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Islamic Finance: Sukuk

Shihama(MusharakahCertificates)andSrh(Government Investment CertificatesGIC)

In the name of Allah, Most Gracious Most Merciful

Dr. Eltegani Abdel Gadir Ahmed

Khartoum

August, 2008

Adviser & President: Higher Consultative committee for Government Securities, MOF

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Purpose: Introducing Islamic Finance: Sukuk (define,

explain)

Mechanism

Usage (Utilization)

Features and Advantage

Welcome

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Conventional

Intermediary

Difference between received interest & Paid interest = Profit

Banking

ConventionalLoans

Interest

Loans

Interest

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Ijara

Islamic Finance

Financial Intermediary

LiabilitiesAssets

Murabaha

Istisnaa

Salam

m

udarabah

Musharaka

Islamic

Banking

(Mudarib)

Investors

Depositors

Rubal Mal

Money

Equipment

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Islamic Modes of

Finance

SalesPartnership

MurabahaIstisnaaSalamIjaraMusharakahMudarabah

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Two Financial papers based on Islamic

modes of Finance.

Shihama is based on Musharakah. Srh (Government Investment Certificates)

GIC; based on Mudarabah, Ijarah,

Murabahaetc.

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The Higher Consultative Committee for

Government Securities (Committee) Due to success in the first generation of Sukuk

(Shihama), the Committee is established. It

consists of complementary membership,including Ministry of Finance, Central Bank of

Sudan (CBS), Khartoum Stock Exchange

(KSE), Universities. All parties participated in

issuing Sukuk are represented in the

Committee.

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Mission:Promote, develop and innovate Financial

Instruments that meet modern economicneeds.

Activities of the Committee is supervised

by the Higher Shariah Board.

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Issuance of Sukuk depends on four parties: Investors (provider of capital money)

Mudarib (SPV)Agent (Wakil) - manager

Ministry of Finance & National EconomyMoF (fiance)

Khartoum Stock Exchange (platform for

selling and buying Sukuk negotiation.

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financial pool is established consists of theownership of the government in certain

companies.

The pool will be divided into financial papers(Sukuk).

Sukuk will be sold to the investors.

Profit is computed based on the financial

performance of the companies.

Shihama provides cash finance to the MoF

Practically it is financing current expenditure

Shihama

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Musharakah (Definition) Al Sharikah (partnership) means a contract made by

two or more parties pertaining to capital and work(management) for the purpose of making profit.

Al Sharika al Masrafiyyah (Banking partnership orAlmusharkah): a finance method derived from thepartnership contract that is known in Islamicjurisprudence, in which the bank participates withone of his clients or more.

Musharakah capital: the total amount contributedby partners in a Musharakah contract.

Profit is shared on a pro-rata basis or as agreedwhile loss is born strictly on pro-rata basis.

A management fee could be charged by themanager party.

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Features:

Matches with Shariah requirements

Cash, un-inflationary financeHelps in managing supply of money, open

market operations

Mobilization of funds outside the banking

system

Used as collateral

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Srh: It is a financial document with nominal

value in Sudanese pound (SDG), gives its

holder the right to participate in financingthe Government (MoF) through certain

modes of finance, for the purpose to

generate profit

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Mechanism:1) Investors (Rab al Mal)

2) Sudan Financial Services Co. (sfs) -

Mudarib

3) MoF ( User of the finance)

4) KSE

Relationship between 1) & 2) is based onMudarabah contract and between 2) & 3) is

based on certain contracts i.e. Ijara,

Murabaha, Istisnaa. The majority is for Ijarato make the Sukuk negotiable

KSE is the platform where Sukuk are sold and

bought in the secondary market

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Mudarabah Is a partnership in which one party provides

the money (capital), while the other party

provides the professional, managerial andtechnical know-how for starting and/or

operating a business enterprise or project.

The profit is shared in a pre-agreed ratio.

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Istisna: Is an agreement meeting the clients need for an

item, equipment, building, or project, which needsto be constructed, manufactured, fabricated orassembled.

Istisna, is a contract in term of which a person buyson the spot something that is to be manufactured

which the seller undertakes to provide aftermanufacturing same using materials of his ownaccording to designated Specifications against adetermined price.

Ijarah:

(lease of objects) : is the selling of a defined benefit(usufruct) against a specific consideration for afixed period.

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Murabaha:Murabaha belongs to the class of contracts in

Islamic jurisprudence, called trust sales (Bia

amana).It has been recently developed to actas the major financing mode in Islamic banks

in place of the forbidden interest- rate

financing.

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Brokers and Mudarib

Brokers

Money

Investors

Underwriter

sfs

Money

Fees

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Suppliers

Contractors

SPV (Mudarib - Manager

MoF)

Mudarabah Contract

Money (Liquidation)

Equipment, goods

Profit

contract

Equipment

Investors (Rabal Mal

Money

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Procedures: Needfor finance is Determined by the MoF with

co-ordination with ministries MoF needs will be transferred to sfs (Mudarib)

Money generated from investors will be used byMudarib to provide the required commodities

Contracts between MoF and sfs will be signed togive the MoF the right to use and own thecommodities

Periodical payments by MoF

At maturity the Fund will be liquidated by sellingthe remaining assets and the payment of debt ifany

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Features and Advantages: Matches with Islamic principles, with close

supervision of the Higher Shariah Board

Sovereign risk High profitability, short intervals for profit

distribution

Un-inflationary, provide finance with real assets

Stabile finance ranging between mid to long -term

Finance the development (Maintaining thegolden Rule Balance for financing

development and realizing profit helps in flourishing KSE

Could be used to develop States

OpenMarket operations

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Absorbs Inflation in Advance:

Supply of money = goods & services(stable economy)

Supply of money < goods & services

(inflationary economy) Solution:

1) Add to goods & services or

2) Decrease the supply of money 3) both 1) & 2)

Srh provides capital goods, goods and services

which add to goods & services side.

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What is needed?

Underwriters (Primarymarket)Market-Maker (Secondary marker)

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Taxation

No Tax is Levied (Attraction of Investment )

Is it advisable?

- Very high rate of profit

- Reduction of profit

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Praise be to Allah, the

Lord and SustainerOf the Worlds