SUKUK AL-IJARAH AS ALTERNATIVE FOR PROPERTY DEVELOPMENT FINANCING OVERVIEW IN MALAYSIA MARKET By Razlan Bin Raghazli 1200248 International Centre for Education in Islamic Finance Malaysia July 08, 2012 June – August 2012 Sukuk Al-Ijarah as an Alternative for Project Financing Overview of Malaysian Property Development Razlan Raghazli June 2010 1. 0Introduction Nowadays, the funding from Islamic Finance Product is highly demanded not only from the consumer market, but also from the corporate organisation and public sector.
According to the Bank Negara Malaysia Annual Banking Statistics 2007 (Malaysia, 2007), the Islamic Banking Assets in Malaysia reached USD6. 5 billion with the average growth rate between 18% to 20% annually. Islamic Finance comprises of several products such as Mudharabah, Murabahah, Bai Al-Istina, and sukuk (Saad, Ramli, & Aminuddin, 2011). These products were selected based on the suitability to finance the underlying assets and to be structured according to the financier and obligator’s requirements. Figure 1 : Common structure of sukuk al-jarah
Source : Malaysia International Islamic Financial Centre 2. 0Literature Review Sukuk are defined by the Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI) as certificates in ownership in a pool of underlying assets. Sukuk Al-Ijarah are certificates that carry equals 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 specification, even if the asset in not owned by the lessor (AAOIFI Shariah Standards 2010; Shariah Standard No. , paragraph 3/5, pg. 113). Sukuk Al-Ijarah in principle is represents a shares in leased assets (pro-rata ownership in sukuk holders and each shares entitles to economic benefits under the lease (Rabiah Adawiah; 2010). Sukuk Al-Ijarah is divided into Purchase Agreement and Lease Agreement which shall consist of servicing agreement and purchase undertaking (Mohd Zain, Hashim, Opir, & Sulaiman, 2011). Sukuk Al-Ijarah is issued for a real estate as the asset backed, which the issuers applied 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 the shariah law to undertake the major maintenance of the assets and will often appoint obligator to carry out such activities on their behalf. One of the fundamental different between shariah compliance 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 bond may be summarised as follows: sukuk and their contemporary applications (Usmani, 2009). Bond does not represent ownership on the part of the bondholders in the commercial or industrial enterprise for which the bond were issued. Rather, they document the interest bearing coupon owed to the bondholders by the issuer. In other words, bond guarantee the return of capital when redeemed at maturity. 3. 0Overview of sukuk al-ijarah for property development in Malaysia Malaysia has the world’s largest sukuk market, both local currency and USD-denominated combined.
Malaysian corporate issued a total of RM32. 3bln of sukuk in 2010, the same amount it was issued in 2009. (Kuwait Finance House. 2011). The history of sukuk al-ijarah in Malaysia was started in June 2002, by the issuance of Malaysia Global Sovereign Sukuk, issued by Malaysia Global Sukuk Inc. (Adawiah, 2010). The said sukuk was listed in Bahrain, Luxemborg and Labuan with a total size of USD600 million, and was rated as baa2 by Moody and BBB by Standard and Poors.
The said sukuk was fully subscribed mostly from Middle East (51%), Asia (30%), Europe (15%) and United States of America (4%). The acceptance of sukuk al-ijarah structure was then accepted by global investor, as as a proof, in 2010, out of the top 10 biggest sukuk paper issued globally, three were designed as the Sukuk Al-Ijarah to be used to finance the property development projects as follows: * USD1. 34bln of sukuk ijarah for Celcom Tranmission Sukuk; * USD1. 1bln of sukuk wakalah from Danga Capital; * USD1. bln of sukuk ijarah from Malaysia Airport Capital Market; For 2010, there were 5 sukuk al-ijarah with the total size of RM18. 5bln approved and issued by Securities Commission of Malaysia as follows: Figure 2 : List of approved sukuk al-ijarah in Malaysia in 2010 No. | Qtr| Issuance| Size (RM’mil)| 1. | Q2 2010| Cagamas Bhd| 5,000. 00| 2. | Q3 2010| Celcom Transmission Sdn Bhd| 4,200. 00| 3. | Q3 2010| Malaysia Airport Capital Bhd| 3,100. 00| 4. | Q4 2010| Alluvium Bhd| 615. 00| 5. | Q4 2010| Senai-Desaru Expressway Bhd| 5,580. 00| Source : Securities Commission Malaysia
Out of 6 real estate corporate bond issued in 2010, 5 were using the structure of sukuk al-ijarah, while Konsortium Projek Lebuhraya Utara-Timur has 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 the government agencies that are currently considering the sukuk ijarah structure to be applied as the source of funding. The government’s projects that are currently working on Sukuk Al-Ijarah structure are as follows: * RM8bln Mass Rapid Transit (MRT) Sungai Buloh-Kajang Line by Danainfra Nasional Bhd; * RM25. bln Kuala Lumpur International Financial District (KLIFD) by 1Malaysia Development Berhad; 4. 0Challenges for sukuk ijarah in Malaysian Capital Market Although the sukuk al-ijarah structure has been accepted widely by the corporate organisation as one of their source of funding for property and infrastructure developments, there are several challenges and criticism against the structure that shall be looked to make this products more marketable in Malaysian Capital Market.
Although the Bank Negara Malaysia and Securities Commission of Malaysia is currently enforced several guidelines on the issuance of sukuk al-ijarah in Malaysian Capital Market, sukuk generally is still subject to the criticism because its empirical applications exhibits great similarity with conventional finance (Ayub, 2007). The other issues that raised the criticism against the sukuk al-ijarah structure is just another form of bay al-wafa’, or another kind of bay al-inah concept which has been contested by most of muslims scholar (Al-Bashir, 2008).
It is argued that even the assets were rented out to the seller, this means renting the assets to who sold it in cash would give a same result as renting and therefore, this transaction could be consider 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 is not really marketable to the other muslims country in the world.
The concept of Bay Al-Inah is also cited by Al-Bashir (2008) as prohibited by 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 these argument was raised that the margin between the seller’s price and buyer’s price is stratagem to riba’, the concept of sale and leaseback structure has been approved by the Shariah Board of AAOIFI. 5. 0Conclusions
In this current environment, the demand of sukuk is exceeds the supply in Malaysia Islamic Capital Market, especially for the financing of property and infrastructure development. The high level demand has spurs Generally, there is a 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 consistent regulatory framework andcorporate governance principles.
Islamic jurisprudence is neither definite nor bound by precedent in absence of unified principles on which shariah scholars decide on 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” Malaysian sukuk market is significant and vibrant, thus give the impact to sukuk al-ijarah as one of the main alternative for funding sources opted by Malaysian property developer. .
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