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FIQH MUAMALAT IIIMGA 4013

EQUITY BASED ISLAMIC BONDS:PUBLIC AND PRIVATE EQUITY

INVESTMENT

Prepared for :MR. ABDULLAAH JALIL


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4.0 INTRODUCTION

Islamic capital market (ICM) markettransactions are carried out in ways thatdo not conflict with the principles of

Muslims and the religion of Islam ICM is a component of the overall capital

market in Malaysia. It plays an importantrole in generating economic growth for the

country


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4.2 ISLAMIC EQUITY FINANCE

Based on Profit Loss Sharing (PLS).

Comprise different forms of mudharaba

(trustee financing) and musharakah(partnership).

A bond that represents common

ownership and entitles the holders sharesin a specific project.


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Cont

Shares of profit are determinedbeforehand by a definite proportion of thetotal bond amount.

Although it is similar to shares, it has afixed maturity which is determined by thetenure or project completion date.

This structure normally bears a floatingrate.


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4.3 PUBLIC EQUITY INVESTMENT

4.3.1 Malaysian Government Certificates:

Issue Treasury Bills/ Government bondson shariah basis.

Showing the borrowing by the governmentfrom the countrys financial institutions

Required by the government to finance its

recurrent expenditure or developmentexpenditure for public projects.


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Bank Negara Malaysia issued under theqard al-hasancontract

The return of dividend rate (if any)

declared by the government The dividend rate is determined by the

Dividend Committee which comprisesrepresentatives from :

Treasury OfficeBank Negara Malaysia

The Economic Planning Unit

The Islamic Bank.

Cont


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4.4 PRIVATE EQUITY INVESTMENT

Partnership in non-listed companies.

The concepts of risk, and profit or loss sharing

align the basics of the private equity marketswith the Shariah ideals.

Fiqh texts refer to the concept of shirkah which

is translated as meaning sharing and is sub-divided into two categories:

shirkatulmilk(the joint ownership of a particularproperty by two or more people)

shirkatulaqd(joint commercial enterprise).


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5.0 CONVENTIONAL BOND MARKET

5.1.2 Primary marketA financial market in which new issues of asecurity, such as a bond or a stock, are sold toinitial buyers by the corporation or governmentagency borrowing the funds.

The investment bank underwrites securitiesand then sells them to the public.

5.1.3 Secondary market

A financial market in which securities that hasbeen previously issued can be resold.It could be an organized market, such asKLSE, or over-the counter (otc) market inwhich dealers at different locations stand readyto buy or sell securities over the counter towhoever accept their price.


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5.1.4 Why conventional bond is haram???

The Islamic finance paradigm is based on thefollowing set of prohibitions:

i. Transactions in unethical goods and services

ii. Earning returns from a loan contract

(Riba/Interest)

iii. Compensation-based restructuring of debts


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Cont

iv. Excessive uncertainty in contracts(Gharar)

v. Gambling and chance-based games(Qimar)

vi. Trading in debt contracts at discount

vii. Forward foreign exchange transactions


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6.0 SHARIAH RULINGS ON

ISLAMIC BONDS

Facilitate and provide guidance in theissuance of Islamic bonds.

The general guideline extending theopinions of the religious beliefs in theshariahto financial agreements andtransactions.


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6.1 ISLAMIC BONDSSHARIAH COMPLIANT

Sukuk as a method of raising fundsneeded for business and infrastructureprojects.

Investor purchases the certificates -undivided share or interest in theunderlying assets which back the sukuk

issuance.

These assets must be essentially tangibleassets.


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Cont

c) Balance Sheet-specific Sukuk

The balance sheet specific use of sukuk fundsis the Islamic Development Bank (IDB) sukuk

issued in August 2003.

The IDB made its entrance resourcemobilization from the international capital

market by issuing US$ 400 million five-yearsukukdue for maturity in 2008.


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6.3 COMPARISON SUKUK

AND BONDS

Sukuk Bonds

Asset-related expenses mayattach to sukuk holders

Bond holders are not concernedwith asset-related expenses

The sale of a sukuk represents asale of a share of an asset

The sale of a bond is basicallythe sale of a debt

Notwithstanding an obligors

Creditworthiness, sukukprices

depend on the market value ofthe underlying asset

Bonds depend solely on the

creditworthiness of the issuer


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Sukuk Bonds

Sukukrepresent ownership

stakes in existing and or well

defined assets

Bonds represent pure debt

obligations due from the issuer

The underlying contract for a

Sukukissuance is a permissible

In a bond, the core relationship is

a loan of money, which implies a

contract whose subject is purely

earning money on money (Riba);

The underlying assets monetized

in a sukukissuance must be

Islamically permissible in both

their nature and use

Bonds, can be issued to finance

almost any purpose which is legal

in its jurisdiction

Cont


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6.3 THE CONCEPT IN EQUITY-BASED

1. MUDHARABAH/ MUQARADAH SUKUK

The capital provided by one party and labourby the other.

The shares of profit are determinedbeforehand by a definite proportion of thetotal.

Used for enhancing public participation in biginvestment projects.


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6.3.1 SIGNIFICANT FEATURES

OF MUDHARABAH

1. Mudharabah Sukuk(MS) represent commonownership and entitle their holders share in thespecific project.

2. The MS contract is based on the official noticeof the issue of the prospectus which mustprovide all information required by shariahforthe Mudharabahcontract.

3. The MS holder is given the right to transfer theownership by selling the deeds in the securitiesmarket at his discretion.


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Cont

4) The Manager/SPV who receives the fundcollected from the subscribers to MS canalso invest his own fund -get profit for

his capital contribution.

5) Permissible to create reserves forcontingencies, such as loss of capital, bydeducting from the profit.


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6.3.3 Steps Involved In The

Structure of Mudharabah

SPV issues islamic bond (sukuk) to raise funds

Mudharib collects regular profit payments and

final capital proceeds from project activity foronward distribution to investors.

Upon completion, Mudharib hands over the

finished project to the owner

Mudharibenters into an agreement with project owner

for construction/commissioning of project


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6.4 MUSHARAKAHSUKUK

Any profit derived from the venture will bedistributed based on preagreed profit-sharingratio.

Used for mobilizing the funds for establishinga new project or developing an existing oneor financing a business activity on the basisof partnership contracts.

Can be treated as negotiable instruments.


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6.4.2 Steps involved in the structure

of Musharakah

Corporate (as Musharik) contributes land or otherphysical assets to the Musharakah

SPV (as Musharik) contributes cash i.e. the issueProceeds received from the investors to theMusharakah

The Musharakahappoints the Corporate as an agent todevelop the land (or other physical assets) with thecash injected into the Musharakah and sell/lease thedeveloped assets on behalf of the Musharakah.


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Cont

The profits are distributed to the sukuk holders

In return, the agent (i.e. the Corporate) will geta fixed agency fee plus a variable incentive feepayable

The Corporate irrevocably undertakes to buy at a pre-agreed price the Musharakah shares of the SPV on saysemi-annual basis and at the end of the fixed period theSPV would no longer have any shares in the Musharakah.


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6.5 RISK OF ISLAMIC BONDS

1. Violating the provisions of IslamicShariah:

Present various types of risks.

Determine the possibility of their potentialinvalidation.

Devising ways to limit this occurrence andfinding ways to remedy it.


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Cont2. Operational risks

Circulation must be based on assets.

The returns on these bonds are generatedfrom these assets.

3. Legal risksResults in a conflict between such systemsand Shariahlaw

To neglecting to implement Shariahlaw inthe governance of states

examined in a accurate scientific mannerso that they may be resolved in a Shariah-compliant way.


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Cont

Sources: Malaysian Islamic Capital Market, Securities Commission.


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Cont

This figure includes the approval of sevencombination issuances (conventionalbonds and sukuk) with combined issue

size of RM89.5 billion.

The combination issuance of RM60 billionby Cagamas Bhd was not included for thepurpose of this calculation due touncertainty of the amount per multipleShariahprinciples to be used.


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Conclusion

Used the concept of Mudharabahor Muqaradahand Musharakah.

Sukuk have confirmed their viability as analternative means to mobilise medium to long-term savings and investments from a hugeinvestor base.

To help issuers and investors alike to participatein major projects, including airports, bridges and

power plants.

To generate strong interest by new issuers inMuslim and non-Muslim in this country.


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PREPARED BY:

NORZIANA BINTI AB RAHMAN1050684(LEADER)

SITI MARIAM BINTI ZAKARIA

1050702

SITI HASNAH BINTI ABU HASSAN

1050727


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