Sukuk and Securitization: Vital Issues in Islamic Capital

Markets

Sigit S.Wibowo

November 24th , 2008

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 1 / 24

Contents

1 Introduction
2 The Capital Market in an Islamic Framework
3 Securitization and Sukuk

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 2 / 24

Introduction

The growth of Islamic banking and …nance has gained momentum

during the last decade, particularly in the areas of Sukuk and
securitization
Sukuk are gaining popularity as an alternative source of funding,
particularly for sovereigns and corporate bodies
The major requirement for making an investment certi…cate
Shar¯¬’ah-compliant is that it should not represent interest-bearing
debt as dominant part of the underlying assets
Like the two categories of modes in Islamic …nance, i.e. participatory
and …xedreturn/debt-creating, Sukuk or investment instruments can
also be variable-return Sukuk (VRS) and …xed-return Sukuk (FRS)

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 3 / 24

Introduction

MUI Fatwa

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 4 / 24

The Capital Market in an Islamic Framework

The salient features of the capital market comprises debt, equity and
the Sukuk markets
An equity market, commonly known as a stock market, is the trading
place for the stocks of joint stock companies
A debt market, which deals in debentures and bonds, normally involves
Riba and Gharar and, therefore, is not an active part of Islamic
…nancial markets, except for debts that can only be assigned to others
on a par value without transferring the risk of default
Key components of an Islamic capital market are Shar¯¬’ah-compliant
stocks, Islamic funds and Sukuk/Islamic investment certi…cates
An Islamic capital market can be developed by developing Sukuk,
introducing Islamic depository receipts (IDRs) at a mass level,
replacing debt …nancing with Shirkah-based indirect and direct
…nancing, securitization and fund management

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Advantages of IDRs

For the originators

expansion of investor base
low cost of funds in highly liquid markets
better image of securities by trading in more organized markets
For the investors
diversi…cation of portfolio in other markets
IFIs to have Shar¯¬’ah-compliant stocks
higher returns for IFIs than conventional placements in Murabaha;
liquidity management facility for IFIs.
Institutions supporting IDR development include
Islamic Development Bank (IDB)
International Islamic Financial Market (IIFM)
rating agencies
International Financial Services Board (IFSB)
local regulatory bodies
Islamic …nancial institutions
Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 6 / 24
Securitization and Sukuk

Today, …nancial institutions increasingly resort to securitization, which

is a process of pooling/repackaging the nonmarketable and illiquid
assets into tradable certi…cates of investment
Securitization transforms the originator’s role from being an
accumulator to that of a distributor

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Securitization and Sukuk (cont’d)

The ownership of the securitized assets is transferred to a special

purpose vehicle (SPV) or special purpose Mudarabah (SPM) that is
set up for the dual purpose of managing the assets on behalf of the
Sukuk holders and for the issuance of the investment certi…cates
Islamic …nancing being asset-backed by nature, provides ample
opportunities for issuance of Sukuk on the basis of assets already
booked by IFIs or by purchasing the assets with proceeds of a variety
of Sukuk created on the principle of Shirkah
Securitization involves evaluating, isolating and e¢ ciently allocating
speci…c risks, evaluating the taxation, accounting and legal
implications, designing appropriate credit enhancement structures and
pricing the (residual) risk for pricing the units of the securitized assets
or pools

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Parties to Sukuk Issue/Securitization

Key players in various issues of Sukuk are:

The originator or the issuer of Sukuk, who sells its assets to the SPV
and uses the realized funds
The SPV – an entity set up speci…cally for the securitization process
and managing the issue
Investment banks – as issue agents for underwriting, lead managing
and book-making services for Sukuk against any agreed-upon fee or
commission
Subscribers of Sukuk – mostly central banks, Islamic banks and NBFIs
and individuals who subscribe to securities issued by the SPV

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Parties to Sukuk Issue/Securitization (cont’d)

Other parties to the general securitization process may include

the obligor
the lead manager
the servicer
the cash administrator or receiving and paying agent
the credit enhancement provider
the legal and tax counsel
the auditor
the custodian/R&T agents

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Classes of Securitized Papers

asset-backed securitization (ABS)

pool-based securitization:
mortgage-backed securitization
CDO/CLO: collateralized debt/loan obligations (not
Shar¯¬’ah-compliant unless subjected to the rules of Hawalah)
lease rentals securitization (for Shar¯¬’ah-compliance of Ijarah Sukuk,
ownership of the assets must also be transferred to the Sukuk holders)
future ‡ow securitization (FFS):
securitization of receivables to be generated in future
road toll securitization (transfer of pro rata ownership to Sukuk holders
necessary for Shar¯¬’ah compliance)
telecom receivable securitization
credit card receivable securitization (not Shar¯¬’ah-compliant unless
subjected to the rules of Hawalah)

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Flow Diagram of the Securitization Process

A ‡ow diagram of the typical securitization process

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Special Purpose Vehicle (SPV)

SPVs are formed as separate legal entities for the speci…ed purpose of
managing the securities issues pool-based securitization
The legal structure of an SPV depends upon the regulatory and legal
environment in which it has to work
Once the ownership has been transferred to the SPV, the discretion
of the original owner in respect of the asset comes to an end, and it
cannot be reversed in the case of insolvency of the original owner or
otherwise
Alternative payment structures adopted by SPVs include
the “pass-through structure” – the SPV remits any funds collected
completely and immediately to the investors
the “pay-through structures” – desynchronization of servicing of the
securities from the underlying cash ‡ows

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Securitization Mitigates the Risks

Originator’s perspective:
mitigates liquidity risk of an illiquid asset
reduced cost of funding
takes assets o¤ balance sheet, without loss of use
reduced cost of …nance if SPV is serving as multiple originators by
pooling assets
Investors’perspective:
foreign exchange risk is reduced if underlying asset is denominated in
multiple currencies
pooling of diversi…ed assets with heterogeneous risk mitigates earnings
risk
undivided ownership of the asset is an added protection

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Shar¯¬’ah Bases of Sukuk Issue

Types of investment certi…cates or Sukuk: the AAOIFI, Shar¯¬ah

Standard for Investment Sukuk):
Sukuk of ownership in leased assets: further divided into Sukuk of
ownership of usufruct of existing assets, Sukuk of ownership of
described future assets, Sukuk of ownership of services of a speci…ed
party and Sukuk of ownership of described future services
Salam Sukuk
Istisna‘a Sukuk
Murabaha Sukuk
Musharakah Sukuk: further divided into participation certi…cates,
Mudarabah Sukuk and investment agency Sukuk
Muzara‘ah (share-cropping) Sukuk
Musāqah (projects involving irrigation of fruit-bearing trees) Sukuk
Mughārasah (projects involving plantation of gardens) Sukuk

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Shar¯¬’ah Bases of Sukuk Issue (cont’d)

Most of the Sukuk issues so far are based on the concept of Ijarah,
while a few Sukuk are based on Shirkah, Salam or pooled assets
A number of Sukuk issues are subject to severe criticism due to the
involvement of Bai‘al ‘Inah, Bai‘al Dayn and other non-Shar¯¬’ah
compliant traits that make the Sukuk as good or as bad as
interest-based bonds
Sukuk issues of Malaysia are mostly based on the concepts of Bai‘al
‘Inah of underlying assets and the concept of Tabarru‘(donation to
the investor irrespective of the cash ‡ow of the project underlying the
Sukuk or certi…cates), while their trading in the secondary market
takes place through Bai‘al Dayn. (Lately, they have also been issuing
Ijarah Sukuk, which is a healthy development.)

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 16 / 24

Tradability of Sukuk in the Secondary Market

Mudarabah/Musharakah certi…cates or Sukuk

Tradable at market price after the commencement of the activity for
which the funds were raised
Ijarah Sukuk based on freehold existing assets
Tradable at market price
Ijarah Sukuk of existing assets subject to head lease
Tradable at market price or at a rate agreed upon at the date of
redemption
Ijarah Sukuk based on future tangible assets
Tradable at market price only after the asset is ascertained and leased

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 17 / 24

Tradability of Sukuk in the Secondary Market (cont’d)
Sukuk based on existing speci…ed services
Tradable prior to sub-leasing of such services
Sukuk based on described future services
Tradable at market price only after the source of the service is
ascertained
Salam Sukuk
Not tradable except at the face value
Istisna‘a Sukuk
Tradable if funds converted into assets and before sale to the orderer
Sukuk issued on Mudarabah basis for Murabaha sales – Murabaha
Sukuk
Tradable before sale of the goods to the end-buyer or if receivables (if
inventory is maintained) are less than 50 %; after sale of the goods and
without inventory of more than 50%, tradable only at face value with
recourse
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Issues in Terms and Structures of Sukuk

Issues concerning for more vigorous and sustained support for the
emerging …nancial system
Pre…xed rates of return in almost all Sukuk, in some cases even
without any provision for third party guarantee
A number of contracts are combined in one arrangement of Sukuk
issue in such a way that they are interdependent on one another, which
make Shar¯¬’ah-compliance at stake
Most of the issues lack transparency in respect of documentation and
rights and liabilities of various parties to the issue

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 19 / 24

Sekuritisasi Aset Bagi Bank Umum

Mekanisme sekuritisasi aset bagi bank umum (konvensional)

Rating EBA
RATING AGENCY

Pembelian kembali
Dana Tunai/EBA 4 PENERBIT EFEK 3
BERAGUN ASET EFEK BERAGUN
ASET
1 Asset keuangan

KREDITUR 2
ASAL
(BANK) FASILITAS LIKUIDITAS

PENYEDIA Mengatasi mistmatch

JASA kewajiban pembayaran kepada INVESTOR
pemodal
Tata usaha aset
untuk kepentingan DEBITUR KREDIT PENDUKUNG
Penerbit EBA
Meningkatkan kualitas
asset keuangan

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 20 / 24

Sekuritisasi Aset Bagi Bank Umum

Aset keuangan yang dialihkan dalam rangka Sekuritisasi

Aset wajib berupa aset keuangan yang terdiri dari kredit, tagihan yang
timbul dari surat berharga, tagihan yang timbul di kemudian hari
(future receivables) dan aset keuangan lain yang setara
Aset keuangan yang dialihkan wajib memenuhi kriteria sebagai berikut
memiliki arus kas (cash ‡ows)
dimiliki dan dalam pengendalian Kreditur Asal
dapat dipindahtangankan dengan bebas kepada Penerbit

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Sekuritisasi Aset Bagi Bank Umum

Fungsi Bank dalam Sekuritisasi

Kreditur Asal
Penyedia Kredit Pendukung
Penyedia Fasilitas Likuiditas
Penyedia Jasa
Bank Kustodian
Pemodal
Persyaratan
tidak menyebabkan rasio KPMM Bank lebih rendah dari ketentuan
yang berlaku
sesuai dengan PBI No. 7/4/PBI/2005 dan SE No. 7/51/DPNP dan
prinsip kehati-hatian
untuk KPR, Peraturan Presiden RI No. 19 Tahun 2005 tentang
Pembiayaan Sekunder Perumahan

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI November 24 th , 2008 22 / 24

Artikel

Bisnis Indonesia

KOMPAS, Selasa, 09 Mei 2006, Depkeu Kurang Dukung SPV NPL:

Sekuritisasi Bisa Tingkatkan "Recovery Rate"

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Reference

Muhammad Ayub (2007), Understanding Islamic Finance. West

Sussex, U.K.: John Wiley & Sons Ltd. (Chapter 15)

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