1. WEL COME IN THE NAME OF ALLAH THE BENEFICIENT THE MERCIFUL
MIAN & SIBGHAT
August 27,2008

2. Sukuk and its Legal and Regulatory Framework in PakistanBy
SIBGHATULLAH AHSAN
Partner
MIAN & SIBGHAT
Advocates & Legal Consultants
Islamabad.
MIAN & SIBGHAT
August 27, 2008

3. ISLAMIC FINANCIAL SYSTEM- AN INTRODUCTION
Based on QURAN and SUNNAH
Demands socio economic justice
Prohibits all kinds of RIBA
Prohibits all forms of exploitation
Provides equal opportunities to all
Condemns accumulation of wealth in few hands
Encourages acts of benevolence
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August 27,2008

4. PRINCIPLES OF ISLAMIC FINANCE
Prohibition of RIBA
Alkharajo bil dhaman (entitlement to profit is associated with corresponding risk)
Prohibition of sale of goods before acquiring ownership
Prohibition of sale of food stuff before possession
Prohibition of debt for debt
Avoidance of Gharar (uncertainty)
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August 27,2008

5. PROHIBITION OF RIBA QURAN
“ALLAH has permitted BAI’ (sale) and prohibited RIBA” (Al Baqarah: 275)
O you believers, fear ALLAH and give up whatever is left in lieu of RIBA if you are indeed believer, Watch out! If you do not obey this order (and give up all outstanding RIBA), then there is a declaration of war against you from ALLAH and HIS PROPHET. However, if you repent you have entitlement only to your principals. Neither you inflict zulm on others, nor the others should do zulm on you. (Al Baqarah: 278-9)
Refer to IIIE blue print for ayat and ahadith.
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August 27,2008

6. PROHIBITION OF RIBA SUNNAH
Obadah ibn Samit directly reports from the Prophet as saying: “Buy and sell gold for gold, silver for silver, dates for dates, wheat for wheat, salt for salt, and barley for barley on the like for like basis. Whosoever gave more or took more, verily he made a RIBA deal. However, trade gold for silver as you wish subject to the condition that the exchange be hand to hand (spot). Trade wheat for dates or barley for dates also likewise.
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August 27,2008

7. EXCHANGE OF HOMOGENEOUS COMMODITIES OR CURRENCIES
DELIVERY: Must be simultaneous / spot
Commodity A
Commodity B
MEASURMENT: Must be same in amount / weight / count
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August 27,2008

8. EXCHANGE OF HETEROGENEOUS COMMODITIES OR CURRENCIES
DELIVERY: Must be simultaneous / spot
Commodity B
Commodity A
MEASUREMENT: May be different
MIAN & SIBGHAT
August 27,2008

9. EXCHANGE INVOLVING RIBA IN HOMOGENEOUS COMMODITIES OR CURRENCIES
DELIVERY: Any one of the counter values is delayed
Commodity A
Commodity B
MEASURMENT: Counter values are not equal
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August 27,2008

10. EXCHANGE INVOLVING RIBA IN HETEROGENEOUS COMMODITIES OR CURRENCIES
DELIVERY: Delay in any of the counter values would amount to RIBA (Delivery must be simultaneous / spot
Commodity B
Commodity A
MEASUREMENT: May be different
MIAN & SIBGHAT
August 27,2008

11. Some principles derived from the Hadith
General principles
In a contract of sale counter values must be exchanged simultaneously
Quantity /number/measure etc. should be same
Exceptions
Credit Sale
Salam
Qard-e-Hasanah
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August 27,2008

12. WHAT IS RIBA Simple definition
Any delay or discrimination (regarding weight, measure or count) in any of the counter values in a contract of exchange is riba
Any addition without a counter value is RIBA
Every loan entailing an increase is RIBA
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August 27,2008

13. ISLAMIC CONTRACTS FOR COMMERCIAL TRANSACTIONS
Musharaka (Profit and Loss sharing)
Modaraba (Profit sharing)
Musawamah (Bargaining sale)
Ijarah (Leasing)
Salam (Advance payment sale)
Istisna’ (Contract of manufacturing)
Murabaha (Cost plus margin sale)
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August 27,2008

14. MUSHARAKA Characteristics All parties share in the capital
All parties share profits as well as losses
Profits are distributed as per agreed ratio
Loss is borne by the parties as per capital ratio
Every partner is agent of other
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August 27,2008

15. MUSHARAKA May be in any agreed ratio PROFIT Rs. 100 Rs. 60 Rs. 40
PARTNER A
PARTNER B
VENTURE
Rs.1000
Rs.1000
Rs. 50
Rs. 50
LOSS
Rs.100
Must be according to
capital ratio
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August 27,2008

16. MUSHARAKA May be in any agreed ratio PROFIT Rs. 100 Rs. 50 Rs. 50
PARTNER A
PARTNER B
VENTURE
Rs.2000
Rs.3000
Rs. 40
Rs. 60
LOSS
Rs.100
Must be according to
capital ratio
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August 27,2008

17. MUDARABA
One partner (Rab al Mal) contributes capital and the other (Mudarib) contributes his skills or services to the venture
Venture may for a fixed period or purpose
Both share profit in pre-agreed ratio
Loss is borne by Rab al Mal only, Mudarib loses his services
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August 27,2008

18. MUDARABA PROFIT 50 % 50 % VENTURE RABBUL MAL MUDARIB ALL MONETORY LOSS
SERVICES
CAPITAL
RABBUL MAL
MUDARIB
ALL MONETORY LOSS
LOSS OF SERVICES
LOSS
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August 27,2008

19. MUDARABA PROFIT 60 % 40 % VENTURE RABBUL MAL MUDARIB ALL MONETORY LOSS
SERVICES
CAPITAL
RABBUL MAL
MUDARIB
ALL MONETORY LOSS
LOSS OF SERVICES
LOSS
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August 27,2008

20. IJARAH
Usufruct of an asset is passed to other party against a periodic rent payment
The asset must have corpus (body) and be in existence
The asset must not be consumable in nature (should not vanish if used)
Ownership will remain with the lessor and he will bear all the risks related to ownership
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August 27,2008

21. IJARAH Use/ usufruct Only LESSOR Ownership LESSEE Asset
Periodical payments/Rent
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August 27,2008

22. SALAM (Advance payment)
It is an exception to the general principle of instant exchange of counter values in a contract of sale
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August 27,2008

23. SALAM (Advance payment)
Full payment of purchase price, No deferment or installment in advance money allowed
No loan adjustment is allowed
Quality and quantity must be specified
Date of delivery must be specified
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August 27,2008

24. MURABAHA
Murabaha is sale of a commodity at cost plus margin; it must fulfill all the conditions of a valid sale
It may be spot sale or a deferred/credit sale
Deferred sale Murabaha is used as financing mode by Islamic Banks
Deferred price becomes a debt and shall be dealt with as a loan transaction
Price once settled at the time of sale can not be changed due to default of creditor, any thing above sale price would be RIBA
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August 27,2008

25. Conditions for Murabaha
Since it is a sale contract; it must fulfill all the conditions of a valid sale
The Bank should purchase the asset from a third party and not from the customer himself
The Bank must own the asset before it sells to the customer
The Bank must have possession (physical or constructive) i.e. it must come to its risk
The seller must know and disclose the cost including freight, insurance and taxes etc.
Profit may be fixed in lump sum or through agreed ratio to be charged over the cost
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August 27,2008

26. MURABAHA
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August 27,2008

27. CLASSICAL MURABAHA COST +MARGIN IMMIDIATE DELIVERY PRICE SELLER BUYER
GOOD
IMMIDIATE DELIVERY
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August 27,2008

28. BAI’ MU’JJAL (deferred sale)
DEFERRED PAYMENT
PRICE
SELLER
BUYER
GOODS
IMMIDIATE DELIVERY
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August 27,2008

29. MURABAHA WITH DEFERRED PAYMENT
COST + MARGIN
DELAYED PAYMENT
PRICE
SELLER
BUYER
GOOD
IMMIDIATE DELIVERY
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August 27,2008

30. What is Sukuk?
The word Sukuk plural of word Suk which means _______________
The Accounting and Auditing Organization for Islamic Financial Institutions defines Sukuk as:
Certificates 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 investments activity
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August 27,2008

31. Legal Definition of Sukuk
Pakistani Law does not define the word Sukuk
There is no particular legislation in Pakistan that governs a Sukuk by a company
Then how to define a Sukuk and how to regulate a Sukuk issue in Pakistan
Section 120 of the Companies Ordinance
120. Issue of securities and redeemable capital not based on interest.
(1) A company may by public offer or], upon terms and conditions contained in an agreement in writing, issue to one or more scheduled banks, financial institutions or such other persons as are specified for the purpose by the Federal Government by notification in the official Gazette, either severally, jointly or through their syndicate, any instrument in the nature of redeemable capital in any or several forms in consideration of any funds, moneys or accommodations received or to be received by the company, whether in cash or in specie or against any promise, guarantee, undertaking or indemnity issued to or in favour of or for the benefit of the company
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August 27,2008

32. DIFFERENT KINDS OF SUKUK
Sukuk representing ownership in tangible assets (mostly based on Sale and Lease back or direct lease).
Sukuk representing Usufructs or Services (based on sublease or sale of services).
Sukuk representing equity share in a particular business or investment portfolio (based on Musharakah/ Mudarabah).
Sukuk representing receivable or future goods (based on Murabaha or Salam or Istisna’).
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August 27,2008

33. BASIC SHARIAH RULES
All the rules of original contract on the basis of which Sukuk are created should be applied.
The issuer cannot guarantee the face value of the certificate for the holder except in case of negligence/misconduct.
In Sukuk based on sale and lease back, the issuer can unilaterally undertake that he will purchase the asset after one year for a certain price.
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August 27,2008

34. BASIC SHARIAH RULES (CONT..)
Different types of reserves (e.g. profit equalization reserve) or takaful pool can be created.
Only those Sukuk can be traded that represent proportionate ownership of tangible assets, usufructs or services.
Trading or redemption of Sukuk is allowed after closing subscription, allotment of Sukuk and commencement of activity.
Sukuk of usufructs can be traded before the assets are sub-leased.
Sukuk of services can be traded prior to passing the services to the user.
In Sukuk of Musharakah/Mudarabah, the issuer can redeem the certificates on the market price or the mutually agreed price.
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August 27,2008

35. TRADABILITY OF SUKUK Tradable Sukuk
Sukuk representing tangible assets or proportionate ownership of a business or investment portfolio are tradable. For e.g. Sukuk of Ijarah or Musharakah / Mudarabah
Non-Tradable Sukuk
Sukuk representing receivables of cash or goods are nontradable. For e.g. Sukuk of Salam or Murabaha
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August 27,2008

36. Legal Nature of Sukuk Is it a debenture? or
It’s a stock/share? or something else?
to ascertain we need to know what is debenture and what is stock/share.
Debenture is not defined as a word in the Companies Ordinance or any other law but as per company law it includes debenture stock, bonds, term finance certificate and any other securities, other than a share, of a company, whether constituting a charge of the assets of the company or not
“share” means ‘a share in the share capital of a company’ (S.2 (1) 35 of the Companies Ordinance)
Sukuk is neither equity nor debenture or bond or a debt instrument
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August 27,2008

37. Asset Backed Securitization Rules
These Rules provide mechanism for securitization and define securitization as:
The Sukuk does not fall in the definition of actionable claim or receivables therefore Sukuk can not be issued under these Rules
"Securitization" means a process whereby any Special Purpose Vehicle raises funds by issue of Term Finance Certificates or any other instruments with the approval of the Commission, for such purpose and uses such funds by making payment to the Originator and through such process acquires the title, property or right in the receivables or other assets in the form of actionable claims
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August 27,2008

38. Nature of Sukuk
As discussed Sukuk is a security of its own kind, not provided by any law in Pakistan.
We may classify it as redeemable capital
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August 27,2008

39. How to Issue Sukuk
Presently most of the Sukuk are issued under private placement which does not require any regulatory compliance
Companies are issuing privately placed Sukuk when they get syndicate financing from financial institutions to meet their financing requirements
Most of the Sukuk are based on Ijarah
These Sukuk are being issued under S. 120 of the Companies Ordinance through an agreement between the issuer and the financial institutions
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August 27,2008

40. How to Issue Sukuk to Public?
There is no specific provision in Pakistani law for Sukuk therefore we will resort to some provisions of the Companies Ordinance that govern issue of securities, debentures and redeemable capital
Again the Sukuk will be issued under S. 120 of the Companies Ordinance.
However, for guidance on public issue we will look at the guide lines issued for Term Finance Certificates (TFCs)
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August 27,2008

41. PUBLIC ISSUE OF SUKUK
Once we consider that Sukuk is a security in the form of redeemable capital then we can issue Sukuk public through circulating and publishing prospectus under section 57 of the Companies Ordinance,1984
An independent trustee shall be appointed and the assets will be transferred in the name of the trustee who will hold the same for the benefit of the investors/Sukuk holders
For issuing Sukuk general public a company will file an application to SECP
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August 27,2008

42. Approval from SECP
i) In case of a new project, Expansion or Balancing, Modernization & Replacement (BMR), a feasibility study should be conducted and a report should be prepared.
ii) Pre-IPO placement of should be finalized.
iii) Underwriting arrangements, if any, should be completed.
iv) Credit rating of the entity as well as the instrument from any rating agency should be carried out.
v) Trustee, Bankers to the Issue, Balloters, Registrar (Transfer Agent) and Legal Adviser to the Issue should be appointed.
vi) Clearance of the prospectus from the concerned stock exchange(s) should be obtained.
vii) Auditor’s certificates as to profit and loss and dividend or returns on securities issued in previous 5 years
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August 27,2008

43. JAZAKUMULLAH KHAIR AND THANK YOU MIAN & SIBGHAT mslaw.pk@gmail.com
August 27,2008

44. Contact: Sibghatullah Ahsan Advocate High Court
MIAN & SIBGHAT Advocates & Legal Consultants
Off. 102-A, 1st Floor, Azeem Mansion,
Block 87-E, Fazal-e-Haq Road, Blue Area
Islamabad.
Ph ,
Fax .
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August 27,2008