ISLAMIC CAPITAL MARKETS�WEEK 3:SUKUK AS ISLAMIC FINANCIAL INSTRUMENT

Lecturer Team

OUTLINE

• Definition and History of Sukuk Issuance
• Types of Sukuk
• The use of sukuk for government
• Sukuk Rating
• FSA Regulation

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DEFINITION AND HISTORY OF SUKUK

SUKUK AND CAPITAL MARKET

• There are two basic financial instruments in capital market:
• Stocks/equity
• Bonds
• Bonds is a debt-based securities, where the bondholder will receive a fixed income from the coupon issued by the issuer. It is often called as fixed income securities.
• It has riba, as it is a debt-based contract having an additional (coupon)
• It is usually traded in secondary market at market price (can be at discount, par, or premium). It is not aligned with the prohibition of trading debt in Islamic law

ISLAMIC PERSPECTIVE ON SECURITIZATION

• Securitization is a process of transforming an illiquid asset into liquid asset in which it includes a packaging process of various financial claims into an asset that can be transferred toward various investors:
• Done to fulfil liquidity needs
• The underlying asset is illiquid before the securitization

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Are stocks and bonds categorized as securitization?

Other than liquidity, there are two benefits of securitization:

• The originator of asset has direct access to capital market
• Investor can liquidate its ownership in secondary market

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DEFINITION OF SUKUK

• Definition of sukuk:
• AAOIFI
• “Certificate of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity”
• Menurut POJK No. 18/POJK.04/2015 tentang Penerbitan dan Persyaratan Sukuk Efek syariah berupa sertifikat atau bukti kepemilikan yang bernilai sama dan mewakili bagian yang tidak terpisahkan atau tidak terbagi atas underlying asset (Sharia securities are in the form of certificates or proof of ownership that have the same value and represent an inseparable or undivided part of the underlying aset)
• Undang-Undang SBSN
• Surat berharga negara yang diterbitkan berdasarkan prinsip syariah, sebagai bukti atas bagian penyertaan terhadap Aset SBSN, baik dalam mata uang Rupiah maupun valuta asing”
• The definition of AAOIFI and IFSB limits that sukuk is only for tangible asset or combination between tangible and intangible asset

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PENDANAAN/PEMBIAYAAN MELALUI PENERBITAN SUKUK�

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EMITEN

Aset/Proyek

INVESTOR

Sukuk

Issue Sukuk

Emiten memberikan imbal hasil dan mengembalikan dana Sukuk

Investor

Menyerahkan dana Sukuk

Aset yang mendasari penerbitan sukuk:

• Penyertaan pd Proyek
• Sewa menyewa
• Jual beli

WHY DOES SUKUK NEED UNDERLYING ASSET?

• Underlying asset can be in the form of:
• Tangible aset 🡪 real estate, commodities, infrastructure
• Usufruct of a tangible aset 🡪 benefit of an asset without owning it
• Services 🡪 sukuk issued to finance projects that provide services, e.g. Hospital, telecommunication, toll road
• Asset of particular project 🡪 e.g. green project
• Investment activity that has been determined

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COMPARISON BETWEEN SUKUK, BONDS, AND STOCKS

HISTORY OF SUKUK

• Classical period of Islam (Umayyad Caliphate) 🡪 Method of payment of the soldiers, who were given commodity coupons in place of cash

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• Contemporary period
• Ustmani/Ottoman period 1775 in form of esham to finance government’s deficit after it was defeated by Russia
• 1978 by Jordan Islamic Bank (Muqaradah Act 1981), 1981 issuing Regulation on Mudharabah Company in Pakistan 🡪 have not produced any product
• 1983 1^st government investment certificate in Malaysia
• 1990 Asset Based Sukuk structure in Malaysia and Bahrain
• 2002 1^st Corporate sukuk in Indonesia
• 2003 AAOIFI issued Sharia Standard 17 on Investment Sukuk
• 2008 State Sukuk Regulation in Indonesia

TYPES OF SUKUK

TYPES OF SUKUK

• Based on the issuer:
• Corporate
• State (government)
• Based on the underlying contract (akad):
• Sale-based (murabahah, salam, istishna)
• Lease-based (ijarah)
• Partnership-based (mudharabah-musharakah)
• Agency-based (wakalah)

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• Based on the technical and commercial scheme
• Asset based
• Asset backed
• Hybrid (convertible & exchangeable sukuk)
• Subordinated sukuk
• Based on the underlying asset:
• Debt-based
• Tangible assets
• Usufruct
• Services
• Right in investment project
• Special investment activities

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MODES OF SUKUK ISSUANCE�ASSET BACKED SUKUK VS ASSET BASED SUKUK

• Sukuk can be in the form of asset backed or asset based
• Asset backed sukuk is a type of sukuk that occurs a “true sale” and a transfer of ownership legally from originator toward the third party. It is often called as Secure Sukuk:
• Using an SPV 🡪 legal entity created for one very limited, particular task.
• Special Purpose Vehicle (SPV) can act as originator that shifts the asset ownership and issue sukuk
• SPV can also act as trustee from the investors regarding underlying asset Sukuk
• Risk and return faced by sukuk holder fully depends on the underlying asset
• Sukuk holder can only have recourse on the sukuk underlying asset

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ASSET BACKED SUKUK VS ASSET BASED SUKUK

• Asset based sukuk is a sukuk where there is no “true sale” or the transfer of ownership between the originator towards the SPV.
• The underlying asset still belongs to the originator’s balance sheet. It is also called as Unsecured Sukuk.
• To fulfill the shari’ah requirement regarding the underlying asset, originator transfers the usufruct towards SPV
• The process in asset based sukuk:
1. Investor purchases the sukuk issued by SPV and SPV issued sukuk certificate for the investor
2. SPV purchases the asset from originator and becomes the owner of the asset
3. SPV will lease back the asset to the originator
4. Originator pays rent fee or asset payment to the SPV
5. The cash flow from originator is distributed to the investors, which can be periodically or at the due date

ASSET BACKED SUKUK VS ASSET BASED SUKUK

• Asset based sukuk is criticized by Syaikh Taqi Usmani in which the legality of the type of sukuk is taken as concern:
• Sukuk holder does not have ownership right of the asset, making the sukuk holders do not have any concern towards the asset
• The fixed payment paid by the originator to the investor is referred to LIBOR+particular rate
• The sukuk originator guarantees that they will buy back the sukuk asset at the due date with the amount of sukuk proceed rather than the market price of the underlying asset
• Hence, asset based sukuk is very similar to the conventional bond

ASSET BACKED SUKUK VS ASSET BASED SUKUK

• From the risk side, there significant differences between asset backed and asset based sukuk:
• The credit risk on asset backed sukuk on the underlying asset
• The credit risk on asset based sukuk is on the company/originator
• In asset based sukuk, the creditworthiness of the originator becomes an important issue

ASSET BACKED SUKUK VS ASSET BASED SUKUK

Sumber: ISRA

AAOIFI PROVISIONS RELATED TO SUKUK

• Sukuk that is traded must represent the ownership of investors to the underlying asset (either ownership or usufruct). The sukuk issuer manager must ensure that the transfer of ownership is real.
• Every return from the underlying asset must be distributed to investors (after deducting costs) and is not based on the interest rate.
• Sukuk managers are prohibited from borrowing funds when actual earnings are lower than expected earnings. However, provisions for anticipating low earnings are allowed.
• Mudharib, partner (syarik), or agent are not allowed to commit to buying back the underlying asset at face value at the end of maturity. The purchase must be made based on the net market value of the asset or at a price agreed upon at the end of maturity.
• The Sharia Supervisory Board (DPS) must monitor the sukuk issuance process from the time of issuance until maturity to ensure that no Sharia principles are violated.

TRADING CRITERIA FOR DIFFERENT SUKUK STRUCTURE

THE USE OF SUKUK FOR GOVERNMENT

INSTRUMENT ALTERNATIVES IN FINANCING GOVERNMENT BUDGET (APBN)

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BENEFITS OF ISSUING GOVERNMENT SUKUK�--SUKUK NEGARA (SBSN)

• Objectives of Sukuk Negara:
• To expand the basis of government budget financing;
• To enrich fiscal financing instruments.
• To expand and diversify the investor base of SBN.
• To promote the growth and development of the domestic Islamic financial market;
• To develop alternative investment instruments.
• To create benchmarks in the Islamic financial market.
• To optimize the utilization of State Property and encourage the orderly administration of State Property management.
• To accelerate the construction of infrastructure projects and improve Public Services & Government Investments.

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SUPPORTING INSTITUTIONS AND FSA REGULATIONS

Lecturer Team

INTRODUCTION

• Recall from previous materials, sukuk, bonds, and stocks have different characteristics
• In terms of structure, sukuk and bonds have many similarities:
• Product features
• Cash flow
• Issuance process
• Position of sukuk holder in the company

Shareholders are the owners of the company in accordance with their ownership ratio, therefore:

• They have voting rights according to the number of shares they own, so they can intervene
• They know directly about the condition of the company
• The fundamental condition of the company is represented by the stock price in the secondary market
• Sukuk holders are not shareholders, therefore:
• Their interests are represented by the trustee (custodian)
• They need objective information about the condition and risks of the company

IMPORTANT ISSUES REGARDING SUKUK STRUCTURE/AKAD

• In 2008, AAOIFI and the Mufti (Sheikh Taqi Utsmani) issued a statement that the majority of global sukuk in circulation had compliance issues with Sharia principles. The criticism was primarily directed at asset-based sukuk that use the mudharabah or musharakah contracts. AAOIFI rules related to sukuk that must be observed:
• In order to be traded in the secondary market, sukuk must represent evidence of ownership of sharia compliant tangible assets and or intangible assets such as usufruct or services (such as toll road concessions).
• In order to be traded in the secondary market, sukuk must not represent debt or loans except (1) representing the entire Sharia-compliant trading company or (2) the debt is attached to the tangible or intangible asset that becomes the underlying asset of the sukuk.
• Each partner in the wakalah, mudharabah, musharakah sukuk is not allowed to undertake or repurchase ownership from another partner at the maturity date or earlier at the initial face value. Undertake is only allowed if the price set is the market price or fair value agreed upon at the time of undertake.

LEMBAGA PENUNJANG PENERBITAN SUKUK

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POJK

No. 16/POJK.04/2015

Supporting Institution: Sharia Capital Market Expert

(Lembaga Penunjang:

Ahli Syariah Pasar Modal)

KEY REGULATIONS

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Pasal 1

• Ahli Syariah Pasar Modal (ASPM) adalah orang perseorangan atau badan usaha yang memberikan nasihat dan/atau mengawasi pelaksanaan penerapan Prinsip Syariah di Pasar Modal dalam kegiatan usaha perusahaan dan/atau memberikan pernyataan kesesuaian syariah atas produk/jasa syariah di pasar modal
• Dewan Pengawas Syariah (DPS) adalah dewan yang bertanggung jawab memberikan nasihat dan saran serta mengawasi pemenuhan Prinsip Syariah di Pasar Modal terhadap Pihak yang melakukan Kegiatan Syariah di Pasar Modal.
• Tim Ahli Syariah adalah tim yang bertanggung jawab terhadap kesesuaian syariah atas produk atau jasa syariah di Pasar Modal yang diterbitkan atau dikeluarkan perusahaan.

Article 1

• Sharia Capital Market Expert (ASPM) is an individual or business entity that provides advice and/or supervises the implementation of Sharia Principles in the Capital Market in the company's business activities and/or provides a sharia compliance statement on sharia products/services in the capital market.
• Sharia Supervisory Board (DPS) is a board responsible for providing advice and suggestions and supervising the fulfillment of Sharia Principles in the Capital Market to Parties that carry out Sharia Activities in the Capital Market.
• Sharia Expert Team is a team responsible for the sharia compliance of sharia products or services in the Capital Market issued or issued by the company.

KEY REGULATIONS

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Pasal 2

Orang perseorangan atau badan usaha yang memberikan nasihat dan/atau mengawasi pelaksanaan penerapan Prinsip Syariah di Pasar Modal dalam kegiatan usaha perusahaan dan/atau memberikan pernyataan kesesuaian syariah atas produk atau jasa syariah di Pasar Modal wajib mempunyai izin ASPM dari OJK.

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Pasal 3

ASPM wajib memenuhi persyaratan

integritas dan kompetensi.

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Article 2

Individuals or business entities that provide advice and/or supervise the implementation of Sharia Principles in the Capital Market in the company's business activities and/or provide a sharia compliance statement on sharia products or services in the Capital Market must have an ASPM license from the OJK.

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Article 3

ASPMs must meet the requirements of integrity and competence.

POKOK-POKOK PENGATURAN

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Calon ASPM

Lembaga Pendidikan Khusus/Lembaga yang diakui OJK*

Permohonan Izin ASPM

Perizinan ASPM

Anggota Dewan Pengawas Syariah

Anggota Tim Ahli Syariah

Komite Standar Keahlian

*) keterangan:

1. Bidang PM dari lembaga atas rekomendasi KSK
2. Bidang muamalah syariah dari lembaga yang diakui OJK

Dibentuk oleh

Rekomendasi ASPM

Proses Perizinan ASPM

SUKUK RATING

SUPPORTING INSTITUTION- SUKUK RATING AGENCY

• One of the important information that investors need is the risk of a financial instrument.
• Risk determines the return that is required or expected from a financial instrument, including sukuk.
• In sukuk and bonds, the level of risk is usually assessed by a third-party independent entity, namely a rating agency.
• Every sukuk and bond must be assessed and rated by a reputable rating agency.
• This is to ensure that the assessment is objective and reliable, and that it is in line with the nature and character of the financial instrument being rated.
• Each rating agency establishes several rating levels.
• The higher the rating 🡪 the lower the risk 🡪 the lower the risk premium.
• The lower the rating 🡪 the higher the risk 🡪 the higher the risk premium.

SUKUK RATING

• There are several bond and sukuk rating agencies globally and in Indonesia:
• Standard and Poor’s
• Moody’s
• Fitch
• Pefindo (Indonesia)
• Pefindo classifies 8 levels of rating:
• The highest 🡪 idAAA(sy)
• The lowest 🡪 idD(sy)

SUKUK RATING

RATING METHODS

• Every rating agency has its own methodology in determining their rating
• Several methods that are often used are:
• OLS regression
• Multiple Discriminant Analysis
• Logistic Regression
• Artificial Intelligence Neural Network
• And several other methods
• Information needed in the rating process:
• Company-related information - business, financial statements, and other reports
• Industry-related information - industry cycle, risks, etc.
• Sukuk structure - contract, asset-backed or asset-based
• Cash flow information, credit enhancement, legal and shariah, transaction structure

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RATING METHODS

SUKUK RATING METHODS

• A study by (2015) regarding the determinants of sukuk rating shows that variables affecting sukuk rating are as follow:
• Log share price
• Return on Assets
• Log GDP
• Long term debt to total assets
• Total debt to total assets
• Cash ratio

FSA REGULATIONS

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Sukuk Issuance and Requirements

(Penerbitan dan Persyaratan Sukuk)

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Pasal 1

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Sukuk adalah Efek syariah berupa sertifikat atau bukti kepemilikan yang bernilai sama dan mewakili bagian yang tidak terpisahkan atau tidak terbagi atas underlying asset

Pasal 3

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Underlying asset dapat terdiri atas:

• Aset berwujud tertentu;
• Nilai manfaat atas aset berwujud tertentu, baik yang sudah ada maupun yang akan ada;
• Jasa yang sudah ada maupun yang akan ada;
• Aset proyek tertentu;
• Kegiatan investasi yang telah ditentukan.

Article 1

Sukuk is a sharia-compliant security in the form of a certificate or proof of ownership that has the same value and represents an inseparable or undivided portion of the underlying asset.

Article 3

Underlying assets may consist of:

• Specific tangible assets;
• The value of the benefits of a specific tangible asset, both existing and future;
• Services that already exist or will exist;
• Specific project assets;
• Determined investment activities.

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Pasal 5

• Emiten yang melakukan Penawaran Umum sukuk wajib mendapatkan pernyataan kesesuaian syariah atas sukuk dari Dewan Pengawas Syariah atau Tim Ahli Syariah yang memiliki izin ASPM.
• Pernyataan kesesuaian syariah tersebut wajib disampaikan Emiten sebelum pengumuman prospektus

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Article 5

• An issuer that conducts a public offering of sukuk must obtain a sharia compliance statement on the sukuk from a Sharia Supervisory Board or Sharia Expert Team that has an ASPM license.
• The sharia compliance statement must be submitted by the issuer before the prospectus is announced.

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Pasal 9

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Emiten wajib menyajikan Laporan Keuangan yang telah diaudit untuk jangka waktu 2 (dua) tahun terakhir dalam Prospektus, dalam hal Emiten yang melakukan Penawaran Umum Sukuk telah memiliki kewajiban penyampaian laporan keuangan secara berkala.

Article 9

An issuer must present audited financial statements for the past 2 (two) years in the prospectus, if the issuer conducting a public offering of sukuk has an obligation to submit financial statements on a regular basis.

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Pasal 10

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Sukuk tidak lagi menjadi Efek Syariah jika :

• tidak lagi memiliki aset yang menjadi dasar Sukuk; dan/atau
• terjadi perubahan jenis Akad Syariah, isi Akad Syariah, dan/atau aset yang menjadi dasar Sukuk, yang menyebabkan bertentangan dengan Prinsip Syariah di Pasar Modal.

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Dalam hal terjadi kondisi di atas, Sukuk berubah menjadi utang piutang dan Emiten wajib menyelesaikan kewajiban atas utang piutang dimaksud kepada pemegang Sukuk.

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Article 10

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Sukuk is no longer a sharia-compliant security if:

• It no longer has the underlying asset that forms the basis of the sukuk; and/or
• There is a change in the type of sharia contract, the contents of the sharia contract, and/or the underlying asset that forms the basis of the sukuk, which causes it to conflict with the Sharia Principles in the Capital Market.

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In the event of the above conditions, the sukuk becomes a debt and the issuer is required to settle the obligations on the debt to the sukuk holders.

REGULATION FRAMEWORK FOR SUKUK

Fatwa DSN-MUI terkait dengan Sukuk (Obligasi Syariah):

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• Nomor: 20/DSN-MUI/IV/2001 ttg Pedoman Pelaksanaan Investasi Untuk Reksadana Syariah
• Nomor: 32/DSN-MUI/IX/2002 ttg Obligasi Syariah
• Nomor: 33/DSN-MUI/IX/2002 ttg Obligasi Syariah Mudharabah
• Nomor: 40/DSN-MUI/X/2003 ttg Pasar Modal dan Pedoman Umum Penerapan Prinsip Syariah di Bidang Pasar Modal
• Nomor: 41/DSN-MUI/III/2004 ttg Obligasi Syariah Ijarah
• Nomor: 59/DSN-MUI/IV/2007 ttg Obligasi Syariah Mudharabah Konversi
• Nomor: 69/DSN-MUI/VI/2008 ttg Surat Berharga Syariah Negara
• Nomor: 70/DSN-MUI/VI/2008 ttg Metode Penerbitan Surat Berharga Syariah Negara
• Nomor: 71/DSN-MUI/VI/2008 ttg Sale and Lease Back
• Nomor: 72/DSN-MUI/VI/2008 ttg Surat Berharga Syariah Negara Ijarah Sale and Lease Back

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THANK YOU