Sukuk

1. THE HISTORY OF SUKUK
By: Camille Paldi
CEO of FAAIF

2. INTRODUCTION: THE ORIGIN OF SUKUK
 Sukuk is derived from the word sakk, which can mean
legal instrument, deed, and cheque. Sakk can also mean
to strike a seal on a paper document.
 The first sukuk transaction took place in Damascus, Syria
in the Great Mosque of Damascus (Umayyad Mosque) in
the 7th Century AD. Syria is a treasure house of culture
and history.

3. SHEIKH ZAYED MOSQUE, ABU DHABI, UAE

4. SUKUK DEFINITION
 Securitization or taskeek in Arabic refers to the
process of the division of the ownership of tangible
assets or rights to use those assets or both or right
to a project into units, which have equal value and
the issuance of those units to investors.
 In simple terms, securitization describes the
process of aggregating assets and packaging them
into marketable securities.

5. SUKUK LINGUISTIC ORIGIN AND DEFINITION
 Tawriq (from wariq) means to render something into
cash. Taskik (from Sakk) is also used as
securitization though literally refers to the process
of dividing the assets into papers (Sukuk).
 Tawriq is defined as: “transforming a deferred debt
for the period between the establishment of the
debt and the maturity period into papers, which can
be traded in the secondary market.” (in Majallah
Majma ‘Al Fiqh’)

6.  AAOIFI in its Shari’ah Standard 17(2), defined
investment sukuk (Sukuk Istithmar) as “certificates
of equal value representing undivided shares in
ownership of tangible assets, usufruct and services,
assets of particular projects or special investment
activity.”
 The IFSB, in its Capital Adequacy Standard (IFSB
2), defined sukuk as “Certificates that represent the
holder’s proportionate ownership in an undivided
part of an underlying asset where the holder
assumes all rights and obligations to such asset.”

7.  Sukuk is described in a decision of the Islamic
Jurisprudence Council of February 1988, which
provides that:
Any combination of assets (or the usufruct of such
assets) can be represented in the form of a written
financial instrument, which can be sold at a market
price provided that the composition of the group of
assets represented by the sukuk consists of a
majority of tangible assets.

8.  Securities Commission Malaysia (SC)
defined sukuk as a document or certificate, which
represents the value of an asset.
 In terms of AAOIFI, the IFSB, and SC, the AAOIFI
and IFSB do not recognize financial assets as
assets that would qualify to form the underlying
assets of a tradable sukuk, while the SC does allow
such assets.

9. MAIN FUNCTION OF SUKUK
The main function of sukuk is to provide an
alternative to conventional bonds, in other
words, to provide the benefits associated with
conventional bonds, but in a Shari’ah compliant
manner.

10. SUKUK V BONDS
 A conventional bond is a contractual debt obligation
whereby the issuer is contractually obliged to pay to
bond holders, on a certain specified date, interest
and principal.
 Under a Sukuk structure, the Sukuk holders each hold
an undivided beneficial ownership interest in the
underlying assets.
 Sukuk holders are entitled to a share in the
revenues generated by the Sukuk assets.
 In sum, Sukuk are monetary denominated
participation certificates of equal unit value to be
issued to investors to represent their proportionate
share in the ownership of the underlying assets and
a pro- rata share in the income generated by those
assets.

11. SUKUK V BONDS
 While bonds represent pure debt obligations from
the issuer to the investors or bondholders, the
sukuk represent ownership of a well-defined asset.
 The sale of sukuk, both in primary and secondary
markets, is a sale of a share of an asset, while
selling a bond is basically the sale of debt.

12. SUKUK V BONDS
 In terms of pricing, sukuk prices are market driven
and depend on the fluctuation of the market value
of the underlying assets. In the case of the issuer’s
default, sukuk holders will possess the asset and
they can sell it to other buyers or keep it as an
asset.
 On the other hand, bondholders depend solely on
the creditworthiness of the issuer without any
specific assets to be relied on. Therefore, in the
case of the issuer’s failure, unsecured bondholders
will be jointly seeking the assets of a bankrupt
company.

13. SUKUK V BONDS
 The aim of bond traders usually is to make capital
gains as fixed-interest bond prices rise when
variable market interest rates fall.
 Bond trading is therefore largely about exploiting
interest rate developments and trading in paper that
is usually unrelated to the value of any underlying
asset.

14. SUKUK V BONDS
 The major risk for holders of conventional bonds is
of payments default, but this risk is usually
assessed solely on the basis of credit ratings, with
the ratings agency rather than the bond purchaser
estimating the risk.
 Hence, the bonds are regarded as mere pieces of
paper with third parties estimating the risk and the
purchaser, at best, only making a risk/return
calculation without any reference to the business
being financed.

15. SUKUK V BONDS
 Sukuk is an undivided ownership share in specific
assets while holding shares means holding an
ownership share in a corporation or a company.
 In sukuk, the assets should be Shariáh compliant
and a minimum of 51% are tangible assets.
 Ordinary shares do not require the company to be
Shariáh compliant and the percentage of tangible
assets is not determined.

16. TYPES OF SUKUK
 Leased-based sukuk, i.e., sukuk al ijarah.
 Partnership-based sukuk, i.e., sukuk mudharabah
and sukuk musharakah.
 Sale-based sukuk, i.e., sukuk murabahah, sukuk
istisnaá, and sukuk salam.

17. SUKUK HISTORY
 In 1990, in Malaysia Shell MDS Sdn Bhd issued
a sukuk ijarah worth RM 125 million. Issuances
grew 145% in 2006 compared to 2005 to reach
US$27 Billion. The sukuk market peaked at US$47
Billion in 2007 and dropped by 55% to US$21
Billion in 2008.
 The market recovered in 2009 to reach a total
issuance of US$31 Billion, which was higher than
the total issuance in 2006.
 2012 saw US$110 Billion in sukuk issuances
while 2013 tapered off with US$79 Billion.

18. HISTORY OF SUKUK IN THE USA
 The US has seen two major sukuk issuances
including the East Cameron Gas Sukuk, which was
the first ever musharakah sukuk in America backed
by oil and gas assets and the General Electric
Sukuk, which is an ijarah sukuk backed by aircraft
leases due for maturity in November, 2014.
 Although the Cameron Gas Sukuk experienced
some technical difficulties, the General Electric
Sukuk is performing well and there is a large
potential for sukuk in the United States as a capital
raising instrument for American firms.

19. US STATE LEGISLATION FOR SUKUK
 In fact, both the state of New York and the state of
Illinois have initiated state bills in their legislatures
enabling sukuk transactions.
 Illinois Bill Title: Bill Islamic Finance Sukuk.
 New York Senate: Bill Introduced by Senator Parker
in the New York State Senate in 2011.
 *Copies available upon Request.

20. EAST CAMERON GAS SUKUK
 East Cameron Partners LP saw the sukuk issuance as
an affordable and flexible finance opportunity through
which it could raise the funds needed to purchase other
shares from its non-operating partner, Macquarie Bank,
whom wished to sell its share in the business.
 East Cameron Partners LP (“ECP” or the “Originator”) is
an independent oil and gas exploration and production
company, based in Houston, Texas whose producing
assets consisted of two gas properties located offshore
of the State of Louisiana, USA.

21. EAST CAMERON GAS SUKUK
 East Cameron Partners (ECP) issued sukuk of
USD165.67 million in June 2006 with a maturity period
of 13 years.
 This was the first sukuk issued by a company based in
the United States and rated by Standard & Poor’s.
 The underlying contract was musharakah (co-ownership/
joint venture) in which sukuk investors own
so called Overriding Royalty Interest (ORRI) in two gas
properties located in the shallow waters offshore the
State of Louisiana through an SPV acting as a trustee of
sukuk holders.

22. EAST CAMERON GAS SUKUK
 The SPV was called East Cameron Gas Company
(ECGP) and incorporated in the Cayman Islands.
 The originator also contributed its funds into the
musharakah.
 The assets of the musharakah were co-owned by the
sukuk holders and the originator company ECP.
 The sukuk were secured by a mortgage on the assets of
the issuer, which included the ORRI and secured
accounts. The sukuk were initially rated CCC+ by
Standard & Poor’s and then downgraded to CC and
finally D.

23. EAST CAMERON GAS SUKUK
 The East Cameron Gas sukuk had a fixed payment
of 11.25% annually. However, there was also a
variable component because the sukuk returns
depended upon the production quantities (the
overriding royalty interest (ORRI) specified a fixed
quantity of natural gas be delivered to the SPV).
 It also contained a redemption feature by where a
percentage of the sukuk would be redeemed if
production exceeded a certain level.

24. EAST CAMERON GAS SUKUK
 Sukuk holders were also exposed to risks found in
the energy sector (i.e.) the volatility of natural gas
and condensate prices, which may adversely affect
payments on the sukuk.
 In order to hedge against severe price fluctuations
in oil and gas markets, there was a Shariáh
compliant hedge that established a price collar
between $7 and $8 per million BTU (Mbtu) on half
the expected products gas production and a put
option at $6 per MMBtu for an additional quarter of
anticipated production (Goud, 2009).

25. EAST CAMERON GAS SUKUK PARTIES
 Originator: East Cameron Partners
 Issuer: East Cameron Gas Company

26. EAST CAMERON GAS SUKUK SUMMARY
Sukuk Name: East Cameron Gas Company Sukuk
Issue Size: USD $165,670,000
Closing Date: 15 June 2006
Shari’ah structure: Musharakah
Currency: USD
Maturity/Tenor: 13 years
Underlying Assets: Oil and gas
Rated by: Standard & Poor’s
Rating: CCC+ to CC and in March 2009 D
Payments: Quarterly
Return: 11.25% (Courtesy of Jassim Mahadik)

27. EAST CAMERON GAS SUKUK
 Instead of being solely used to support the
capital and operating costs of drilling and
operating wells in the Gulf of Mexico for East
Cameron Partners, the proceeds were also used
to pay most of the conventional debt of the
company.
 This brought the debt- to- equity ratio of the
company to a Shariáh compliant level, however,
also bankrupted the sukuk.

28. EAST CAMERON GAS SUKUK
On October 16, 2008, East Cameron
Partners filed for bankruptcy protection
under chapter 11, claiming its inability to
pay the periodic returns on its USD166
million sukuk issued in June 2006.

29. GENERAL ELECTRIC SUKUK PARTIES
 Originator: Sukuk Aviation Leasing Inc through GE
(SAL is a subsidiary of GE Capital).
 Issuer: GE Capital Sukuk Limited

30. GENERAL ELECTRIC SUKUK SUMMARY
Sukuk Name: GE Capital Sukuk
Issue Size: USD $500,000,000.00
Closing Date: Shari’ah structure: Ijarah
Currency: USD
Maturity/Tenor: 5 years due for maturity in
November 2014
Underlying Assets: Aircraft leases
Rated by: Standard & Poor’s
Rating: AA+
Payments: Semi- annually (May and November, due
in 2014)
Return: 3.875% (Courtesy of Jassim Mahadik)

31. POPULARITY OF SUKUK AND CONCLUSION
The sukuk instrument is growing in popularity around the
world as an innovative financing instrument and a way to raise
funds for various projects, business expansion, and increased
competitiveness, which attracts ethical and creative investors
worldwide. The UK just announced it is the first Western
Nation to issue a sukuk (200 Million Pounds). The USA should
join the competition.

32. THE END

33. AL HUDA CERTIFIED SUKUK PROFESSIONAL
COURSE

34. FEEL FREE TO CONTACT ME AT
CAMILLE@FAAIF.COM
The End