mudaraba contract. 6. These Sukuk are issued by the Mudareb for the purpose of utilizing the issuance realized fund in a particular project or activity. They represent at issuance undivided shares in the Mudaraba capital, then after issuance they represent undivided shares in the Mudaraba assets purchased with the capital. However, they never represent a debt liability upon their issuer (the Mudareb) for their holders (the capital providers). 7. These Sukuk are issued on the basis of the Sharia contract of Mudaraba, which must fulfill its all relevant rules and conditions and produces its legal effects. 8. The issuance prospectus and its underlying Mudaraba contract must determine the respective profit share of the Mudareb as well as the Sukuk holders; nevertheless, upon the distribution of profit, each party may waive to the other his share in the
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profit or a part thereof. However a previous agreement to this effect may not be made in the Mudaraba contract or the issuance prospectus. 9. The Mudareb invests Mudaraba assets on a trust basis in which case he is not liable for damage or losses of these assets except in cases of breach of the requirements of trust, negligence or misconduct in respect to taking the appropriate investment decisions, according to the standards of an experienced Mudareb in the respective Mudaraba activity. In case of dispute between the Sukuk holders and the Mudareb over the occurrence of misconduct it is the responsibility of the Mudareb to prove that the occurrence of damage or loss was for reasons beyond his control, and which he neither could anticipate nor avoid; otherwise, he would be held liable for the Mudaraba capital and the realized profit. 10. It is permitted for the Mudareb to undertake to purchase the Mudaraba assets at the price that will be agreed upon at the time of executing the purchase, at the market price, a fair price or a price equivalent to the net value of the Mudaraba assets. However, in cases where Mudareb is held liable for the loss, i.e. in cases of breach of the requirements of trust, negligence or misconduct in respect to taking the appropriate investment decisions, Mudareb may provide an undertaking to purchase the Mudaraba assets at their face value, for this price represents then the Mudaraba capital for which Mudareb becomes liable in the aforementioned cases. 11. The said undertaking in cases of breach of the agreement, negligence or mismanagement however binds the Mudareb only and not the Sukuk holders. If the Mudareb does not execute his undertaking, the Sukuk holders shall then have the right to sell the Mudaraba assets in the market and claim from the Mudareb the difference, if any, between the selling price and the Mudaraba capital. However, Sukuk holders shall not have the right to compel the Mudareb to execute the purchase (the actual execution of the very purchase contract). 12. It is permitted that the Mudareb undertakes to purchase the Mudaraba assets upon the maturity of the Mudaraba, if the Mudaraba assets remain the same as they were at the time of giving the undertaking and without a change in their value, at the price that will be agreed upon at the time of executing the purchase, the market price, a fair price or a price equivalent to the net value of the Mudaraba assets as will be agreed by the two parties or by a third party determined mutually in the Mudaraba contract or the issuance prospectus. 13. The Mudareb is responsible for refunding the Mudaraba capital if it remains intact as well as the realized profit on the maturity of the Mudaraba after liquidation of the Mudaraba assets. Sukuk holders on the other hand, being the owners of the Mudaraba assets, have the right to dispose of the Mudaraba assets; however, they are liable to pay the Mudareb his share in the realized profit. Sukuk of Musharaka in Profit A. Sukuk of Joint Ownership 1. It is permitted to issue Sukuk for the purpose of acquiring a common share in the ownership of an asset or a usufruct so that the other partner remains the owner of the remaining share. 2. Sukuk holders and the other partner are like foreigners to each other so that no party has the authority to act on behalf of the other unless with delegation of power, and
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each party is independently entitled to the return on his share in the ownership. 3. It is permitted to appoint the other partner as an agent in acts like taking procession or assets or settling payments, but not in investment, against a determined fee. However, it is permitted to give the agent an incentive if the return on principals share has exceeded a certain limit. B. Musharaka Sukuk (contractual partnership) 1. Contractual Musharaka Sukuk can be issued in two different structures: 1.1. First, they can be issued by the owner of an asset, a particular project or a specific venture regardless of its legal form, for the purpose of receiving the monetary contribution of the Sukuk holders, as partners, to develop a project or furnish it with new equipments. The contribution of the Sukuk issuer shall be in the form of tangible assets of his project or venture. The combination of the cash contributed and the value of the tangible assets contributed constitute the capital of this partnership, and the share of each partner, the Sukuk issuer and Sukuk holders, shall be proportionate to his contribution. 1.2. Second, they can be issued by a party seeking a Musharaka capital to be invested in a particular project or venture. He handles the management of this partnership and may become a partner to it if he buys some of the issued Sukuk. 2. Each Sakk represents a common share in the Musharaka capital when Sukuk are issued, then a common share in the Musharaka assets when these assets are purchased with the Musharaka capital. 3. It is not permitted for the Sukuk issuer who manages the Sukuk to give a purchase undertaking to the Sukuk holders to buy their share in the Musharaka assets at its face value. However, if the purchase undertaking was on the value that will be agreed upon at the time of executing the purchase, at a fair value or at the price that will determined by an independent party, then it is permitted. 4. Contractual Musharaka Sukuk is two types: 4.1. First, Sukuk of Musharaka in a particular, existing, specific and Sharia compliant project or venture. This project or venture is owned by the Sukuk issuer, and the aim of issuance is to expand the venture or increase its capital. 4.1.1. The Sukuk holders share in the specific project or venture is the Sukuk issuance realized fund, while the Sukuk issuer share is the net value of his project or venture based on a valuation conducted by a specialized independent party. However, all Sharia rules and conditions must be fulfilled in this project or venture. 4.1.2. It is permitted to appoint the project owner (the Sukuk issuer) as the Musharaka manager against a specific fee based on a management contract which must be independent of the Musharaka contract. It is also permitted for the Sukuk holders, through their representative, to be the party handling the management of the project against a specific fee. It is permitted as well that the management is handled jointly by the Sukuk holders representative and the Sukuk issuer or by a third partly appointed by them based on a mutual agreement. In the latter case, the manager may handle the management as a Mudareb against a share in the profit or as an agent against a specific fee plus a percentage in the realized profit as
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incentive if applicable. 4.1.3. Both Sukuk holders and Sukuk issuer (Sukuk holders partner) are liable for loss in proportion to each partners share in the specific project or venture. Profit shall be distributed as per their agreement. 4.1.4. It is permitted for the Sukuk issuer who manages the Sukuk to undertake to purchase the share of the Sukuk holders in the project at the price that will be agreed upon at the time of executing the purchase, at a fair value, a market value or the net value and not the face value. However, if the purchase undertaker was not the Sukuk manager, then he may undertake to purchase it at face value. 4.1.5. It is not permitted for the Sukuk manager (Sukuk holders partner) to undertake to purchase the share of the Sukuk holders in the specific project or venture (the project) at its face value. However the price may be equivalent to the face value of the Sukuk holders share in the Musharaka in cases of breach of the requirements of trust, negligence or misconduct in respect to taking the appropriate investment decisions according to the standards of an experienced Mudareb in the respective Mudaraba activity. 4.1.6. In all cases, the project manger manages the project on trust basis, and he is not liable in principle for the Musharaka assets. 4.2. Second, Musharaka Sukuk that are aimed for financing a specific project or venture that will start with the fund mobilized through the issuance of the Sukuk, and the issuer is a partner in proportion to the number of Sukuk he subscribe to. 4.2.1. These Sukuk represent a common share in the ownership of the project, and thus the holder of these Sukuk shares profit and loss in proportion to the number of Sukuk he holds. 4.2.2. Whatever applies to the Sukuk of Musharaka in existing project in terms of appointment of the Musharaka manager and his undertaking to buy the Sukuk holders share in case of wrongful acts or on the maturity of the Sukuk applies as well to this type of Sukuk. 5. It is permitted for the Sukuk issuer to form a partnership with the Sukuk holders whereby each partner makes a specific contribution to a specific capital; this contribution may be in form of cash money or some tangible assets. 6. It is permitted for the Sukuk issuer who owns a specific project or venture to issue Sukuk with the aim of using the Sukuk issuance realized fund to increase the capital of the project and expand its activities. The partners shares in this Musharaka shall be determined by measuring the ratio of the net value of the project assets to the fund realized for the issuance of the Sukuk. The loss shall be borne by the two partners according to the said ratio, while profit shall be distributed as per agreement. 7. The managing partner manages the project on trust basis, so he is not liable for the damage or loss of the Musharaka assets unless in cases of breach of trust or negligence. However, if a dispute arises between the Sukuk holders and the managing partner over the occurrence of misconduct then it is the responsibility of the managing partner to prove that the occurrence of damage or loss was for reasons beyond his control, and which he could neither anticipate nor avoid; otherwise, he would be held liable for the Mudaraba capital and the realized profit.
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Finance Sukuk A. Salam Sukuk 1. Salam Sukuk are issued in two different ways: 1.1. One: After the Sukuk issuer has already purchased the Salam goods. 1.2. Two: When the Sukuk issuer undertakes in the Sukuk prospectus to buy some goods on Salam basis then sell them to the Sukuk holders. 2. The Sukuk holders replace the Sukuk issuer in the ownership of the goods purchased so each one owns a share in these goods in proportion to the number of Sukuk he holds. 3. It is permitted to return (sell) the Salam goods (to their seller) provided they are not food in kind and the price is not higher than the original selling price, since such resale is deemed Iqala (cancellation of contract). 4. It is also permitted to, according to the view of Sheikh Dr. Hussain Hamed Hassan, to trade (sell to a third party) the Salam goods at their market value. 5. However, according to the view of Sheikh Dr. Abdulsattar Abughuddah, which is in line with the Fiqh academy resolution and AAOIFI standards, only the return of the Salam goods to their original seller is permitted and not their trading, but subject to the fulfillment of the relevant Sharia conditions. B. Murabaha and Bay Bethaman Ajel Sukuk 1. Murabaha or Bay Bethaman Ajel Sukuk are issued for the purpose of utilizing their proceeds by the issuer to buy some goods then sell them on Murabaha or Bay Bithaman Ajil basis. In case of Murabaha, the Sukuk issuer will have already obtained a promise backed by adequate guarantees from specified parties to buy these goods on Murabaha basis. 2. The holders of these Sukuk are the joint owners of the goods purchased so they proportionately share the selling price and the profit margin. 3. It is not permitted to trade Murabaha and Bay Bethaman Ajel Sukuk. C. Istisna Sukuk 1. Istisna Sukuk are issued for the purpose of utilizing their proceeds in the purchase of some assets of certain specifications on Istisna basis, then the sale of these assets either after taking delivery of them or before through a parallel Istisna that is independent of the first. 2. They can be issued as well against assets already purchased through Istisna so that the Sukuk issuer sells them to third party through a parallel Istisna. 3. The Sukuk holders own the Istisna assets and so have the right to sell them through a parallel Istisna and claim the price. 4. It is not permitted to trade Istisna Sukuk.
D. Funds Sukuk 1. It is permitted to issue Sukuk for the purpose of utilizing their proceeds in the purchase of a fund of a legal entity and independent financial liability, which is inclusive of tangible assets, usufructs, cash money, receivables and financial rights provided:
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1.1. The ratio of cash, receivable or the two combined shall not exceed 70% of the total fund assets. 1.2. The purpose of establishing this fund is not to go around the sale of debt or cash so that they can be traded without the observance of their relevant Sharia rules. However, if the ratio of the tangible assets, the usufructs, the rights of personal utilization of assets and financial rights is below 30% then acquiring this fund is not permitted unless with observance of the Sharia rules pertaining to sale of receivables, money or the two combined together.
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Sukuk Guarantees
General Rules 1. Investment in Sukuk is an investment in ownership rights whereby Sukuk holders bear the risk of the assets in which the fund realized from their subscription is invested, such as in stocks or funds. Thus, Sukuk do not represent debts liability upon their issuer towards their holders. Consequently: 1.1 Sukuk holders shall bear the risk and reap the fruits of the assets in which the fund realized from their subscription is invested. 1.2 Neither the Sukuk issuer nor the Sukuk manager or the user of the fund mobilized from subscription, through one of the investment contracts like Mudaraba, Musharaka or Wakala Bilistethmar is permitted to guarantee to the Sukuk holders the face value of their Sukuk or a certain return on their investment; otherwise the very issuance and its underlying contract are null and void. 2. The meaning of guarantee in this context is guaranteeing the value of the Sukuk assets by the guarantor when they get destroyed or damaged, or when they fully or partially lose their value, without any misconduct, negligence or breach of the issuance conditions on the part of the guarantor. Nevertheless, the Sukuk manager shall guarantee the value of the Sukuk assets in these cases unless he proves that their occurrence was for reasons beyond his control, and which he neither could anticipate nor avoid. 3. The Sukuk managers undertaking to buy the Sukuk assets at any value does not amount to a guarantee of the Sukuk assets resulting thus in holding the Sukuk manager liable for these assets in cases of full or partial damage or loss. This is because the purchase undertaking binds its undertaker only when the assets promised to buy are existent at the time of its executing, while if the assets have been destroyed or damaged then the undertaking is not executable, because selling non-existing assets is not valid. However, if the assets undergo depreciation in their value, then the purchase undertaking may not be on the face value of the Sukuk, but only on a fair value or the market value. 4. The investment Sukuk manager is obliged to physically or constructively liquidate the Sukuk assets upon the maturity of the Sukuk as per the market practice, and to refund the capital as well as the realized profit unless he proves that the Sukuk assets have been damaged or have lost value for reasons beyond his control. 5. It is permitted for the holders of Istethmar Sukuk to obtain from a third party a binding promise over the purchase of the Sukuk assets at certain time or upon the maturity of the Sukuk. It is permitted as well for this promise to originate from the Sukuk manager so that he undertakes to buy the Sukuk assets described in the undertaking at one of the permitted values; the market value, the value agreed upon at the time of executing the purchase, the net assets value, a fair value or the value determined by the market experts at the time of executing the promise. The promise to purchase 1. This promise binds the promising party and not the beneficiary; however, it is not permitted to force the promising party to execute his promise, but only to be demanded by the beneficiary to compensate him for any actual harm that may attach him as a result of default on the promise. The actual harm in this case shall correspond to the difference between the cost of acquiring the goods and their
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selling price when sold to a third party. 2. This promise shall not bind its giver unless it is given on something known by description, and which shall remain as per description until the time of executing the promise. If it was damaged or disposed of then the promise would not bind its giver since purchase of non-existing assets is not valid. Guarantees in Investment Sukuk 1. Manager of Istethmar Sukuk may guarantee the value of the Sukuk assets in case of breach of the agreement (cases of breach of the requirements of trust, negligence or misconduct in respect to taking the appropriate investment decisions which should normally be expected of an investment expert) or the investment rules stipulated by the Sukuk holders. The guarantee shall be over the capital and in accordance with the general rules of guarantees. The obligation to liquidate the Sukuk assets and refund the capital 1. The Sukuk issuer, who utilizes the Sukuk proceeds, is obliged to liquidate the assets of Mudaraba, Musharaka or Wakala Bilistethmar upon the maturity of the Sukuk, and to refund the capital as well as the realized profit to the Sukuk holders. However, if he claims damage, loss or deterioration in the market value of the Sukuk assets, then the burden of proof shall lie on his shoulder to suggest that the occurrence of these incidents was not the result of his breach of the requirements of trust, negligence or misconduct in respect to taking the appropriate investment decisions which should normally be expected of an investment expert. Undertaking of purchase at price equivalent to the remaining unpaid fixed rental (the non-managing lessees undertaking) 1. It is permitted for the purchase undertaking of the Ijarah Muntahia Bettamleek Sukuk assets to be at a value equivalent to the remaining unpaid fixed rental (fixed rentals balance), regardless of whether the leased assets were originally bought from the same lessee or a third party. Such undertaking does not tantamount to guaranteeing the capital or the profit to the Sukuk holders (neither to a non-independent third-party guarantee if the Sukuk manager was the one who sold the leased asset to a third party). If, however, the lessee is the Sukuk manager through Wakala Bilistethmar, Mudaraba or Musharaka then the undertaking is not permitted. If, on the other hand, the lessee is a service agent then the undertaking is permitted. Lending undertaking by the investment Sukuk manager 1. It is not permitted for the Sukuk manager (as Mudareb, partner or investment agent) to undertake to lend the Sukuk holders in case of shortfall in the Sukuk assets expected returns, for this involves the prohibited combining of a commutative contract with a loan contract. It is permitted, however, for the Sukuk manager to source a Sharia compliant financing or an interest-free loan in order to cover the shortfall. In this case, the Sukuk manager shall claim the same amount from the future profit or the selling price of the Sukuk assets. Lending undertaking by the investment Sukuk manager 1. It is permitted for the Sukuk manager or the Sukuk issuer of finance Sukuk (Sukuk of
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assets, usufructs or rights of utilization) to give an undertaking independent of the financing contract to lend the Sukuk holders in case of shortfall in the Sukuk assets expected returns, because in this case the Sukuk manger can be deemed as a third party. Guarantee of a certain determined profit for the Sukuk holders 1. It is not permitted for the manger of investment Sukuk to guarantee for the Sukuk holders a certain profit as a fixed amount or as a percentage of the capital, because this guarantee nullifies profit sharing; the underlying principle of investment.
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Dubai Sukuk Stds (Draft)

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