Introduction:
Nowadays, funding from Islamic Finance Products is highly demanded not only by the consumer market but also by corporate organizations and the public sector. According to the Bank Negara Malaysia Annual Banking Statistics 2007 (Malaysia, 2007), Islamic Banking Assets in Malaysia reached USD6.5 billion with an average growth rate between 18% to 20% annually. Islamic Finance comprises several products such as Mudharabah, Murabahah, Bai Al-Istina, and sukuk (Saad, Ramli, & Aminuddin, 2011). These products were selected based on their suitability to finance the underlying assets and be structured according to the financier and obligator’s requirements.
Literature Review:
Sukuk is defined by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) as certificates of ownership in a pool of underlying assets. Sukuk Al-Ijarah are certificates that carry equal value. Ijarah is a contract that may be executed for an asset undertaken by the lessor to be delivered to the lessee according to the specifications, even if the asset is not owned by the lessor (AAOIFI Shariah Standards 2010; Shariah Standard No., paragraph 3/5, pg. 113).
Sukuk Al-Ijarah, in principle, represents shares in leased assets (pro-rata ownership in sukuk holders), and each share entitles the holder to economic benefits under the lease (Rabiah Adawiah, 2010). Sukuk Al-Ijarah is divided into a Purchase Agreement and a Lease Agreement, which shall consist of a servicing agreement and a purchase undertaking (Mohd Zain, Hashim, Opir, & Sulaiman, 2011). Sukuk Al-Ijarah is issued for real estate as the asset backed, and the issuers apply the sukuk proceeds to purchase real estate from the originator.
The originator undertakes to purchase the real estate at maturity or upon settlement at the original purchase price or the market value upon. The issuer is required under shariah law to undertake the major maintenance of the assets and will often appoint an obligator to carry out such activities on their behalf. One of the fundamental differences between shariah-compliant Sukuk Al-Ijarah and conventional bond structure is the requirement of tangible assets to underlie any sukuk issuance (Bashir, 2008).
The most prominent characteristics of conventional bonds may be summarized as follows: sukuk and their contemporary applications (Usmani, 2009). Bonds do not represent ownership on the part of the bondholders in the commercial or industrial enterprise for which the bonds were issued. Rather, they document the interest-bearing coupon owed to the bondholders by the issuer. In other words, bonds guarantee the return of capital when redeemed at maturity.
Overview of Sukuk Al-Ijarah for Property Development in Malaysia
Malaysia has the world’s largest Sukuk market, both in local currency and USD-denominated combined. Malaysian corporates issued a total of RM32.3 billion of Sukuk in 2010, the same amount as issued in 2009 (Kuwait Finance House, 2011). The history of Sukuk Al-Ijarah in Malaysia started in June 2002 with the issuance of the Malaysia Global Sovereign Sukuk, which was issued by Malaysia Global Sukuk Inc. (Adawiah, 2010). The said Sukuk was listed in Bahrain, Luxembourg, and Labuan with a total size of USD600 million and was rated as Baa2 by Moody’s and BBB by Standard and Poor’s.
The said Sukuk was fully subscribed mostly from the Middle East (51%), Asia (30%), Europe (15%), and the United States of America (4%). The acceptance of the Sukuk Al-Ijarah structure was then accepted by global investors. As proof, in 2010, out of the top 10 biggest Sukuk papers issued globally, three were designed as the Sukuk Al-Ijarah to be used to finance property development projects as follows:
USD1.34 billion of Sukuk Ijarah for Celcom Transmission Sukuk; USD1.1 billion of Sukuk Wakalah from Danga Capital; USD1 billion of Sukuk Ijarah from Malaysia Airport Capital Market.
For 2010, there were 5 Sukuk Al-Ijarah with a total size of RM18 billion. Out of 6 real estate corporate bonds issued in 2010, 5 were using the structure of Sukuk Al-Ijarah, while Konsortium Projek Lebuhraya Utara-Timur issued the bond based on Bay Al-Istisna’ structure due to its nature of arrangement with the concession holder. There were also several mega-projects undertaken by government agencies that are currently considering the Sukuk Ijarah structure to be applied as the source of funding.
Although the Bank Negara Malaysia and Securities Commission of Malaysia are currently enforcing several guidelines on the issuance of Sukuk Al-Ijarah in the Malaysian Capital Market, Sukuk, in general, is still subject to criticism because its empirical applications exhibit great similarity with conventional finance (Ayub, 2007). The other issue that raised criticism against the Sukuk Al-Ijarah structure is that it is just another form of Bay Al-Wafa’ or another kind of Bay Al-Inah concept, which has been contested by most Muslim scholars (Al-Bashir, 2008).
It is argued that even though the assets were rented out to the seller, this means renting the assets to who sold it in cash would give the same result as renting and therefore, this transaction could be considered as the sale and leaseback structure or Bay Al-Wafa’ in Islamic Products. Bay Al-Wafa’ is allowed by minority Muslim scholars but was rejected by the majority, and the Islamic Fiqh Academy in Jeddah passed a resolution 1412AH (1192) disallowing it. This makes the Sukuk Al-Ijarah not really marketable to other Muslim countries in the world.
The concept of Bay Al-Inah is also cited by Al-Bashir (2008) as prohibited by a clear hadith of the Prophet Muhammad (S.A.W.), especially when the sale and leaseback is combined with a purchase undertaking at the pre-agreed price from the original seller. Although arguments have been raised that the margin between the seller’s price and buyer’s price is a stratagem to riba, the concept of the sale and leaseback structure has been approved by the Shariah Board of AAOIFI.
Conclusions
In the current environment, the demand for sukuk exceeds the supply in the Malaysian Islamic Capital Market, especially for the financing of property and infrastructure development. The high level of demand has spurred concern about whether shariah compliance might hamper an orderly dispute resolution under conventional law and about the legal enforceability of asset claims under the AAOIFI recommendations on sukuk structures. Considerable heterogeneity of scholastic opinion continues to hamper the creation of a consistent regulatory framework and corporate governance principles.
Islamic jurisprudence is neither definite nor bound by precedent in the absence of unified principles on which shariah scholars decide on the compliance of new products. Fragmented opinions of shariah boards have inhibited universal recognition and enforceability of rulings, which has raised the issue of “non-shariah compliance risk”. The Malaysian sukuk market is significant and vibrant, thus giving an impact to sukuk al-ijarah as one of the main alternatives for funding sources opted for by Malaysian property developers.
References:
- AAOIFI. (2008). Shariah Board Resolutions on Sukuk. Available at www.aaoifi.com/aaoifi_sb_sukuk_Feb2008_Eng.pdf.
- Adawiyah, Dr. Engku Rabiah. (2010). “Applied Shariah in Financial Transaction” Proceedings of the 2010 Corporate Directors’ Training Lembaga Tabung Haji, Kuala Lumpur, Malaysia, 14-23.
- Ayub, M. (2007). Understanding Islamic Finance. Wiley.
- Bashir, M. (2008). “Sukuk Market: Innovations and Challenges” Islamic Economic Studies, Vol. 15, January 16-18.
