ISLAMIC CAPITAL MARKET�WEEK 4-5: SUKUK CONTRACTS

Lecturer Team

TYPES OF SUKUK BASED ON CONTRACT (AAOIFI)

GROUP EXERCISE

CLASSROOM ACTIVITY: JIGSAW LEARNING – UNDERSTANDING SUKUK STRUCTURES

Topic: Sukuk Structures (Musyarakah, Mudharabah, Istisna, Ijarah)�Total Duration: 90 minutes

• Learning Objectives
• By the end of this activity, students should be able to:
• Explain the basic mechanisms of different sukuk structures.
• Distinguish between Musyarakah, Mudharabah, Istisna, and Ijarah sukuk.
• Apply sukuk concepts to the financing of a real-world project.

​

Stage 1 – Forming Home Groups

• ⏱ Duration: 10 minutes
• Students will be divided into Home Groups consisting of 4 members.
• Each member in the group will be assigned one sukuk structure to specialize in.
• Topic allocation:
• Student 1 → Sukuk Musyarakah
• Student 2 → Sukuk Mudharabah
• Student 3 → Sukuk Istisna
• Student 4 → Sukuk Ijarah
• Each student will become the “expert” for their assigned structure.
• The goal is that every member understands all four sukuk structures.

Stage 2 – Expert Group Discussion

⏱ Duration: 25 minutes

Students with the same assigned topic will gather in Expert Groups.

For example:

• All students assigned Musyarakah, Mudharabah, Istisna, and Ijarah Sukuk will form one group.

In these expert groups, students will:

1. Study and discuss the slides provided by the instructor.
2. Understand how the sukuk structure works.
3. Prepare how they will explain the structure to their Home Group members.

Each expert group should focus on understanding:

• The underlying contract (akad) used
• The basic structure and transaction flow
• The source of investor returns
• A simple explanation suitable for teaching peers

Stage 3 – Return to Home Groups (Peer Teaching)

⏱ Duration: 25 minutes

Students return to their Home Groups.

Each member will take turns teaching their assigned sukuk structure to the rest of the group.

MUSHARAKAH SUKUK

MUSHARAKAH SUKUK

• According to AAOIFI, istisna’ sukuk is defined as:

“These are certificates of equal value issued for the purpose of using the mobilized funds to establish a new project, develop an existing project or finance a business activity on the basis of a partnership contract. The certificate holder become the owners of the projects or the assets of the activity according to their respective share, with the musharakah certificates being managed on the basis of either participation, mudharabah, or an investment agency”

• Unlike sukuk murabahah, which is debt-based, and sukuk ijarah, which is fixed income, sukuk musharakah is equity-based:
• The return received by investors depends on the performance of the underlying asset.
• Risk sharing between investors and originators occurs in accordance with the ownership ratio.

​

MUSHARAKAH SUKUK

8

X%

Y%

​

Issuer

​

​

Capital

​

Revenue of Project

​

Invests in Project (real estate)

​

Contract of Musharakah Capital contribution – X:Y

​

Investors

​

• Profit: shared according to agreed ratio or according to ratio of capital contribution
• Loss shared according to ratio of capital contribution

Issues Musharakah Sukuk

MUSHARAKAH SUKUK

• Some important issues that often arise in the issuance of sukuk musyarakah:
• The return is fixed or constant, where the originator guarantees that investors will receive a certain nominal amount on a periodic basis. If the originator's earnings are above this value, the excess belongs to the originator. Conversely, if the originator's earnings are less than this value, the originator will pay the shortfall to the investor.
• The existence of guarantees accompanying the issuance of sukuk musyarakah. The musyarakah contract is a partnership contract based on trust, so there is no need for guarantees.
• In a musharakah contract, the ownership of sukuk holders in the project or asset that becomes the underlying asset of the sukuk can be reduced periodically.
• This contract is called a musharakah mutanaqisah or diminishing musharakah.
• The originator periodically buys back the ownership from the sukuk holders.
• At the end of the maturity, 100% of the ownership is fully in the hands of the originator.

​

EXAMPLES

MUSHARAKAH SUKUK

MUSHARAKAH SUKUK

12

Musyarakah

Venture

​

​

SPV

​

​

Sukuk

Holders

(Investors)

​

Company

​

Musharakah Mutanaqisah

Invest Capital

(10%)

agency

agency

Musyarakah Revenue

(RMXXX Million)

Profit sharing

Company

X%

Investors

Y%

Service Contract

(RMXXX Million)

Assignment

Invest Capital

(90%)

Servicing Oil

Companies

Oil Companies

1

2

Issue

Sukuk

1

2

2

3

4

4

5

6

7

Active Partner

• Case study of RM200m Vastalux Musyarakah Sukuk

ISTISNA SUKUK

ISTISNA’ SUKUK

• According to AAOIFI, istisna’ sukuk is defined as:

“These are certificates of equal value issued with the aim of mobilizing funds to be employed for the production of goods so that the goods produced come to be owned by the certificate holder”

• Istisna' is usually used to finance large-scale construction or manufacturing projects
• The underlying asset is an intangible asset that must be created first
• The buyer will place an order with the seller or contractor to create the asset, which will be delivered in the future
• The istisna' contract contains specifications, delivery expectations, price, and other conditions

​

ISTISNA’ SUKUK

1. The issuer or SPV issues sukuk to raise funds from investors
2. The SPV uses the funds to pay the contractor with an istisna' contract to create and deliver the project
3. The SPV sells the asset to the end user with another istisna' contract
4. The end user makes periodic payments
5. The SPV distributes the payments to investors
6. The asset is delivered to the end user after it is completed

Investor

SPV

Contractor

End User

1

2

5

6

4

3

ISTISNA’ SUKUK

1. A company purchases an asset from an SPV with an istisna' contract (the SPV sells an asset that will be built). Payments are made periodically (installments)
2. The SPV repurchases the same asset with a second istisna' contract in cash
3. The SPV issues sukuk to raise funds from investors to pay for the second istisna' contract
4. The company makes periodic payments to the SPV
5. The SPV distributes the payments to investors

Investors

SPV

Company

3

5

1

2

4

ISTISNA’ SUKUK

1. Issuer or PV issues sukuk to raise funds from investors.
2. SPV uses the funds to pay the contractor for the construction of the asset (istisna').
3. SPV leases the asset to the end user.
4. The end user makes periodic payments.
5. SPV sells the asset to the end user to exit the istisna' contract.

Investors

SPV

Company

1

4

3

5

Contractor

2

ISTISNA’ SUKUK

1. The issuer or SPV issues sukuk to raise funds from investors
2. The SPV enters into an istisna' contract with Tabreed, in which Tabreed agrees to build cooling plants for 3 years
3. After completion, Tabreed leases the plants to the SPV for 2 years
4. The lease payments are made periodically by Tabreed to the SPV
5. At maturity, Tabreed purchases the asset from the SPV

Tabreed Financing (SPV)

Tabreed as contractor

3

5

2

Investor

4

1

ISTISNA’ SUKUK

• Sukuk istisna' is suitable for financing large-scale infrastructure projects
• Like sukuk murabahah, sukuk istisna' cannot be traded in the secondary market because it is a debt-based contract
• Can be combined with other contracts, such as ijarah contracts and other contracts:
• The order between one contract and another needs to be considered
• Each contract is independent of the other, so the rights and obligations of each party involved in the transaction become clear

EXAMPLES

SBSN STRUCTURE FOR PROJECT FINANCING

22

​

SPV

(Issuer/ Trustee)

​

Istisna Agreement and Undertaking to buy Istisna Asset of the SPV at the end of sukuk period or on a periodic basis

Sukuk Proceeds

Payment for

Sukuk

Secondary Market

​

​

Investor

​

​

​

Sukuk

Issuance

Transfer of Istishna’ Asset

Payment for Istisna Asset/ Sukuk Redemption

Sukuk

Redemption

​

SPV

(Issuer/ Trustee)

​

​

Investor

​

​

Obligor

​

​

Paying

Agent

Forward Lease of Istisna Asset

Periodic Lease Payment / coupon

Penerbitan dan Pembayaran Imbalan Sukuk

Jatuh Tempo

Obligor

​

SALAM SUKUK

SALAM SUKUK

• Sukuk salam is essentially similar to sukuk istisna’:
• Salam and istisna' are the same type of contract, where the istisna' is usually used for infrastructure projects that require manufacturing.
• The salam is the contract that is usually used in commodity transactions where the funds are paid in advance and the asset is delivered in the future (forwards sale).
• Sukuk salam is not widely used because of its unique characteristics and risks:
• A large credit risk from the seller's side because there could be a risk of crop failure (agriculture and plantations) or other risks related to commodities.
• Market risk can also occur when the market value of commodities plummets in the market.

SALAM SUKUK

• The Government of Bahrain sells aluminum to the buyer (sukuk salam holder) at a predetermined price for later delivery.
• The buyer (sukuk holder) pays cash for the aluminum at the agreed price. In return, the Government of Bahrain guarantees to provide a certain quantity of aluminum on a future date.
• At the same time, the buyer appoints the Government of Bahrain as its agent to sell the aluminum at the time of distribution to its partners.
• The Government of Bahrain provides an additional guarantee to the agent to sell the aluminum at a price that provides the agreed profit to the sukuk salam holder.

IJARAH SUKUK

IJARAH SUKUK

• According to AAOIFI, ijarah sukuk can be defined as:

“These are certificates of equal value issued by the owner of a leased asset or a tangible asset to be leased by promise, or they are issued by a financial intermediary acting on behalf of the owner with the aim of selling the asset and recovering its value through subscription so that the holders of the certificates become owners of the assets”

• Sukuk ijarah is the most popular type of sukuk because:
• It has characteristics similar to conventional bonds, where lease payments (ujrah) are typically fixed and paid periodically.
• Unlike sukuk murabahah, ijarah sukuk can be traded in the secondary market at market price because investors have direct ownership of the underlying asset.

​

IJARAH SUKUK

1. A special purpose vehicle (SPV) issues sukuk.
2. The SPV purchases an asset from a supplier or manufacturer.
3. The SPV leases the asset to a company (ijarah).
4. The company receives the asset from the manufacturer.
5. The company promises to purchase the asset to ensure sukuk payments.
6. The company makes periodic payments (ujrah) to the SPV.
7. The SPV distributes the payments to investors.
8. At maturity, the company purchases the asset from the SPV and the SPV distributes it to investors.

Investors

SPV

Company

1

6

Manufacturer

2

7

3

5

4

Ijarah sukuk for asset acquisition

IJARAH SUKUK

• In the previous scheme, ownership of the asset is in the hands of investors through sukuk ownership, so the underlying asset of sukuk ijarah has value and can be traded in the secondary market.
• The above ownership features raise issues:
• In Islamic law, the owner (lessor) is responsible for maintenance, depreciation, and insurance expenses.
• In practice, the lessee acts as a representative of sukuk holders to handle various matters related to maintenance and insurance expenses.
• AAOIFI considers ijarah to be a pure operating lease, not a financial lease. Therefore, in the IMBT (ijarah mumtahiya bit tamlik) contract, the sale contract at the end of the tenor is optional.

IJARAH SUKUK

1. A company sells its asset to an SPV for cash.
2. The SPV issues sukuk to purchase the asset.
3. The SPV leases the asset to the company.
4. The company promises to purchase the asset back.
5. The company makes periodic lease payments to the SPV, which are then distributed to investors.

Investors

SPV

Company

2

1

5

3

4

Ijarah Sale and Leaseback

IJARAH SUKUK

• �In addition to the two previous models, sukuk ijarah can also be in the form of ABS (asset-backed securities).
• In the two previous models, the underlying asset is not a revenue-generating asset.
• The return is generated from the transaction between the issuer and the investor.
• There are several types of income-generating assets, which are owned by companies for commercial purposes.
• In conventional finance, financial assets such as receivables or debts can also be securitized because they are considered to generate income.
• In Islamic finance, this is prohibited because it has implications for riba. There is no underlying real asset.

IJARAH SUKUK

1. Originator (asset owner) owns an asset and leases it to a third party (income generating).
2. Originator sells the asset to SPV (true sale).
3. SPV issues sukuk to purchase the asset from originator.

SPV

Sukuk holder

Originator

Obligor

1

2

3

IJARAH SUKUK: FORWARD LEASE

Developer

Land Owner

Ijarah Contract

On Use of Land

Sukuk

Investors

Lease of

Rights of

Future

Use of Units

On Chosen

Time Slots

Payments

For Lease Rental

(SAR/US$)

SUKUK

AL INTIFA’

Evidenced by

Sukuk Certificates

4

Proceeds from

Sukuk Sales

Commercial

and Hotel

Complex

Payment

For Lease of

Land (SAR/US$)

Development

Costs (SAR/US$)

“Time Use” By Sukuk Holders

5

6

7

2

3

4

1

EXAMPLES

SUKUK IJARAH PLN II TAHUN 2007

Notes:

• The amount of issuance is Rp 300 billion.
• The tenor of the sukuk is 10 years.
• The ijarah payment is Rp 31.2 billion per year.
• The payment of the ijarah is made every 3 months since the issuance date.

IJARAH SUKUK -- MATAHARI

Notes on the Contracts:

• Wakalah Contract: The investor, through its representative (wali amanat), as the principal (muwakkil), with PT Matahari, as the agent (wakil), to enter into an ijarah contract for the benefit of the asset (CITOS space). (Done simultaneously with transactions 1 and 2)
• Ijarah Contract: The investor, through its representative (PT Matahari), enters into an ijarah contract with the asset owner (CITOS) for the benefit of the asset (CITOS space). (Transactions 3 and 4).
• Ijarah Contract: PT Matahari acts as the lessee (musta’jir) with the investor as the lessor (mu’ajjir) for the benefit of the asset (CITOS space). (Transactions 5 and 8)

39

Pokok-pokok Desain Instrumen SBSN

STRUCTURE: SBSN IJARAH - SALE & LEASE BACK

40

​

​

Investors

​

​

1a. Sales of Asset (Beneficial Title)

1d. Proceeds

(Pembayaran atas Aset)

1e. Lease of Asset

1b.Sukuk

issuance

​

​

1c. Proceeds

(Pembayaran atas sukuk)

4. Sales of Asset

Jatuh Tempo

Secondary Market

2. Periodic Lease Payment

3. Sukuk Redeemption

5. Sukuk

certificate

​

​

Paying

Agent

​

Investor

​

​

MoF - GOI

(Obligor/Originator)

MoF - GOI

(Obligor/Originator)

​

SPV

(Issuer/ Trustee)

​

​

​

SPV

(Issuer/ Trustee)

​

Penerbitan dan Pembayaran Imbalan SBSN

Structure for Retail Sukuk SR-4

MUDHARABAH SUKUK

MUDHARABAH SUKUK

Pemegang Sukuk

Project

Pemerintah

(Project Owner)

SPV

(Mudharib)

(1) Perjanjian Mudharaba

(2) Sukuk

$

$

$

Penerbitan Sukuk

Pembayaran Imbalan

Project

SPV

(Mudharib)

1

2

Pemegang Sukuk

1. A special purpose vehicle (SPV) (mudharib) enters into a mudharabah agreement with the government as the project owner (Project Owner) where the SPV funds 100% of the projects/activities that will be built by the government.
2. The SPV issues sukuk to finance the government's projects in accordance with the mudharabah agreement.

1. The SPV receives profits on a regular basis from the project activities.
2. The SPV distributes the returns to the Sukuk holders.

MUDHARABAH SUKUK

Loss borne

Totally by

rabb al mal

Profit shared

in accordance

to pre-agreed

proportions

(X:Y)

Y% to

rabb al

mal

X% to mudarib

​

Investors

(Rabb al Mal)

​

​

Issuer

(Amil / Mudarib)

​

​

CAPITAL

​

Outcome of

project

​

Invests in project (real estate)

​

Contract of Mudarabah

Issues Mudarabah Sukuk

Contract of Mudarabah

Issues Mudarabah Sukuk

STRUCTURE -- MUDHARABAH SUKUK ADHI 2007

Notes:

The amount of issuance is Rp 125 billion.

The tenor of the sukuk is 5 years.

The ratio of sukuk holders is 76.39%.

Profit sharing income every 3 months since the issuance date.

MURABAHAH SUKUK

MURABAHAH SUKUK

• According to AAOIFI, sukuk murabahah is:

“These are certificates of equal value issued for the purpose of financing the purchase of goods through Murabahah so that the certificate holders become the owner of Murabahah commodity”

• Sukuk murabahah is a debt-based sukuk, as the payment is done periodically:
• AAOIFI states that sukuk murabahah is not tradable unless in its par value
• Several shari’ah scholars in Malaysia views that the transaction in secondary market is allowed
• In sukuk market, there are 3 (three) models of sukuk murabahah:
1. Murabahah sukuk for asset acquisition
2. Two party murabahah sukuk
3. Murabahah sukuk – tawarruq

​

MURABAHAH SUKUK

1. Issuer or SPV issues sukuk to raise fund from investor
2. SPV purchases asset from supplier
3. SPV sells the asset to the company with scheme of cost-plus margin (Murabahah)
4. Company obtains the asset from the supplier
5. Company makes periodical payment
6. SPV distributes the payment to investors

MURABAHAH SUKUK

1. Company sells their asset to issuer or SPV to obtain cash
2. SPV issues sukuk to raise fund from the investors to purchase the asset
3. SPV sells back the asset to the company using Murabahah
4. Company makes a periodical payment to SPV and SPV distributes it to the investor

Ba’I Al-Inah

MURABAHAH SUKUK

1. Issuer or SPV issues sukuk to raise fund
2. SPV purchases the commodity in sport market from broker A
3. SPV sells the commodity to company using Murabahah
4. Company sells the commodity to broker B at spot price (in lower price) at cash
5. Company makes periodical payment to the SPV
6. SPV distributes the payment to the investor

MURABAHAH SUKUK

• No matter which model is used, sukuk murabahah implies a debt-based contract
• Transactions in the secondary market at market prices can lead to riba due to additional value from the initial value
• Models 2 and 3 raise controversy in terms of compliance with sharia principles:
• The majority of scholars agree that ba’I al-inah is contrary to sharia principles because it is a form of deception (khila).
• The tawarruq model is also a subject of debate from a fiqh perspective, with some scholars allowing it and others prohibiting it.

GROUP EXERCISE

GROUP CHALLENGE

• Stage 4 – Challenge: Design the Sukuk Structure
• ⏱ Duration: 20 minutes
• All groups will work on the same project scenario:
• Project: Development of an Integrated Sharia Medical Center
• The project includes:
• A main hospital building
• Specialist clinic facilities
• A parking building
• Halal commercial areas (pharmacy, halal cafés, etc.)
• The fund needed is IDR 1 Trilion.
• The developer plans to finance the project through sukuk issuance.

​

Group Task

Each group must:

1. Choose one sukuk structure that they believe is most suitable for financing this project.
2. Design a simple sukuk structure diagram that includes:
1. Investors
2. SPV (Special Purpose Vehicle)
3. Issuer / developer
4. Underlying asset
5. Flow of funds
6. Investor returns
3. Explain why the chosen sukuk structure is appropriate for the project.

Groups should present their ideas using a simple diagram or visual structure.

Stage 5 – Group Presentations

⏱ Duration: 10–15 minutes

Each group will deliver a short presentation (approximately 5 minutes) explaining:

• The sukuk structure they selected
• Their designed sukuk structure diagram
• The reasoning behind their choice