Sudanese Experience

In Sukuk Issuance
Presentation By:
Osman Hamad Mohd-Khair
General Manager
Sudan Financial Services Company
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Bank of Sudan
 Contents
Introduction
First Generation Of Islamic Products
Central Bank Musharaka Certificates (CMCs)
Government Musharaka Certificates (GMCs)
Second Generation Of Islamic Products
Short- term Salam Securities
Islamic Lease (Ijara) Securities
Islamic Development Sukuk
Government Investment Certificates (GICs)

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Introduction

A-Enable Islamic banks to provide attractive long-

term investment opportunities to their investors,
while playing at the same time an important role
in effective mobilization of the idle savings to be
utilized in the economic development
b-These Islamic papers can be an effective
instruments for development of Islamic inter- bank
market
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One of the critical problems representing a pressing worry for
many central banks working in an Islamic banking field is the
concern of inventing non-interest bearing negotiable financial
instruments for effective carrying out open market operations.
However with regard to that issue Bank of Sudan took of lead
in a joint effort with the committee for Shariah supervision,
MOF and the IMF staff, after continuo's research for one &
half years a roust work in that front culminated in innovation
of two distinguished Islamic –based financial instruments
namely Central Bank Musharaka Certificates (CMCs) and the
Government Musharkah Certificates (GMCs) .They are not
debt-based securities i.e. they are non interest bearing
instrument but are profit and loss sharing certificates.

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Basic Reqirements for Success
of Securitization
Full compliance with Islamic Shariah
Appropriate Laws that enable the Securitization and
protect interest of investors & issuers
Marketability of the instruments
Profitability (yield / competitiveness)
Low transaction cost
Security
Transparency appropriate flow of financial data investors +
historical financial statistics
Operational,standardization,systems and documentations
Appropriate accounting standards
Grading assets liquidity & risks
Standardized service quality
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Existence of deep efficient active market
Regional co-ordination
Proper credit- rating of banks, issuers and
instruments

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A-First Generation Of Islamic Products
CMC’s
1-Objectives:
New instruments intended to regulate
domestic liquidity in the banking system
through OMO
Offer banks an investment opportunity for
their excess reserves

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2- Description:
Asset - based securities issued agaist BOS
& government ownership in commercial
banks
CMCs nature is an asset securitization
Satisfy Sudan Islamic banking rules which
prohibits ex ante guaranteed positive return
on security
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3- Mechanism & Mode of Issue:
No. of CMCs is arrived at by dividing the
accounting or book value of the pool of
investments on April 30,1998 by an
arbitrary initial nominal value for each
certificate which is equal to the fair market
value defined as the book value of equity
capital +reserves i.e. :
LS (39,400,000,000 ÷ 10,000,000)=3940
certificates

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4- Charactcteristics of CMC’s:
Issued in compliance with Sharaiah laws
Fixed numbers of CMCs
Issued in fully registered form
Open maturity
Transferable –fully negotiable
Tradable- listed in KSE
Access is limited to commercial banks, gov.
owend companies funds and insurance companies
Bids are submitted per number of CMCs in
“SD000”
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5- Standard Terms Of Auctions
CMCs are sold in a competitive uniform
types of auction .Bids will be classified
according to the high price and winning
bids will be awarded in descending order to
the lowest price to the point where the
accumulated winning bids absorb the total
amount offered for sale. The opposite will
happen when purchasing CMC’s (See the
table)

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Certificates Offered for Sale

Bank A 200 10.200.000 100

Bank B 100 10.100.000 200
Bank C 150 10,050,000 350
Bank D 150 10,040,000 500
Bank E 100 10,030,000 600 (Cut-off price)
Bank F 200 10,020,000 800
Certificates Offered for Purchase

Bank A 100 10,030,000 100

Bank B 100 10,040,000 200
Bank C 100 10,060,000 400
Bank D 100 10,070,000 500
Bank E 100 10,080,000 600 (Cut-off price)
Bank F 100 10,090,000 700
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First Generation Of Islamic Products (Cont)

What are GMC’s

GMCs refer to the insruments that enable the
government to raise funds through issuance of
securities.These securities are asset -based
securities issued agaist certain % of
government owenership in profitable and joint-
venture enterprises .They are based on
Musharaka contracts between government and
investors and in a pool of assets
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 Basic functions
Provide financing for budget deficit through non -
inflationary instruments
Atool for OMO to manage liquidity
Mobilize national savings
Encourage investment
Development of money market
Provide the monetary authorities with an Islamic
monetary insrument for management and
execution of monetary policy
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Mechanism & mode of issue
The Number of GMCs (same as CMCs) is
arrived at by dividing certain % of the book
value of the pool of investments by an
arbitrary initial nominal value of the
certificate in Sudanese Dinar i.e:
SD (14,674,203,239 ÷ 500,000)=29,349
certificates

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 SALIENT FEATURES OF
GMC’s
Fixed –term securities (one year)
Issued in fully registered form
Listed in KSE (tradable)
Transferable & fully negotiable
Access to GMCs is not limited
Ownership is trans and fully negotiable
High rate of return (round 30%).
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 B-Second Generation Of Islamic Products
(Salam/Sukuk)
Nature and legality of Salam securities:
Salam government securities are instruments
representing assets ( which are sold for advance payments
against deferred delivery) and which are accounted as
aliability ( of the seller ). The Government issues these
securities to create new fields for the investment of surplus
financial resources in the society and to provide short-term
financing for the expenditures and needs of various
investment projects.

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The securities are kept until the delivery date. The
.
Manager may be authorized to receive the commodities
and to sell them to an independent party who does not own
the commodity wholly or partially and who pledge to
purchase the commodity at a price exceeding the forward
buying price. The sale price is distributed to the holders of
the securities according to ownership percentages after the
Manager’s actual expenses and management commission
are deducted based on an investment authorization contract
. The expense and commission must not exceed certain
percentage

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Definition Of A Salam Contract

A Salam contract is a contract for the sale of a

commodity accounted for as a liability in exchange
for a price paid immediately upon signing of the
contract. In other words, it is a contract concluded
between two parties, in which one party pays the
price in advance and the other party commits to
deliver the commodity in the future.
There are three kinds of contract involved: -
Forward purchase contract
Sale contract
Pledge to purchase contract
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Objectives
The issuance of Islamic Salam securities is intended to :
1. Develop for the Islamic inter – bank market,
individuals, companies, and financial institutions-
high quality financial instruments for use in
handling their short term monetary liquidity
surpluses, some of which are currently invested
outside the national economy.
2. Create an important instrument for successfully
establishing an Islamic financial and money market.
The monetary authorities, in collaboration with the
Islamic countries, have already establish this Market
(IIFM)
3. Provide a greater role for Islamic financial
institutions to finance the government’s short – term
needs. 20
 Ijara certificates (Sukuk)
Ijara is an Arabic term for leasing ,having its
origin in Islamic Figh,and literally means to
give something to rent
Basic agreements in respect of sale ,purchase
and lease of assets are as follows:
- Asset purchase agreement
- Lease rental agreement
-Assets sale agreement
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 ISLAMIC LEASING SUKUK
(3_7 YEARS)
The Mudarabah
Issue and offer
Incorporating a Special participation sukuk to the Will purchase specified
purpose Vechile (SPV) market identified Trangible Assets

Central Bank is the Mudareb to collect Mudareb will execute

Mudareb the subscription the sale contract

The Mudarabah
will lease the At maturity to conclude a Mudarabah to be liquidated
purchased tangible sale contract for selling and sukuk redeemed
assets to interested leased assets
parties on Ijara
Liquation basis for
rental rental income -Mudarabah To execute
the contract
-Mudarabah To execute the contract
-to receive the sale price
-To get collateral & security from the
lessee Secondary market
-To collect the periodical rented trading of issued
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income sukuk
 Islamic Development Sukuk
These types of Sukuk can be developed and
offered to be utilized in the mobilization of
short- term deposits for the development of
long -term infrastructure projects
The structure and mechanism for issuing such
instrument is as follows:

1. To incorporate special purpose restricted

Mudarabah(SPRM)
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2. To offer the Mudarabah participation Sukuk
to the market
3. To receive the subscription capital of the
mudarabah
4. To contract or build the specified infra-
structure or equipment through istinaa
contract with full specification

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5. To lease (Ijara wa lqtina) the finished
contracted or built assets to (lessee)
6. To manage both the liability and assets of
the mudarabah
7. To trade both the issued certificates
(sukuk)in the secondary market
8. At maturity , to liquidate the mudarabah
and redeem the issued Sukuk

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 ISLAMIC DEVELOPMENT SUKUK
(10_15 YEARS)
Issue and offer The Mudarabah
Incorporating a Special participation sukuk to the
purpose Mudaraba will bulid needed infr-structure
market
projects on Istisna basis
Central Bank is the Mudareb to collect Mudareb will execute
Mudareb the subscription the istisna contract
with qualified
The Mudarabah contractor
will lease the built At maturity to conclude a
tangible assets to sale contract for selling the Mudarabah to be
interested parties on leased assets liquidated and sukuk
Ijara Wa Iqtina basis redeemed
for rental income
-Mudareb To execute the
-Mudarabah To execute the contract contract

-To get collateral & security from the -to receive the sale price
lessee
-To collect the periodical rental Secondary market trading of
income issued sukuk 26
Sudan Government Investment Certificates
(GiCs)

Objectives

The Government Finance Certificates (GIC) should:

Raise short medium and long term finance to the
budget (developmental projects: hospitals, roads
capital goods etc.. )
Generate a stable and known return / cost to
investors / government.
Liquid (from shariah and operational perspectives)

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Key Structural Elements

Underwriter.
Holding and fund management legal entity.
An open-end fund.
A pool of assets composed of appropriate Islamic
financial contracts (vs. shares in companies in GMC
type security).
Securities (Certificates) issued against the fund's
assets

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Contract Choice for Financing the Government:

The three most appropriate contracts are Murabaha

Joa'ala, Ijara & Salam contracts or a combination of
these contracts.
Almost all government procurements could be carried out
using Murabaha contracts.
Joa'ala contracts would be useful as a financing tool for many
government development projects that are usually contracted
to perivale companies (e.g. road construction equipments &
machineries)
The Ijara contract is highly flexible instrument that could be
used to finance the acquisition of goods ( particularly large
ticket – items )

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 GIC- design features

1. An underwriter (e.g. BOS, SFSC, IB, other!) will

finance government Procurement and capital
spending through Murabaha, Joa'ala, Ijara , Salam
And stisna contracts )
2. Majority (define?) of the contracts should be ljara to
ensure the liquidity of the GFC from Shariah
perspective.
3. The contracts will be transferred to an open-end fund
(at SFSC).
4. The net asset value of the fund can be established on
regular basis.
5. The return to the fund will be equal to the average
return on the underlying Contracts.

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 GIC- design features

6. Dividends will be divided among the issued GICs as

per their share in the Fund.
7. Changes in the yield at the primary auction would
reflect changes in the Average income earned by the
fund, the market price discount or both.
8. The GICs can be traded in secondary market. The
Market price reflect changes in average income
earned the fund and the track record.

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Regulation & Supervision of Sukuk (Governance)

In Sudan we adopt multiple regulatory system for

Issuance, regulation & control of Sukuk:
BOS
MOF ( Sukuk Law of 1995) .
High Shariah Supervisory Committee for Banks &
Financial Institutions.
Sukuk Regulation Committee.
KSE.
High Advisory Committee for Gov. Sukuk.
Ministry of Justice.

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As Mr. Johnnie puls it “but where problem
exists , opportunities abound and aggressive
and innovative financial institutions should
find fertile grounds for offering Islamic
securitization products”

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