1 Sukuk Islamic Bond Hamad Rasool Director First

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Sukuk (Islamic Bond) Hamad Rasool Director : First WAPDA Sukuk Co. Director: First Credit Investment Bank. Director: WAPDA Finance 2

Defination Sukuk is the Arabic name for a financial certificate, Islamic alternative to conventional bonds, Sukuk is a Trust certificate in which investor returns are derived from legal or beneficial ownership of assets. 3

Introduction 4

Growing Sukuk n Liquidity Management of Islamic Banking. n Islamic financial institutions are seeking to diversify their portfolio and increase their portfolio size of tradable instruments with fixed income profile n The industry requires Sukuk funds for retail distribution n Sukuk a Money Market instrument. n Islamic Inter-Bank or Short term Islamic Finance market can be developed through sukuks n The underlying assets are purely used as a means of transacting and do not constitute a Transaction specific pool of security 5

Growing Sukuk n Sukuk are usually issued through special purpose vehicle (‘SPV’) n In Pakistan a Limited Liability Company has acted as the issuer and is registered with and regulated by SECP n It is estimated that by 2006, close to US$ 25 billion of Sukuk would be outstanding and by 2008, approximately US$ 50 billion Sukuk will be outstanding. Bahrain Issues near about 24 Sukuk in a year n Short and long term 5 – 10 Years Periods n There are 77 Sukuk has been issued with the volume of USD 17, 977. 11 Millions 6

Advantage of Sukuk Issuance Diversify funding source n Create and enhance profile in international market n Pricing benchmark n Secondary liquidity n Sizeable financing. n Ease of clearing and settlement n 7

Advantage of Sukuk Investor n n n Diversify Investment Provides Leveraging Capabilities Secondary Market Liquidity Ease of clearing and Settlement Investment available to Institutional and Retail investors Allows for many computation of Risk –Credit /Mkt. /Duration etc 8

Issuance of Sukuk- Factor to be considered Identify investors n Rating – by a Credit Rating Agency n Underlying Assets n Secondary Market Considerations n Applicable laws – SECP rules n Cost to the Issuers n Drafting of Legal Documents n Regularity Frame work n 9

Parties Involved Originator : Initial Owner n SPV : Set up for Special Purpose n Investors: Subscribers. n Servicer: Servicer the assets. n Receiving and Paying Agent : Banks n Credit Enhancement provider : hedges, Guarantees, Takaful etc n 10

Parties Involved Merchant Banker : n Credit Rating Agency: n Legal & Tax Counsel: n Auditor n 11

Challenges of Market Limited number of issuance that constrains active trading of these instruments in the secondary market n Buy and Hold Strategy by major investors of sukuks n Limited quality assets available for Ijarah securitization n Limited Corporate Focus - Changing n 12

Ideal models for structuring of Sukuk Especially focused on Construction Industry. 13

Sukuk Structure Sukuk Structuring may based on following modes Mudarabah (Trust Financing/Trust Investment) n Murabahah (Sale And Purchase) n Musharaka (Partnership, Project Financing Participation) n Istishna (Purchase by Order or Manufacture) n Salam (In-front Payment Sale) n Ijarah (Operating Lease Concept) n 14

Sukuk Al-Ijara based Model 15

Sukuk al Istismar (51% Ijarah structuring) 16

Global Sukuk Issues 17

Global Sukuk Cumulative Issuance 18

Global Sukuk Issuance 19

Sukuk Issuing in Construction Industry Name Emaar Amlak UEM Builders Aldar Com. RE Motorway Country UAE Malasiya Behrain Kuwait Pak Volum $65 m $200 m $82 m $100 m $600 m Date July 2004 July 2005 Jan-2006 Oct – 2005 May 2005 Jan-2005 Tenor 5 years 7 years 5 years WAPDA, Penang Port and bridge , Sanctuary Building-U k, Sukuk, Zam tower KSA etc also has been issued sukuk related to construction Industry list attached for further consideration) 20

CASE STUDIES Case study of Sukuk Relatively with Construction industry. WAPDA Sukuk for upraising Mangla Dam n Motorway Sukuk n 21

WAPDA Sukuk n WAPDA’s financing requirement: PKR 8, 000 million to (partially) fund the Mangla Dam Raising Project Key objectives for WAPDA were: n To raise financing in a n cost efficient manner n Strengthen its presence in the local financial markets n Diversify and cultivate WAPDA’s investor base n Undertake a landmark transaction which will catalyze the promotion of Islamic Financial instruments and lead the way for other public sector entities 22

Transaction Structure 23

Transaction Structure 24

Offering Summery 25

Motorway Sukuk 26

Glossary 27