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Globally Accepted Islamic Products
At Maybank IB, our Islamic Markets division can assist you in tapping the wealth of Islamic funds available, through various shariah compliant capital market instruments and financing structures. We can provide unmatched capability in advising, structuring and arranging Islamic finance transactions worldwide. Below we present a few of the Islamic finance structures that can be employed to meet your funding needs.
Musharakah – Financing A Successful Business Venture
Musharakah is a partnership or a joint venture. It is a partnership arrangement between two parties or more to enter into a business venture whereby all parties contribute capital either in the form of cash or in kind. As it is a joint venture in nature, both profit and/or loss is shared accordingly; profit is distributed based on a pre-agreed profit sharing ratio and loss is shared based on capital contribution.
Sukuk Musharakah is a certificate of equal value issued with the aim of using the capital contributed by the partners for the purpose of a new project or financing a business activity contract. The participants become the owner of the project or the business activity according to their respective shares. The venture then will be managed by the participants or by one of the participants or by a professional Manager appointed by the participants. For Sukuk issuance, it is permissible to combine Sukuk Musharakah with other contracts such as Ijarah, Istisna and others as long as the structure fulfills all Shariah requirements.
- Short-Term Instrument @Commercial Papers (ICP) – 1 to 12 months
- Medium-Term Instrument @Medium Term Notes (IMTN) - 1 year to 5 years
- Long-Term Instrument @Bond - more than 5 years
Issuer must state upfront the size and the tenor of the programme at the point of submission to the SC and must disclose to prospective Investors the following information prior to each drawdown:
- Size of issue;
- Utilisation of proceeds;
- Minimum level of subscription (where applicable);
- Tenor;
- Revisions of the rating, if any, since the date of the last draw down; and,
- The identified underlying assets and value
- Contribution by the Investors and Issuer i.e. Musharakah between Investors and Issuer; or
- Contribution by the Investors only i.e. Musharakah among Investors
A pool of Shariah-compliant assets to be joint ventured will have to consider the following with respect to usage of type of assets:
- Existing tangible assets including immovable properties such as buildings and landed properties and moveable properties such as vehicles, vessels, equipments and machineries. Normally it involves process of lease back or Istisna’.
- Financial assets (intangibles) such as shares and equities, intellectual property rights. Normally it involves portfolio creation or general business
- Financial receivable (debt) although can be considered as an assets but it needs to be bundled with other tangible asset. Normally it involves creation of Sukuk Istismar (mixed asset)
- Government awards, concessions, licenses and contracts (beneficial right). Normally it involves portfolio creation and Istisna.
Mudharabah – Professional profit sharing partnership
Mudharabah is a contract made between two parties to enter into a business venture where one party (investor or rabb al-mal) will provide the capital and the other party (entrepreneur or mudharib) will manage the project with the common objective to generate profit. If the venture is profitable, the profit will be shared between rabb al-mal and mudharib based on a pre-agreed ratio. In the event the business venture suffers a loss, the loss will be borne solely by the rabb al-mal. From financing perspective, Mudharabah structure will likely to be applied for issuer of lower risk and strong credit rating. Otherwise, Musharakah transaction will be applied.
Sukuk Mudharabah is a certificates of equal value issued with the aim of using the contribution on the basis of partnership contracts via profit sharing mechanism. The capital provider ‘becomes’ the owner of the project or the asset as per their respective shares. The venture will be managed by an entrepreneur (in this case) under the capacity of Mudharib. For Sukuk issuance, it is permissible to combine Sukuk Mudharabah with other contracts/structures such as Ijarah, Istisna as long as the structure fulfills all Shariah requirements.
Although it is a partnership contract that is evidenced by issuance of certificate, Sukukholders do not enjoy the same rights and benefits as equity Investors do, as they are only entitled to a profit share. In addition, they are not the registered owners, and cannot attend or vote at the annual general meeting. The capital must be in cash and classified as mal al-hadir (ready property). Thus, it is not permitted for the investor to use debt owed by him as his capital contribution;
- Short-Term Instrument @Commercial Papers (ICP) – 1 to 12 months
- Medium-Term Instrument @Medium Term Notes (IMTN) - 1 year to 5 years; and
- Long-Term Instrument @Bond - more than 5 years
Issuer must state upfront the size and the tenor of the programme at the point of submission to the SC and must disclose to prospective Investors the following information prior to each drawdown:
- Size of issue;
- Utilisation of proceeds;
- Minimum level of subscription (where applicable);
- Tenor;
- Revisions of the rating, if any, since the date of the last draw down; and,
- The identified underlying assets and value
A pool of Shariah compliant assets to be joint ventured from Issuer such as:
- Existing tangible assets including immovable properties such as buildings and landed properties and moveable properties such as vehicles, vessels, equipments and machineries. Normally it involves process of lease back or Istisna’.
- Financial assets (intangibles) such as shares and equities, intellectual property rights. Normally it involves portfolio creation or general business.
- Financial receivable (debt) although can be considered as an assets but it needs to be bundled with other tangible asset. Normally it involves creation of Sukuk Istismar (mixed asset)
- Government awards, concessions, licenses and contracts (beneficial right). Normally it involves portfolio creation and Istisna’.
Ijarah – Convenient leasing scheme
Ijarah basically means an usufruct (manfa’ah) type of contract whereby an owner (lessor or Muajjir) leases out an asset or equipment to a client (lessee or Musta’jir) at an agreed rental fee (ujrah) for pre-determined lease period upon the contract (`aqd). The ownership of the leased asset or equipment remains in the hands of a lessor.
Sukuk Ijarah refers to certificate representing a pro rata ownership by the Sukukholders over the leased asset which enables the Sukukholders to enjoy rental income and capital gain from the disposal of the leased asset (if relevant) as well as to bear the risk of loss and damage of the leased asset.
- Short-Term Instrument @Commercial Papers (ICP) – 1 to 12 months
- Medium-Term Instrument @Medium Term Notes (IMTN) - 1 year to 5 years
- Long-Term Instrument @Bond - more than 5 years
a) Tangible assets (a’in) such as vessel and building.
Tangible assets can be either in form of immovable properties such as buildings, premises, lands etc or in form of moveable properties such as vehicles, vessels, equipments, machineries etc. Basically the characteristics of tangible asset are as follows:
- Tangible and exist physically;
- Can be used / enjoyed (manfa’ah);
- Can be leased and leaseback;
- Free from encumbrances/not in pledge status;
- Must be owned by the owner; and
- Known by specifications, descriptions, locations, etc
b) Intangible assets in term of usufruct of services (manfa’at al-khadamat) such as marketing services and delivery services.
Intangible assets in term of services (khadamat) is a securitization of owned services that implies each service (either service of assets or services of human beings or a combination of both) which is well described and specified in the contract and the obligation implied therein. The lessee therefore may only extract and avail the specified services throughout the lease period as specified earlier in the contract. Thus, the actual services or benefit depends on the owner of the asset/usufruct.
c) Intangible assets in term of usufruct of right (manfa’at al-haq) such as right over for the use of land, right over the concession project.
Intangible assets in term of usufruct of right is a securitization of owned rights (right over the assets or right over the services of human beings or a combination of both) which must be specified in the contract and the obligation.
Istisna’ – Financing for your future assets
Istisna’ is a purchase order contract whereby a buyer places an order to purchase an asset to be delivered in the future. The buyer requires the seller/contractor to construct the asset according to the specifications given in the sale and purchase contract and deliver it in the future. Both parties decide on the sale and purchase prices and the settlement can be delayed or arranged based on a schedule of work completed.
Sukuk Istisna’ is a certificates of equal value issued with the aim of mobilizing the proceeds to be employed for the production of goods or projects. The capital provider who makes the order will become the project owner evidenced by the certificate.
- Government awards;
- Concessions;
- Licenses; and,
- Contracts
Concessionary rights and government contracts on assets that are not real estates and supply or maintenance contracts with the government/government agencies can be classified as type of asset that can be transacted on Iqta’ principle i.e. can be the basic asset in the issuance of Islamic securities based on principle of Iqta’.
The usage of the Istisna’ structure is usually associated with manufacturing and construction. Thus, project financing can be undertaken through an Istisna’ contract whereby proceeds are advanced to pay for the supplies and labour costs by the Sukuk Investors.
- Istisna’ which involve two parties namely the Issuer (who is also the contractor) and the financier (the Sukukholders). This structure is known as Istisna’ Inah since the transaction occurs one after another on same date and time.
- Istisna’ which involves three parties namely the contractor, Issuer and financier (Sukukholders). This structure is known as Istisna’ mawaizi (Parallel Istisna).
The Sukuk Istisna certificate is not tradable in GCC due to Bay Dayn concept. However, in Malaysia it is permissible and is open to secondary market trading.
It is possible for Istisna’ to be combined with other Shariah principles such as Mudharabah, Musharakah and Ijarah. The ways combining the principles are as follows:
- For an Istisna’ with Mudharabah, the Issuer initially becomes the contractor. After the project is completed, the Issuer manages the project in its capacity of the mudharib.
- For an Istisna’ with Musharakah, the Issuer is the contractor and Manager or one of the partners. After the project is completed, the Issuer will run and oversee the project as part of the Musharakah Venture.
- For an Istisna’ with Ijarah principles, the concept of Ijarah Mausufah Fi Zimmah or forward leasing is applied. At the beginning of the contract (Istisna’ contract), the lessee will pay a rent based on forward lease of an asset yet to be completed. Upon completion of the asset, the forward leasing will become an Ijarah and the lessee will pay a rental on a completed asset (Ijarah contract).
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