SUKUK.docx - Title Note on SUKUK Student Name Definition of...

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Title: Note on SUKUK Student Name:
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Definition of SUKUK (Islamic bonds): Islamic bonds, structured in such a way as to generate returns to investors without infringing Islamic law (that prohibits riba or interest). Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity. The IFSB, in its Capital Adequacy Standard (IFSB 2), defined sukuk as “Certificates that represent the holder’s proportionate ownership in an undivided part of an underlying asset where the holder assumes all rights and obligations to such asset.” Types of SUKUK: Sukuk al Murabaha: This is a process of direct structuring of securities wherein a Special Purpose Vehicle (SPV) invests the funds raised through the sale of Sukuk in Murabaha operations. Sukuk al Ijara: The Company seeking to raise finance through the issuance of Sukuk al Ijara (the originator) sells certain assets to the issuer. The issuer, then, pays for the assets using the proceeds of the Sukuk issuance and holds title to the assets on trust for the Sukuk holders. Sukuk al Musharaka: Several corporate entities refer to these Sukuk as Musharaka Term Finance Certificates (MTFCs). Under the Sukuk al Musharaka, the Sukuk holders
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contribute a capital amount to the issuer. The issuer then enters into a joint venture with the party seeking finance (the originator) where the issuer provides the capital received from the Sukuk holders. Difference between SUKUK and CONVENTIONAL FINANCE: There are five important differences between sukuk and Conventional bonds: 1. Sukuk indicate ownership of an asset. Conventional bonds indicate a debt obligation. 2. The assets that back sukuk are compliant with Shariah. Assets backing bonds may include products or services that are against Islam. 3. Sukuk are priced according to the value of the assets backing them. Conventional bond pricing is based on credit rating.
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