1. Misperceptions On Costs And Complexity Of Sovereign Sukuk: Economics And Legal Perspective
Moinuddin Ul Islam
Farhanah Mohd Mokhtar
MSc In Islamic Banking and Finance
IIUM Institute of Islamic Banking and Finance

2. The Islamic Bond: Sukuk
Bond is a debt instrument which allows investors to lend money to corporation or government entity for a certain period of time at a fixed interest rate (premium). The capital will be returned at maturity date.
Sukuk is financial certificate of equal value representing undivided ownership of tangible asset, usufruct and business activity. It is an ownership claim of an asset but not a financial claim to cash flow.

3. Sukuk AAOIFI Governance SC of Malaysia Types of Sukuk Asset-Based
Asset-Backed
Unsecured
Contracts
Secured
Covered
Sale-Based
Lease-Based
Murabahah
Partnership-Based
Salam
Ijarah
Istisna
Musharakah
Mudarabah

4. Sovereign Sukuk Meaning
Sukuk issued internationally by government of issuer’s country
Meaning
Asset-based sukuk
Common Structure
Ijarah Contract
Common Contract
To have access over huge and growing Islamic funds
Common Interest
Expected to $30billion by end of the year (Moody’s, 2014)
Size

5. Issues On Issuance Of Sovereign Sukuk
Identification of Underlying Assets (Othman and Kamarudzaman, 2012)
Right To Leasehold Under Sukuk Ijarah Structure (Zakaria, 2012)
Slow Development of Sovereign Sukuk: Lack in Demand (Jobst, 2008)

6. Issues On Issuance Of Sovereign Sukuk
Untested Instruments and Lack of Ratings (Hassan, 2012)
Limited Diversity and Illiquid Secondary Market (Jobst, 2008)
Parity Between Taxation On Sukuk And Conventional Bond (Jobst, 2008)

7. Findings: The Misperceptions (1)
The Underlying Asset
Importance of presence of underlying asset
Asset Backed Sukuk
Asset Based Sukuk
Most of the sovereign sukuk issued are asset-based sukuk
The issuer only passes beneficial ownership of asset to sukuk holders, while still keeps its legal ownership

8. Findings: The Misperceptions (2)
Right To Leasehold Asset
International sukuk holders are assumed to be entitled to right to leasehold the property
Viewed as property owners in the country
However, through purchase undertaking agreement, the government repurchases the sukuk-underlying assets at a predetermined price
Malaysia: treated as unsecured securities

9. Findings: The Misperceptions (3)
Lack in demand
Commonly issued at premium
Asset-based sukuk dependent on ratings
Almost all first time sovereign sukuk issuance of 16 countries are oversubscribed

10. Findings: The Misperceptions (4) Summary
Lack Of Availability Of Shari’ah Compliant Asset
Issues for non-Muslim countries on searching for Shari’ah compliant asset: no prohibited items or interest bearing assets
Options:
Setting up Islamic financial institution
Put a portion of earning from underlying asset in Islamic financial institutions in another country

11. Findings: The Misperceptions (5)
Illiquid Secondary Market
Ijarah structure does not allow the sukuk holders to trade the sukuk: no secondary market
Malaysia:
Introduction to Sukuk Wakalah
Current development: Perpetual sukuk
To attain requirement of Basel III

12. Findings: The Misperceptions (6)
Taxation
Malaysian Legal Framework:
Section 2(7) and 2(8) of Income Tax Act (ITA)
All underlying sales and purchase of assets required under Shari’ah law will be disregarded for tax purposes.
Tax exemption of 100% from Year of Assessment 2007 to 2016 for Islamic banks and Islamic banking units on income derived from Islamic banking business conducted in international currencies.
Tax deduction on expenses incurred on the issuance of Islamic securities based on principles of Mudarabah, Musharakah, Ijarah, Istisna’ and other Islamic securities approved by SC
Extension of stamp duty exemption of 20% on instruments of Islamic financing products approved by the SAC or BNM or SC up to Dec 31st 2015

13. Conclusion The Underlying Asset
Malaysia is one of the pioneers in issuance of sukuk. From the introduction first sovereign sukuk to most advanced perpetual sukuk, the country has benefitted from both economics and legal changes that it had gone through. Although there is substantial development of sukuk market, some issues still remains which
needs to be clearly identified.
The Underlying Asset
Right To Leasehold Asset
Lack in demand
Lack Of Availability Of Shari’ah Compliant Asset
Illiquid Secondary Market
Taxation

14. Thank You
SIFEC2014
Misperceptions On Costs And Complexity Of Sovereign Sukuk: Economics And Legal Perspective