Post on 26-Mar-2015
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IN THE NAME OF ALLAH THE BENEFICIENT
THE MERCIFUL
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By
SIBGHATULLAH AHSAN
PartnerMIAN & SIBGHATAdvocates & Legal ConsultantsIslamabad.
Sukuk Sukuk and itsand its Legal and Legal and Regulatory Framework in Regulatory Framework in
PakistanPakistan
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ISLAMIC FINANCIAL SYSTEM- ISLAMIC FINANCIAL SYSTEM- AN INTRODUCTIONAN INTRODUCTIONBased on QURAN and SUNNAHDemands socio economic justiceProhibits all kinds of RIBAProhibits all forms of exploitationProvides equal opportunities to allCondemns accumulation of wealth in few
handsEncourages acts of benevolence
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PRINCIPLES OF ISLAMIC PRINCIPLES OF ISLAMIC FINANCEFINANCEProhibition of RIBAAlkharajo bil dhaman (entitlement to profit is
associated with corresponding risk)Prohibition of sale of goods before acquiring
ownershipProhibition of sale of food stuff before
possessionProhibition of debt for debtAvoidance of Gharar (uncertainty)
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PROHIBITION OF PROHIBITION OF RIBARIBA
QURAN– “ALLAH has permitted BAI’ (sale) and prohibited
RIBA” (Al Baqarah: 275)
– O you believers, fear ALLAH and give up whatever is left in lieu of RIBA if you are indeed believer, Watch out! If you do not obey this order (and give up all outstanding RIBA), then there is a declaration of war against you from ALLAH and HIS PROPHET. However, if you repent you have entitlement only to your principals. Neither you inflict zulm on others, nor the others should do zulm on you. (Al Baqarah: 278-9)
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PROHIBITION OF PROHIBITION OF RIBARIBA
SUNNAHObadah ibn Samit directly reports from the Prophet as saying: “Buy and sell gold for gold, silver for silver, dates for dates, wheat for wheat, salt for salt, and barley for barley on the like for like basis. Whosoever gave more or took more, verily he made a RIBA deal. However, trade gold for silver as you wish subject to the condition that the exchange be hand to hand (spot). Trade wheat for dates or barley for dates also likewise.
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EXCHANGE OF HOMOGENEOUS EXCHANGE OF HOMOGENEOUS COMMODITIES OR CURRENCIESCOMMODITIES OR CURRENCIES
Commodity A Commodity B
MEASURMENT: Must be same in amount / weight /
count
DELIVERY: Must be simultaneous / spot
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EXCHANGE OF HETEROGENEOUS EXCHANGE OF HETEROGENEOUS COMMODITIES OR CURRENCIESCOMMODITIES OR CURRENCIES
Commodity B Commodity A
DELIVERY: Must be simultaneous / spot
MEASUREMENT: May be different
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EXCHANGE INVOLVING EXCHANGE INVOLVING RIBA RIBA IN HOMOGENEOUS IN HOMOGENEOUS COMMODITIES OR CURRENCIESCOMMODITIES OR CURRENCIES
Commodity A Commodity B
MEASURMENT: Counter values are not equal
DELIVERY: Any one of the counter values
is delayed
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EXCHANGE INVOLVING EXCHANGE INVOLVING RIBARIBA IN HETEROGENEOUS IN HETEROGENEOUS COMMODITIES OR CURRENCIESCOMMODITIES OR CURRENCIES
Commodity B Commodity A
DELIVERY: Delay in any of the counter values would amount to RIBA (Delivery must be simultaneous / spot
MEASUREMENT: May be different
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Some principles derived from Some principles derived from the the HadithHadithGeneral principles
– In a contract of sale counter values must be exchanged simultaneously
– Quantity /number/measure etc. should be same
Exceptions– Credit Sale– Salam– Qard-e-Hasanah
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WHAT IS WHAT IS RIBARIBA
Simple definition– Any delay or discrimination (regarding
weight, measure or count) in any of the counter values in a contract of exchange is riba
– Any addition without a counter value is RIBA
– Every loan entailing an increase is RIBA
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ISLAMIC CONTRACTS FOR ISLAMIC CONTRACTS FOR COMMERCIAL TRANSACTIONSCOMMERCIAL TRANSACTIONSMusharaka (Profit and Loss sharing)Modaraba (Profit sharing)Musawamah (Bargaining sale)Ijarah (Leasing)Salam (Advance payment sale)Istisna’ (Contract of manufacturing)Murabaha (Cost plus margin sale)
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MUSHARAKAMUSHARAKA
Characteristics– All parties share in the capital– All parties share profits as well as losses– Profits are distributed as per agreed ratio– Loss is borne by the parties as per
capital ratio– Every partner is agent of other
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MUSHARAKAMUSHARAKA
PARTNER A PARTNER BVENTURERs.1000 Rs.1000
PROFIT Rs. 100
LOSSRs.100
Rs. 60 Rs. 40
Rs. 50 Rs. 50
May be in any agreed ratio
Must be according tocapital ratio
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MUSHARAKAMUSHARAKA
PARTNER A PARTNER BVENTURERs.2000 Rs.3000
PROFIT Rs. 100
LOSSRs.100
Rs. 50 Rs. 50
Rs. 40 Rs. 60
May be in any agreed ratio
Must be according tocapital ratio
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MUDARABAMUDARABA
One partner (Rab al Mal) contributes capital and the other (Mudarib) contributes his skills or services to the venture
Venture may for a fixed period or purposeBoth share profit in pre-agreed ratioLoss is borne by Rab al Mal only, Mudarib
loses his services
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MUDARABAMUDARABA
RABBUL MAL MUDARIBVENTURE
SERVICES CAPITAL
PROFIT
LOSS
50 %50 %
ALL MONETORY LOSS LOSS OF SERVICES
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MUDARABAMUDARABA
RABBUL MAL MUDARIBVENTURE
SERVICES CAPITAL
PROFIT
LOSS
40 %60 %
ALL MONETORY LOSS LOSS OF SERVICES
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IJARAHIJARAH
Usufruct of an asset is passed to other party against a periodic rent payment
The asset must have corpus (body) and be in existence
The asset must not be consumable in nature (should not vanish if used)
Ownership will remain with the lessor and he will bear all the risks related to ownership
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IJARAHIJARAH
LESSOR LESSEEAsset UsufructUsufruct
Ownership
Periodical payments/Rent
Usufruct
Use/ usufruct Only
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SALAM (Advance payment)SALAM (Advance payment)
It is an exception to the general principle of instant exchange of counter values in a contract of sale
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SALAM (Advance payment)SALAM (Advance payment)
Full payment of purchase price, No deferment or installment in advance money allowed
No loan adjustment is allowedQuality and quantity must be specifiedDate of delivery must be specified
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MURABAHAMURABAHA
Murabaha is sale of a commodity at cost plus margin; it must fulfill all the conditions of a valid sale
It may be spot sale or a deferred/credit sale Deferred sale Murabaha is used as financing
mode by Islamic Banks Deferred price becomes a debt and shall be dealt
with as a loan transaction Price once settled at the time of sale can not be
changed due to default of creditor, any thing above sale price would be RIBA
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Conditions for MurabahaConditions for Murabaha
Since it is a sale contract; it must fulfill all the conditions of a valid sale
The Bank should purchase the asset from a third party and not from the customer himself
The Bank must own the asset before it sells to the customer The Bank must have possession (physical or constructive)
i.e. it must come to its risk The seller must know and disclose the cost including
freight, insurance and taxes etc. Profit may be fixed in lump sum or through agreed ratio to
be charged over the cost
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MURABAHAMURABAHA
MURABAHA
CLASSICAL / SPOT DEFERRED
with LUMP SUM PAYMENT
DEFERRED with INSTALLMENT
PAYMENT
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CLASSICAL MURABAHACLASSICAL MURABAHA
SELLER BUYER
GOOD
PRICE
IMMIDIATE DELIVERY
IMMIDIATE DELIVERY COST +MARGIN
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BAI’ MU’JJAL (deferred sale)BAI’ MU’JJAL (deferred sale)
SELLER BUYER
GOODS
PRICE
IMMIDIATE DELIVERY
DEFERRED PAYMENT
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MURABAHA WITH MURABAHA WITH DEFERRED PAYMENT DEFERRED PAYMENT
SELLER BUYER
GOOD
PRICE
IMMIDIATE DELIVERY
DELAYED PAYMENTCOST + MARGIN
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What is What is Sukuk?Sukuk?
The word Sukuk plural of word Suk which means _______________
The Accounting and Auditing Organization for Islamic Financial Institutions defines Sukuk as:
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 investments activity
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Legal Definition of SukukLegal Definition of Sukuk Pakistani Law does not define the word Sukuk There is no particular legislation in Pakistan that governs a Sukuk
by a company Then how to define a Sukuk and how to regulate a Sukuk issue in
Pakistan Section 120 of the Companies Ordinance
– 120. Issue of securities and redeemable capital not based on interest.(1) A company may by public offer or], upon terms and conditions contained in an agreement in writing, issue to one or more scheduled banks, financial institutions or such other persons as are specified for the purpose by the Federal Government by notification in the official Gazette, either severally, jointly or through their syndicate, any instrument in the nature of redeemable capital in any or several forms in consideration of any funds, moneys or accommodations received or to be received by the company, whether in cash or in specie or against any promise, guarantee, undertaking or indemnity issued to or in favour of or for the benefit of the company
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DIFFERENT KINDS OF SUKUKDIFFERENT KINDS OF SUKUK
Sukuk representing ownership in tangible assets (mostly based on Sale and Lease back or direct lease).
Sukuk representing Usufructs or Services (based on sublease or sale of services).
Sukuk representing equity share in a particular business or investment portfolio (based on Musharakah/ Mudarabah).
Sukuk representing receivable or future goods (based on Murabaha or Salam or Istisna’).
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BASIC SHARIAH RULESBASIC SHARIAH RULES
All the rules of original contract on the basis of which Sukuk are created should be applied.
The issuer cannot guarantee the face value of the certificate for the holder except in case of negligence/misconduct.
In Sukuk based on sale and lease back, the issuer can unilaterally undertake that he will purchase the asset after one year for a certain price.
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BASIC SHARIAH RULES (CONT..)BASIC SHARIAH RULES (CONT..)
Different types of reserves (e.g. profit equalization reserve) or takaful pool can be created.
Only those Sukuk can be traded that represent proportionate ownership of tangible assets, usufructs or services.
Trading or redemption of Sukuk is allowed after closing subscription, allotment of Sukuk and commencement of activity.
Sukuk of usufructs can be traded before the assets are sub-leased.
Sukuk of services can be traded prior to passing the services to the user.
In Sukuk of Musharakah/Mudarabah, the issuer can redeem the certificates on the market price or the mutually agreed price.
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TRADABILITY OF TRADABILITY OF SUKUKSUKUK
Tradable SukukSukuk representing tangible assets or proportionate ownership of a business or investment portfolio are tradable. For e.g. Sukuk of Ijarah or Musharakah / Mudarabah
Non-Tradable SukukSukuk representing receivables of cash or goods are nontradable. For e.g. Sukuk of Salam or Murabaha
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Legal Nature of Legal Nature of SukukSukuk Is it a debenture? or It’s a stock/share? or something else? to ascertain we need to know what is debenture and what
is stock/share.– Debenture is not defined as a word in the Companies
Ordinance or any other law but as per company law it includes debenture stock, bonds, term finance certificate and any other securities, other than a share, of a company, whether constituting a charge of the assets of the company or not
– “share” means ‘a share in the share capital of a company’ (S.2 (1) 35 of the Companies Ordinance)
Sukuk is neither equity nor debenture or bond or a debt instrument
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Asset Backed Securitization RulesAsset Backed Securitization Rules These Rules provide mechanism for securitization and
define securitization as:
The Sukuk does not fall in the definition of actionable claim or receivables therefore Sukuk can not be issued under these Rules
"Securitization" means a process whereby any Special Purpose Vehicle raises funds by issue of Term Finance Certificates or any other instruments with the approval of the Commission, for such purpose and uses such funds by making payment to the Originator and through such process acquires the title, property or right in the receivables or other assets in the form of actionable claims
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Nature of Nature of Sukuk Sukuk
As discussed Sukuk is a security of its own kind, not provided by any law in Pakistan.
We may classify it as redeemable capital
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How to Issue How to Issue SukukSukuk Presently most of the Sukuk are issued
under private placement which does not require any regulatory compliance
Companies are issuing privately placed Sukuk when they get syndicate financing from financial institutions to meet their financing requirements
Most of the Sukuk are based on Ijarah These Sukuk are being issued under S. 120
of the Companies Ordinance through an agreement between the issuer and the financial institutions
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How to Issue How to Issue SukukSukuk to Public? to Public?
There is no specific provision in Pakistani law for Sukuk therefore we will resort to some provisions of the Companies Ordinance that govern issue of securities, debentures and redeemable capital
Again the Sukuk will be issued under S. 120 of the Companies Ordinance.
However, for guidance on public issue we will look at the guide lines issued for Term Finance Certificates (TFCs)
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PUBLIC ISSUE OF PUBLIC ISSUE OF SUKUKSUKUK
Once we consider that Sukuk is a security in the form of redeemable capital then we can issue Sukuk public through circulating and publishing prospectus under section 57 of the Companies Ordinance,1984
An independent trustee shall be appointed and the assets will be transferred in the name of the trustee who will hold the same for the benefit of the investors/Sukuk holders
For issuing Sukuk general public a company will file an application to SECP
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Approval from SECPApproval from SECP i) In case of a new project, Expansion or Balancing,
Modernization & Replacement (BMR), a feasibility study should be conducted and a report should be prepared.
ii) Pre-IPO placement of should be finalized. iii) Underwriting arrangements, if any, should be
completed. iv) Credit rating of the entity as well as the instrument
from any rating agency should be carried out. v) Trustee, Bankers to the Issue, Balloters, Registrar
(Transfer Agent) and Legal Adviser to the Issue should be appointed.
vi) Clearance of the prospectus from the concerned stock exchange(s) should be obtained.
vii) Auditor’s certificates as to profit and loss and dividend or returns on securities issued in previous 5 years
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Contact:Contact:
Sibghatullah AhsanAdvocate High Court MIAN & SIBGHAT Advocates & Legal ConsultantsOff. 102-A, 1st Floor, Azeem Mansion, Block 87-E, Fazal-e-Haq Road, Blue AreaIslamabad.Ph. 92-51-4309208, 4319884Fax. 92-51-2802542Email. mslaw.pk@gmail.com