SUKUK: Plural: Sakk Literal meaning: certificate

Definition: As paper representing financial obligation arising from trade and other commercial activities Trust certificates which represents a share in an asset or business venture. Sc defined sukuk as: A sukuk is a certificate that represents the value of asset. Tradability of Sukuk: Trade of such Sukuks is permissible, because it will be equivalent to the sale/ purchase of holders proportionate share in the assets. AAOIFI states that sukuk Murabahah is allowed but when the commodity is delivered to the buyer then trade in Murabahah certificate is not permissible It is only permissible when Murabahah commodity is purchased by the buyer ad before selling it to the second buyer. Para 5/2/13 of shariah standard no. 17 deals with this. Salam Sukuk is not tradable according to para 196 of IFSB 2. Where the salam capital is constituted by an advance payment to a counter party as the supplier of the commodity to be delivered at a future date. This type of sukuk is non tradable, since the subject matter is considered to be a financial asset. Role of shariah framework in sukuk structuring: Generally to raiser fnds for operation in the conventional financial market, firms either approach banks to obtain loans or tap to the capital market. The conventional banking market is known as an indirect financing market because the firms with banks, which act an intermediaries i.e., collecting surplus funds channeling them to the firms. The capital market is known as the direct financing market because the firms deal directly with investors rather tan going indirectly with investors via the banking market. The conventional debt market and conventional banking market have similarities. Since both offers products that are debt in nature. The bank(in the conventional banking market) or the investors (in bond issuance) provides loan to the firms in need of funds. In other words bonds are evidence of a loan from the investors to the issuer, similar to a loan that a bank provides to a firm. The re-payment of the bond consists of loan capital (principle) plus interest. Even in zero coupon bond the investor will receive the accumulated interest at maturity as the bond will be issued at a discount price. First of all we will discuss shariah issue in relationship with bond.

In shariah loan contracts are interest free. Any additional contractual benefit to the lender is considered riba, which is prohibited in Shariah. The prohibition is directly comes from Quran and Sunnah. Therefore, in sukuk the loans are normally not use as the underlying relationship, unlike bonds. Since theinvestors cannot enjoy any return in such cases of sukuk. It will utilize other underlying contracts to enable the investor to enjoy a return over their investment. Like contracts of sale, lease and partnership. Shariah prohibits trading of debts (Bai Dayn) as it involves Gharar. Bonds are evidence of debt, whereas sukuk are broader as they can include debts and non-debt assets. TYPES OF SUKUK: SUKUK ISTISNA: Istisna is a contract to sell a manufacturable thing with an undertaking by the seller to present it manufactured from his own material, according to specified description and at a determined price. This type of sukuk is used for the advance for funding for real state development, major industrial products or large items of equipment such as turbines, power plants, ships or maybe aircrafts. The Islamic financial institution funds the manufacturer or the contractor during the construction of the assets,, acquires title to that asset and up to completion either immediately passes title to the developer on agreed deferred payment terms or, possibly, leases the asset to the developer under Sukuk Ijarah SUKUK MUDARABAH: This is an agreement made between two parties, one who provides the capital and the other party (the entrepreneur) provides the services. It is to enable the entrepreneur to carry out business projects, which will be on profit sharing basis, according to predetermined ratios agreed on earlier by the two parties. In case of loses, loses are born by the provider of the funds only. Sukuk Mudarabah is used to enhance public participation in big investment projects. It should be noted that mudarabah bond bears close resemblance to revenue bond financing in the conventional system. Example A city wants to build a new airport, believing that the new facility will attract industry to the area. The local government issues revenue bonds to finance the construction of the airport. The money for the periodic dividend payment and eventual retirement of the bonds come from airplane lending fees, ticket counter and concession rental, hanger rentals airline fuel surtaxes, and other revenue associated with the facility. In other words, only revenue generated by the airport can be used to service the airport revenue bonds. If the airport generates enough revenue to pay off the bonds, then bondholders receive their interest and principal in full and on time. However, if the airport does not generate enough revenue, bondholders either receive their interest and principal later or nothing at all. They have no recourse to the local

governments general treasury fund. The bondholders are solely dependent on the revenue generated by the project being financed Sukuk al ijarah: Ijarah is an Islamic alternate of conventional leasing. Issuing certificates of ownership of assets, Leased to a particular customer is known as Sukuk Al Ijarah or simply Ijarah Sukuk. Ijarah Sukuk concept is one of the most popular concepts among issuers of global Islamic Sukuk. Example: If a Company requires, for example, Rs. 500 million for the purchase of land, real asset, equipment etc it can issue Ijarah sukuk equaling that amount in small denominations, say Rs. 500,000 each. After collection of funds from the investors the company either purchases the asset on behalf of the Sukuk investors or transfers the ownership of the already acquired asset to sukuk holders usually by establishing a Special Purpose Vehicle (SPV), which owns the underlying assets SUKUK AL SALAM: Salam is an Islamic mode of finance. Under a Salam transaction the seller makes an advance payment for goods which are to be delivered later provided the goods are defined and the date of delivery is fixed. Government of Bahrain first issued Salam Sukuk as an alternate to short-term government treasury bill. Under the transaction Government took an advance payment from the investors for a future delivery of Aluminum ingots. A paper was issued as an acknowledgment of receipt ,which is known as Salam Sukuk. Upon delivery of Aluminum ingots to the investors at the time of completion of Salam contract, Government sold ingots to third parties as agent of the investors. SUKUK AL MUSHARAKAH: Musharakah is a mode of financing against which Sukuks can be issued. If a company required financing for any of its project through Musharakah it can issue Sukuks against which investors would provide funding as per the rules of Musharakah.

SUKUK IN PAKISTAN:

In Pakistan, the first Islamic Sukuk was issued in 2002 when Sitara Chemicals Industries issued its MTFC. However, the market really started in FY 2005 and since then Sukuks worth at least Rs. 30 billion has been issued or are in the process of issuance. Market is growing at a very healthy rate as large corporates and conglomerates such as WAPDA, Engro Chemicals, PEL, EDEN Developers, Maple Leaf Cement, etc are using Sukuk to fund their requirements.