Faculty of Economic and Management Science

(BBA Islamic Finance)

MWS 4103 Seminar in Islamic Finance
Topic:
The Implementation of Ijarah Sukuk in Malaysia

PREPARE FOR:
PROF IZAH BT MOHD TAHIR

PREPARE BY:
Name

Matric No

Mohd Syaufik Bin Mohd Noor

030226

Che Mohd Khairul Afzan Bin Che Andilah

032951

Siti Nurfatihah Binti Wan Ngah

030350

Nur Hapsyah Binti Nordin

030606

Amaliah Binti Yusof

032463

Siti Nor Binti Muhammad

032386

Nur Izzati Binti Hilaludin

032349

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ABSTRACT

Sukuk Ijarah is becoming one of the most developed Islamic Finance products in recent years.
Sukuk Ijarah has become the most ideal solution to the prevailing liquidity management
challenges faced by the Islamic Finance industry. This sukuk is encompasses into two main
structures namely, sale and lease back (Ijarah Mumtahiya bittamlik) and forward leasing (Ijarah
Mausufah fii Zimmah). This report will explain more about the concept of ijarah sukuk and also
issues and challenges related in the Islamic financial institutions, and also as the alternative to
protect Muslims from involve in the conventional finance area.

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ACKNOWLEDGEMENT

We would like to express our gratitude and appreciation to all those who gave us the possibility
to complete this report. A special thanks to our lecturer seminar in Islamic Finance, Prof. Dr.
Izah Binti Mohd Tahir, whose help, stimulating suggestions and encouragement, helped us to
coordinate our final report of seminar especially in writing this report. We also wish to express
our appreciation to the important role given by each Member of the group for the completion of
this report. Finally, thanks go to the Chief report, Mohd Syaufik Bin Mohd Noor who has given
his full guiding team members in achieving the complete report. As well as encouraging him to
keep progress on track. We would appreciate every Member of this group in the success and
completion of this report, although we face various problems in finishing it as a lack of
references. But, with determination the group members, we are successfully finishing it.

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TABLE OF CONTENTS

Acknowledgement ......................................................................................................................... II
Abstract ........................................................................................................................................III
Chapter 1: Introduction
1.1 Overview of Islamic Finance
1.1.1 What Is Islamic Finance ..........................................................................................2
1.1.2 History of Islamic Finance ......................................................................................3
1.2 Principle of Islamic Finance
1.2.1 Riba (Usury) ...............................................................................................................5
1.2.2 Gharar (Uncertainty) .................................................................................................6
1.2.3 Maysir (Gambling) .....................................................................................................7
1.2.4 Unlawful (Goods or Service) .....................................................................................8
1.3 Islamic Financial Instruments
1.3.1 Definition of Islamic Financial Instruments ...............................................................9
1.4 Overview of Project Paper ..............................................................................................11
1.5 Objective of Project Paper ..............................................................................................11
1.6 Organization of Project Paper
1.6.1 Scope of Ijarah Sukuk In Chapter 2 ..........................................................................12
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1.6.2 Scope of Implementation Of Ijarah Sukuk In Chapter 3 ..........................................12

1.6.3 Scope of Issues On Ijarah Sukuk In Chapter 4 .........................................................12
Chapter 2: The Application of Sukuk Ijarah Market
2.1 Introduction ......................................................................................................................14
2.2 Concept of Ijarah Sukuk .................................................................................................15
2.2.1 Types of Contract
2.2.1.1 Asset Backed ..............................................................................................18
2.2.1.2 Forward Lease ............................................................................................20
2.2.1.3 Saleand Lease Back ...................................................................................23
2.2.2 Illustration and Example for the Operation ..............................................................24
2.3 Legitimacy of Ijarah Sukuk
2.3.1 Source from Hadith ...................................................................................................26
Chapter 3: The Application Sukuk Ijarah Model
3.1 Introduction ......................................................................................................................28
3.2 Sukuk Growing Market in Malaysia ..............................................................................30
3.3 Model of Ijarah Sukuk Implement In Malaysia ............................................................32
3.4 Ijarah- Convenient Leasing Scheme ...............................................................................36

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Chapter 4: Issues of Sukuk Ijarah

4.1 Introduction ......................................................................................................................48
4.2 Ownership .........................................................................................................................48
4.3 Head Lease and Sub-Lease .............................................................................................50
4.4 Tradability ........................................................................................................................52
4.5 Buy Back Arrangement ...................................................................................................53
Chapter 5: Conclusion ................................................................................................................55
Reference .....................................................................................................................................58

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CHAPTER 1
INTRODUCTION

1.0

OVERVIEW OF ISLAMIC FINANCE

1.0.1 What is Islamic Finance
Islamic finance is a term that describes the financial business that does not
conflict with the principles of Shariah. If the conventional banking business finance in
particular, depends on taking deposits from and loans to the public. Therefore, the
relationship with the customer is always associated bank as debtor and creditor. The main
aspects of conventional banking to or receiving of interest, which specifically prohibited
by law.
The essence of Islam is that it originated principles and values of Al-Quran and
Hadith of the Prophet Muhammad. Shariah provide guidance in terms of beliefs, moral
and legal conduct practical or legal. According to Islam, a perfect living system is based
on both prescription laws and good moral behavior. Values are shown as a guide to legal
purposes in some specific contracts such as trust (honesty) within the concept of
Murabahah (mark up) financing. Other principles of moral values related to commercial
transactions including:

Timeliness in the payment of debt or delivery of an asset. Missed comply with

this aspect may involve legal consequences between the parties involved.

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Tolerance in terms of bargaining, in which the parties are encouraged to be

considerate of purposes and circumstances of each to meet their own
purposes.

Mutual cancellation of the contract upon request by a party where he found

himself uncomfortable with the outcome of the transaction.

Honesty and Trust in all reality, representation and warranties. These

principles are not intended to be exhaustive but rather to highlight areas
where, according to Islam, morality is irrelevant in the course of trade.

Al-Qur'an is very precise and clears on the issue of Islamic finance this. Basically there
are three components of an economic paradigm of Islam:

As a caliph, people should get the blessings that God has given to man. Of
wealth is obtained, he should enjoy his own part.

Next, he should be gracious to others and use some of that wealth obtained
also for the benefit of his fellow creatures as per the wealth that belongs to
someone else there.

Finally, that his actions can not intentionally damaging to his fellow creatures.
Human society in Islam is based upon the validity of the law, and the validity
of human life.

1.0.2 History of Islamic Finance

In the middle Ages, Middle Eastern traders in the Ottoman Empire and elsewhere
practiced financial transactions comply with Islamic principles. However, it was not until
the 1960s and 70s that scholars develop unique Islamic about economic philosophy
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which will handle issues of the modern economy. This philosophy has been done to
social justice, equitable distribution of wealth, and concern over the poor. He declined
both capitalism and socialism.
Islamic finance in Malaysia beginning with the Islamic savings institution known
as the Pilgrims Management and Fund Board (Lembaga Tabung Haji) in 1969. As
awareness of Shariah compliant finance the increase, step by steps approach has been
applied for develop the Islamic finance industry productive.
The first full-fledged Islamic Bank was established under the Islamic Banking Act
1983. The introduction of Islam that justify the conventional financial institutions to offer
products and services Shariah-compliant banking and allows the Islamic banking industry
to develop effectively. Onwards it easier the formation of a dual financial system, in
which Islamic finance operates in parallel with the conventional financial system at
present.
The launch of interbank money market in 1994 permitted Islam in the Islamic
banking industry so that it continues evolves. Takaful companies are combined under the
Takaful Act 1984. Meanwhile, the Islamic finance industry has progressively liberalized
over the years, enabling more foreign investment or foreign.
Great achievements in the evolution of the Islamic finance industry in Malaysia
including the first sukuk issued by foreign-owned companies in 1990, the admission into
Malaysia from the first foreign Islamic bank of the Middle East in 2005 and the
establishment of the first Islamic banking subsidiary companies in this country a foreign
banks incorporated in Malaysia in 2008.

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Issues of licenses to foreign Islamic financial institutions are encouraged fair

competition and added to the advancement of the Islamic financial industry itself. Strong
market demand has been met with an innovative Shariah-compliant product.
1.1

PRINCIPLES OF ISLAMIC FINANCE

1.1.1

Riba (Usury)

Riba literally means the excess, development, increase, additional or growth.

Technically, Riba can determine the profits to unlawful Al Quran and Hadith that
obtained from quantitative inequality counter value in any transaction. Furthermore, Riba
not limited to increasing the loan transaction as a result of delays in payment time, as this
will also happen in any improper surplus over and above the capital, whether in loans
between creditors and debtors, credit sales or in the trade.

Source from Al-Quran:

Al-Baqarah verse 276-280

God condemns Riba, and blesses charities. God dislikes every disbeliever, guilty. Lo!
those who believe and do good works and establish worship and pay the poor-due, their
reward is with their Lord and there shall no fear come upon them neither shall they
grieve. O you who believe, you shall observe God and refrain from all kinds of Riba, if
you are believers. If you do not, then expect a war from God and His messenger. But if
you repent, you may keep your capitals, without inflicting injustice, or incurring injustice.
If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it
would be better for you, if you only knew.
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Al-Nisa verse 161

And for practicing Riba, which was forbidden, and for consuming the people's money
illicitly. We have prepared for the disbelievers among them painful retribution.
Source from Hadith:

From Anas ibn Malik: The Prophet, peace is on him, said: "If a man extends a
loan to someone he should not accept a gift."

From Abu Burdah ibn Abi Musa: I came to Madinah and met 'Abdallah ibn Salam
who said, "You live in a country where Riba is rampant; hence if anyone owes
you something and presents you with a load of hay, or a load of barley, or a rope
of straw, do not accept it for it is riba." [Sahih al-Bukhari, Volume 5, Book 58,
Number 159].

1.1.2

Gharar (Uncertainty)
Another important element that can cause an invalid transaction is ghahar or

uncertain. Literally, the word to imagine ghahar risk or uncertainty and hazards.
Technically transformation of materials or properties of the object of sale or doubt on the
existence and availability at time of uncertainty and ignorance contract one or both
parties to the contract that are involved.
Source from Al-Quran:

Al Nisa verse 29

O you who believe! Eat not your property among yourselves unjustly by falsehood and
deception, except it is a trade amongst you, by mutual consent.

Source from Hadith:

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From Abu Hurairah: Prophet Muhammad (S.A.W) said prohibited all sales on
Gharar (uncertainty). For examples is the prohibition of sale of fish in the sea,
bird in the air, unborn animals.

From Sheikh Wahbah Al-Zuhaily defined Gharar (uncertainty) in the following

term a contact which a risk to any one of the parties which could lead to his loss
of properties.

1.1.3

Maysir (Gambling)

Meaning Maysir can get from many scholars and intellectuals. Maysir purposes
according to Islamic Banking and Finance (IBFIM) is betting or wearing something that
will be lost if one fails to obtain greater profits that one hopes for. According to Syed
Alwa (2007), the Maysir is strictly prohibited arise from the premise that a clear
agreement between the parties is in fact the result of the encouragement provided by the
is unconscionable false hopes in the minds of the parties that they will a profit set by the
contract with little consideration of the risk of loss. Some people are confused between
gambling and speculation. Meaning Speculation has many differences of opinion among
scholars. The scholars agree that speculation is strictly prohibited but speculation is valid
in terms of the contract.
This is forbidden in Islam Maysir also by moral principles. Including effect of a
zero sum game of chance, in which at least one party will end up as a loser by chance
alone. Moral principles must be prevented in Islamic institutions and activities of our
lives.
Source from Al-Quran :

Al- Maeda verse 90-91

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Intoxicants, games of chance (maysir), worship of idols and divination by arrows are but
an abomination, Syaitans handiwork; avoid it then, so that you might prosper! By means
of intoxicants and games of chance, Syaitan wants only to sow enmity and hatred among
you, and hider you from the remembrance of God and from prayer. Will you not the
desist?
1.1.4

Unlawful goods or services

Another equally significant feature is that Islamic finance must not participate in

any activity related to goods and services that are unlawful. Goods and services that are
prohibited include non-halal food such as pork, meat or animals not slaughtered in
accordance Islamic principles, drink, entertainment and tobacco related products and
weapons. Non-participation not only restricted to buying or selling but also including all
production and distribution chain, such as packaging, transport, storage and marketing of
goods and services strictly prohibited. It is illegal under the laws or in the Holy Quran
and the Hadith.
Source from Hadith:

Rasulullah P.B.U.H was said that prohibited activities and products that narrated
by Al-Bukhari and Muslim by are not allowed as below:
"Allah and His Messenger have forbidden the wine business (liquor),
carcass, swine and sculpture."

Narrated by Imam Ahmad and Abu Daud :

"Indeed, when God forbid a thing, once banned its price."
From the hadith above, we can see that the Prophet (saw) has banned the
activities

unlawful.

Dealing

in

illegal

activities

and

products

will

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encourage people to commit sin and are prohibited in legitimate activities

and products will help keep people from sin.

1.3

ISLAMIC FINANCIAL INSTRUMENTS

1.3.1

Definition of Islamic Financial Instruments

The Islamic financial system is based on equity whereas the conventional banking

system is loan based. Islam is not against the earning of money. In fact, Islam prohibits
earning of money through unfair trading practices and other activities that are socially
harmful in one way or another. (Lahkani, 1998).
This is verse from Surah 2:275
Those who swallow down usury cannot arise except as one whom Satan has
prostrated by (his) touch does rise. That is because they say, trading is only like usury;
and Allah has allowed trading and forbidden usury. To whomsoever then the admonition
has come from his Lord, then he desists, he shall have what has already passed, and his
affair is in the hands of Allah; and whoever returns (to it) - these are the inmates of the
fire; they shall abide in it.
Among the more popular instruments in Islamic financial markets are trading with
markup or cost-plus sale (Murabaha). One of the most widely used method for short-term
financing is based on the traditional notion of financial purchases. Investor undertakes to
supply goods or commodity specific, mutually agreed contracts for resale to customers

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and mutually negotiated margin. About 75 percent of Islamic financial transactions are
cost-plus sales.
Secondly, there is leasing (Ijarah). Another popular instrument, about 10 percent
of Islamic financial transactions, is a lease. Designed for vehicle financing, leasing,
machinery, and equipment. Different forms of leases are allowed, including leases where
a portion of installment payments go towards the purchase of goods (with the transfer of
ownership to the lessee as freehold).
Third is profit-sharing agreement (Mudarabah). Under contract Mudarabah bank
financing to fund entrepreneurs who agreed on the understanding that on both sides will
share the profits of certain enterprises funded by both parties. A deposit made to the bank
by an individual under contract Mudarabah considered regarded as an investment in the
bank by the individual. The bank will use this investment to make profit from trading
activities of individual financing and business experts. Under contract Mudarabah the
bank will agree to give depositors some of the profits in return for an investment based on
an agreed ratio in the initial agreement.
Besides that, equity participation (Musharakah) is defined as a general
partnership whereby two or more parties enter into a contract to exploit their labor and
capital jointly and to share the profits or losses of the partnership.
Next is sales contract. Deferred-payment sale (Bay 'Muajjal) and deferred salesdelivery (Bay'salam) contract, in addition to the sales area, used to run a credit sale. In a
deferred payment sale, delivery of the product has been taken in the council but delivery
charges are deferred for a period agreed between the two parties involved. Payment shall
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be made in a lump sum or in installments, provided that no additional charges for late
payment. A deferred-delivery sale is similar to futures contracts where the delivery of the
product is in the future in exchange for payment in the spot market.

1.4

OVERVIEW OF PROJECT PAPER

The aims of this article are to explain the implementation of Ijarah Sukuk in Malaysia. In
short, overview of this articles include how the implementation of Ijarah Sukuk in Malaysia,
starting from the definition of the concept of Ijarah Sukuk, continued with the models used in the
contract of Ijarah Sukuk, the model used in Malaysia and issues that are often discussed in
connection Ijarah Sukuk. Moreover, this paper was created because to fulfill the study of Islamic
Finance Seminar @ Academic Projects (MWS 4103).
1.5

OBJECTIVE OF PROJECT PAPER

The objective of this paper is to achieve in the following:

To help the people in getting knowledge about the concept of the sukuk and emergence.

To get knowledge about the development of Ijarah Sukuk issued by company in

Malaysia.

1.6

To exposure the current issues in implementation of Ijarah Sukuk.

ORGANIZATION OF PROJECT PAPER

This paper which is Implementation Ijarah Sukuk in Malaysia has been created in four
chapters. All the chapters have their own information and clarification on this topic paper. The
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topic that included in this four chapter are introduction, scope of Ijarah Sukuk, scope of
implementation of Ijarah Sukuk, and the lastly is scope of issues Ijarah Sukuk.
1.6.1

Scope of Ijarah Sukuk in Chapter Two

The scope of Al-Bai 'Bithaman Ajil in chapter two will discuss the introduction
and the concept of Ijarah Sukuk. In addition, the concept of Ijarah Sukuk discusses an
overview of the whole thing about the four subtopics, including what it wants to discuss
and what matters included in this chapter. The concept of Ijarah sukuk also discuss what
the definition and a kind of contract which is have four model, illustrations operations
and example operation of Ijarah Sukuk.
In addition, the validity of Ijarah sukuk will also discuss the topics. Sunnah and
scholars sources will be included in efficacy. We will prove the validity of the chapter
from Hadith include translation of what the Prophet Muhammad did and said. At the end
of this chapter, we will summarize all the important details will be more effective.
1.6.2

Scope of Implementation of Ijarah Sukuk in Chapter Three

In this chapter, we will give for more in-depth about introduction in this subtopic,
overview of Ijarah Sukuk in Malaysia, beside that about overview of Ijarah Sukuk in
Malaysia, illustration of the operations and last but not least is example operations of
Ijarah Sukuk in Malaysia.
1.6.3

The Scope of Issues in Ijarah Sukuk for Chapter Four

Scope of issues in Ijarah Sukuk will be discussed in chapter four. In this chapter,
there are several issues to be addressed and often into discussions among researchers.
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Among the issues to be discussed include ownership, lease and sublease head, lease and
lease back, buy back arrangement and tradability. Each issue will be discussed on this
chapter based on studies made by researchers previously and the most important thing is
these issues will provide the opinion of scholar and sources by hadith.

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CHAPTER 2
THE APPLICATION SUKUK IJARAH MARKET

2.0

INTRODUCTION

Sukuk Ijarah is related to real estate and leased assets, their carrying values are
the same, and issued by the owner of the leased property or his agent. The purpose of the
transaction at the end is to sell the leased property by issuing Sukuk, with it, the
certificate holder or Sukuk Ijarah assets and charges for the rental period, each in
commensurate with Sukuk certificates held in the leased asset. Under the Ijarah contract,
on the merits of a particular property is transferred from owner to another person in
exchange for rental payments. In other words, it is lease agreements with the lessor are
referred to as Mujir, called mustajir tenants and rent paid to the lessor called ujrah. Sharia
law imposes restrictions on Ijarah agreement which is not available in conventional lease
contracts; mainly to protect the parties as far as possible from the uncertainty and to
ensure there is no ambiguity in the agreement. For example, there may be a building that
is leased, monthly or annual income that goes to the Sukuk certificate holders who are
considered as partners in the ownership of the building.
In addition to the return of the lease, the Sukuk holders may sell the same in stock
market. This is the sukuk that represent ownership in equal parts in the rented property or
properties to merit. This Sukuk gives its owner the right to own property, leasing and
disposing of sukuk receive them in a way that does not affect the rights of tenants, both
those that can be traded. Sukuk holders bear all costs of maintenance and damage to real
property (AAOIFI). Ijara Sukuk is securities that represent ownership of existing assets
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and clearly tied to the lease contract and return the rent payable to bondholders. Ijarah
lease payments may not be related to the period benefited by the tenant. It can be made
before the commencement of the lease term, in or after the period to which the parties
may mutually decide. This flexibility can be used to convert different forms of contract
and sukuk that can serve different purposes of the issuer and the holder.
2.1

CONCEPT OF IJARAH SUKUK

The structure of the sukuk structure is most dominant in the global sukuk market
as well as the structure of the partnership. Ijarah is a contract where the owner to the
tenant rent rental assets with the specific rental rates and agreed rental period stipulated in
the contract. Ijarah financing was described as Islamic rental or financing Islamic
taxation. But in contracts of sukuk, sukuk issued based on transactions between
publishers with the obligor, involves tangible and intangible property. According to
Shabnam Mokhtar and Abdulkader Thomas (2009: 145-159) there are four basic
approaches to this structure the sukuk ijarah. The first involves three parties with the
acquisition of assets by investors from the person who offers and lease next to the
obligor. Second, the sukuk ijarah involving two parties, namely by selling and leasing
back the assets that backed up. Third, sukuk ijarah involving asset securitisation, which is
the owner of the assets sell the assets from the balance sheet to the control of investors
who bear the risks and earn rewards, and finally the sukuk ijarah involving leases of
assets will be handed over in the future.
In the first models of the sukuk ijarah financing involves large, for instance to
finance a plane or ship. Publishers (SPV) on behalf of investors will buy planes from

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suppliers and leased to the company/obligor. At the end of the maturity period kapat fly
transferred to the obligor. Sinking fund mechanism model of sukuk is on the following
figure:-

Sukuk
Investor

1
6

SPV
2

Corporate
company

Supplier

Figure 2.1: Ijarah Sukuk first model

SPV to issue the sukuk investors to get cash funds. SPV buy assets (aircraft) from
suppliers (factories). SPV rent the asset to the company. Suppliers make penyerahkan
assets to the obligor. Obligor make buy-back for the purpose of redemption of mortgage
asset. Obligor to pay the lease by time period and SPV distribute lease payments to
investors. When reaching maturity of leases, the SPV will hand over the assets to the
obligor.
The second model is murabahah sukuk using one or more owned assets to get
cash funds through sales and lease-back model. Model of the sukuk ijarah sukuk first and
second assets does not generate income. Therefore, the lease between publishers with the

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obligor income generation to holders of sukuk. This second sukuk model mechanism can
be explained through the following figure:-

Figure 2.2: Ijarah Sukuk Second model

The company sells its assets to the SPV (issuer sukuk) to get cash. Issued sukuk
sold to investors to get cash for the purposes of obtaining the assets of the company. Then
the company SPV sewakan. The company provides a letter of purchase of back for the
purpose of ensuring the redemption of the mortgage and pay the rental term. SPV
distribute lease payments to the investor and upon maturity, purchase return by the
company.
For model third different sukuk ijarah models before, because this model has a
backup assets that can generate income. In addition, investors can sell back to the SPV to

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get cash. This means this asset can be disekuritasikan. Explanation of the third model of
the sukuk ijarah inexplicable mechanism in the next figure:-

SPV

Originator

Sukuk
Investor

Obligator

Figure 2.3: Ijarah Sukuk Third model

Orginator (owner of assets) have lease its assets and generate income. Originator
sell the assets to the SPV. This matter must meet the actual sale and bankruptcy and SPV
issued sukuk to obtain the funds to get the assets. Although similar to the second model,
but the different is there is no pawn of the originator.

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2.2

TYPES OF CONTRACT

2.2.1

Asset backed

Asset-backed securities, called ABS, are bonds or notes backed by financial

assets. Habits of these assets consist of receivables other than mortgage loans such as
credit card receivables, auto loans, manufactured housing contracts and home equity
loans. ABS is different from most other types of bonds that their creditworthiness is
derived from sources other than the ability to pay of the originator of the underlying
assets. Loans from financial institutions including banks, credit card providers, auto
finance companies and consumer finance companies-turn their loans into marketable
securities through a process known as securitization.
The original company loans are typically used as ABS, but in fact they are the
sponsor, not the publisher directly, these securities. Financial institutions sell pools of
loans to a special purpose vehicle (SPV), a single function is to buy these assets to
securitize them. SPV, which is usually a corporation, then sold to the trust. Trust that
repackages the loans as interest securities and completely remove them. "Actual sales" of
loans by the sponsor to the SPV provides "bankruptcy remoteness," insulating the trust of
sponsors. Securities that are sold to investors by the investment banks that underwrite
them, are "credit plus" with one or more additional forms of protection-whether internal,
external or both.
Asset-backed securities involve a financial technique of pooling various
categories of assets and creating securities to represent the pooled assets. The ABS
derives their value from the asset pool and income streams there from. The investor will
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rely solely on those assets for payment. Thus, the asset must be legally isolated so that the
securities will not be impaired by the financial behavior of the related originator. Islamic
ABS is still relatively new and limited in term of numbers of issuance.
2.2.2

Forward lease

This contract is a combined construction and finance lease agreements that can be
redeemed. Because of this lease is executed for a future date, it is called a forward lease.
Lease contract before buying the project, typically the overall construction project
achieve its goals or in tranches part of the project. Forward contracts Ijarah meet the
needs of each of the following: Islamic banks, lessors, lessees, and the banking business
in general. For the lessor, Bank Islam, if he is sure of its ability to provide the necessary
Ijarah property and want a commitment from potential tenants, it may enter into a
contract of Ijarah forward, then have a treasure and then, finally, give it up.
This method is more robust than a promise to hire secured from interested parties
to hire a particular item, because the promise is not binding promise to continue the
contract. If it does not meet any commitment with customers, the sole is due
compensation for actual damage, with customers paying the difference between the rent
that was promised and agreed upon by the tenant lease renewals. For tenant needs a
forward Ijarah contract is, first, to ensure a strong possibility of obtaining usufruct
contract according to strength and not mere promises.
Second, it ensures continuity benefits in kind. That is because the destruction of
the property leased by front Ijarah cannot terminate the contract; otherwise, the lessor
must provide a replacement tenant to allow the continued use of the benefits. For banking
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practices, forward Ijarah has enabled banks to finance activities that are not up to now
possible for them to refinance when the transaction is structured as an exchange for
money. Because he is not allowed to finance the cash to cash for profit, the alternative is
to see the benefits of goods for which funding has been committed, which is obtained by
advance payment, while consumers benefit paid by delayed payment, which may even
have bank before items or the subject matter of the contract.
Although it is not permissible for the bank to finance customers by making them
more up-front fees for services that he desires, the bank did not have the ability to take
possession of benefits prescribed by the presence of Ijarah contract and make advance
payments to suppliers upstream ways. So it may enter into forward contracts with
customers Ijarah for the same service that runs parallel to the first contract, without any
contractual link between it and what the bank contracted with the service provider. This
allows it to avoid trading in debt by selling certain something before taken possession.

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Figure 2.4: Forward lease model

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2.2.3

Sale and lease back

Below show a sale and lease back sukuk structure with an embedded Put option :-

Figure 2.2.1.2 A Sukuk Ijarah to finance a Sale- Lease Agreement with an embedded Put
Option

In the sale and lease back sukuk, the mudarib will ask to lease an asset or make a
financing to the SPV. Then, the SPV will issue the Sukuk Al-Ijarah and sale it to the
sukuk Investor. Next, sukuk Investor will subscribe in the certain amount. In the fifth
step, SPV will lease the asset to the mudarib. Mudarib will make monthly payment to the
SPV. The SPV will pay the lease payment to the Sukuk Investor. In the last step, the put
option granted by the mudarib to the trustee provides the investors (sukuk holders) with
22 | P a g e

the assurance that the mudarib will buy back the asset at maturity at a pre-determined
exercise price. If the put option has a European style exercise, the sale price is perdetermined. However, if the Pot were an Asian style put, the exercise price would depend
on an average of spot prices and would therefore have an exercise price that is not predetermined.
2.3

ILLUSTRATIONS AND EXAMPLE OF THE OPERATION

In the first step of Ijarah Sukuk contracts are borrowers who purchase the asset rather
than a seller and sell it to a reputable typical purpose (SPV). As an alternative, the SPV buys
assets of the seller continue to follow the will of the borrower. After that pay for the
acquisition, SPV to issue sukuk holders. Sukuk holders pay sukuk proceeds to the SPV and
citations received results than the holder of a receipt for the borrower to pay for purchases
property. If the SPV to buy assets rather than the seller, the edict is also used to pay for
purchases property and paid to the seller. SPV hire these assets to the borrower or recipient
taxes. In return of the tax transactions, payment of the tax paid lease fixed to the SPV. SPV
distribute payments to the holders of the tax bill as a regular distributive than this amount is
equal to the payment of the tax received rather than the borrower or recipient taxes. In sukuk
matures, the borrower will purchase the assets rather than the original SPV. Borrowers pay
the purchase price back to the SPV. SPV circulate behind the purchase price received than
the borrower to the holder bon as distributive dissolution.
One more form of Sukuk Ijarah is without any SPV or mediator Financial to issue
such instruments. Sukuk Ijarah issued by a borrower to buy the asset. Ownership of the asset
is transferred to the holder of the issuer or borrower when the bill becomes beneficiary or

23 | P a g e

Sukuk Ijarah asset utilization. There is no premium paid to the mediator of Islam, but the
issuer may take a little booty contract rather than a transaction (Al-Amine, 2001).
At the time of the contract, all parties need to have full knowledge of the asset and
the amount of the payment of the tax to tax. Employer taxes may sell sukuk without any
interruption in the tenant's own ability to take chances than the leased asset. New sukuk
holders will receive payment of the tax or the amount of distributive tray periodically. Rent
in Ijarah must necessarily clear at the beginning of the renewal of the contract and the
future. The summer may be a quest, increases or decreases, with the signing of cedar or
requirements relating to variables as inflation levels, percentages, or the ubiquitous price
index during the broadcast of all during.
Security is based on (2002) which should represent the ownership of the assets of the
tax, complete with all the rights and obligations. There is a common misconception that only
the issue of Sukuk Ijarah provides payment of the tax, without granting ownership of assets
backrest. In case, sukuk holder will not have any relationship with the assets taxed at all other
than receiving payment of the tax but lease. However, this type of securitization is not
justified under the principles of Shariah.

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2.4

LEGITIMACY OF IJARAH SUKUK

2.4.1 Sources from Hadith

There are two hadiths and practices describing sukuk at that time, i.e. the hadith
prohibition buy sukuk or debt paper.

The hadith narrated by Abu Hurairah says:

Allah has said to Marwan: You purchases legalize As Sikak (Sukuk), it is the
plural of Dhava. He also is writing a book where government provision (real) men
and their division of the book and them (the government) to sell what was inside
before they find out immediately and in cash. They also give buyers Assakku for
signatures and got it. Then Allah forbid such as it is buying and selling what is not
available.

History Sulaiman bin Yasar narrated from Abu Huraira who was said to Marwan:
Meaning: From Sulaiman bin Yasar from Abu Huraira: That he was said to
Marwan: "You have forbidden usury". Marwan replied and said: "I do not legalize
usury". Then Abu Huraira said, "You've been to legalize the sale as-Sikak
(Document debt) and Allah has prohibited selling food before you get it".
Even so, the first hadiths prohibition is limited to financial obligations or debt

issued documents. Usually issued by government authorities or the lack of money. In

return, buyers benefit from the purchase of laptop documents. Then the Prophet forbade
such transactions. Athar while the second, the prohibition is limited to ribawi of 6 items
cannot be traded at a rate of profit. In fact, Abu Hanifa and Abu Yusuf ie major jurists in
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Hanafi sect permit the sale documents or sakk based on real assets rather than debt or
ribawi.

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CHAPTER 3
OVERVIEW OF SUKUK MARKET

3.0

INTRODUCTION
Sukuk have become increasingly popular as one of the long-term financial instrument as

the vital vehicles for resource mobilizations for raising funds that feasible and viable shariahcompliant whether in the public or private sector. Malaysia government issued the first Islamic
bonds with the issuance of the Government Investment Certificate and become the first issuer in
Malaysia, 1983. The bond was issued to facilitate the management of assets in the Islamic
banking system. Followed by the first corporate sukuk issuance in Malaysia was Shell MDS Sdn.
Bhd., a non-Islamic corporation in 1990 with RM125.0 million.
In 2002, the Malaysian government issued the first global sovereign sukuk which is
Malaysian Government Sukuk lease participation trust certificate, raising US$600 million, 5
years sukuk based on the Ijarah concept. Due to the consistent growth in the issuance of sukuk,
Malaysia has become the worlds largest sukuk issuer with more than 62% of total global sukuk
outstanding issued. And local currency sukuk issued 35.5% of outstanding total bond market at
the end of June 2010. Sukuk had an experienced a stunning falls from the peak in 2007 with
US$33 billion to US$19 billion in 2009 due to the credit crunch during global financial crisis and
Dubai financial crisis which forced investors to step aside from the fixed income market. But in
October 2009, 1Malaysia Development Bhd teamed up with Saudi Arabias PetroSaudi
International Ltd to establish a US$2.5 billion joint venture company to boost investments from
the Middle East into the country and Malaysia continue to be the top world issuer with 54.1% of
the value of sukuk issued in 2009.
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The global market for Islamic financial services has increased in 2013 reached $1,688
billion according to The City UK. The industry keep growing significantly in the years ahead and
the largest centers remain concentrated in Malaysia and the Middle East. Malaysia is one of the
countries registered globally with more than 50 firms reporting to The Bankers survey as
practice sharia-compliant in their financial services. This is attributable to the various factors
including the existence of a complete, matured and well established Islamic financial system in
Malaysia, The Securities Commission and Bank Negara Malaysia have also worked closely to
facilitate the growth of the corporate debt securities and sukuk market through the issuance of
joint guidelines. Following this, multilateral financial institutions, multilateral development
banks and foreign corporations have all tapped the Malaysian debt securities and sukuk market
for their financing needs and profiling purposes.
According to Chief executive officer and global head, consumer banking, Standard
Chartered Saadiq Wasif Saifi said that this year expected to be good for Malaysian sukuk
industry driven by the strength of the economy. He also told selected media members at the
recent Standard Chartered Malaysia media; there is already strong interest in ringgit sukuk
issuance from a global perspective. This is evident from the recent issuance by a Turkish
institution which represents a major raised by an overseas investor in a single sukuk issuance.
This is the first issuance by a Turkish issuer of ringgit denominated sukuk in the Malaysian debt
capital market by a wholly-owned asset leasing company, TF Varlik Kiralama. The company
recently issued a RM800 million sukuk under its inaugural RM3 billion Sukuk Murabahah
Programme. Wasim added the first two quarters looked promising for the sukuk industry, buoyed
by a robust gross domestic product which posted 6.2% growth in the first.

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There also news reported that large Malaysian company plan, aims and launched a sukuk
for their capital investment. Sukuk already start to rise slowly back in 2012 when the main
Malaysia airline, MAS has proposed to launch a sukuk programmed of up to RM2.5 billion to
shore up its capital base as one of three main pillars of its funding plan to address working
capital requirements. The second pillar consists of a proposal to lease MAS new aircraft from an
external entity and the third pillar is the commercial funding of aircraft capital expenditure
(capex). It proof that sukuk had started to make their way starting long ago and this year become
the good year for sukuk industry to expand their product when lot of company in Malaysia
implement the sukuk in their financing services.
3.1

SUKUK GROWING MARKET IN MALAYSIA

One of the products which are rapidly growing in Malaysia capital market is Sukuk al-

ijarah which is as an alternative to Islamic debt securities. Total Sukuk Ijarah issued in 2004 was
RM310 million and Ijarah principle was used for the Islamic bond structure with commercial
paper programmed and medium term note. Size of Sukuk Ijarah issued by private party increase
from 2% in 2004 to 11% in 2007. In 2005, the first Sukuk Ijarah in Malaysia had been issued in a
small amount which is 2.9% from other the total Islamic issued and it have been developed from
2.5% in 2005 to 34% in 2011. Structure of Sukuk Ijarah can be used in a long term development
because it has a strong underlying asset and not just a payment promise only. Sukuk Ijarah been
used in financing economic development project, however it still cannot defeat sukuk
Murabahah where it is a common type of sukuk used by Malaysian citizen. There are three types
of sukuk that can be used to finance real estate investment, which is Sukuk Ijarah, sukuk
Mudarabah dan sukuk Musharakah. Based on Securities Commission Malaysia report, Ijarah
comes in third place after Murabahah and Musharakah.
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Bai al-Dayn
0%

Others
1%

Musharakah
15%

Mudharabah
4%

BBA
25%

Ijarah
19%
Murabahah
33%
Istisna
3%

BBA

Murabahah

Istisna

Ijarah

Mudharabah

Musharakah

Bai al-Dayn

Others

Figure 3.1: Corporate Sukuk Market Issued & Rated by Financing Contract as at Dec 2012
(by number of issues)

This situation occurs because, in Malaysia the investor more consider to choose as profit
and loss sharing mechanism especially for the firms that issued sukuk and not competitive in
bond market. While from the profit aspect, Sukuk Ijarah issuer will be more profitable than those
issued Musharakah for a long term period. Sukuk Ijarah have a slow growth of development in
2004 until 2007 because of many industry in Malaysia use bai al-Dayn and bai al-Inah principle
in issuance Islamic debt securitization. However, both these mechanism have been found
unacceptable by the majority of Islamic scholars.
Malaysia also tries to attract sukuk investors globally by issuers Ijarah bonds where is
widely acceptable among the scholars. Issuers of Ijarah will be excluded from sales taxes for a
further three years to 2018, said Malaysia Prime Minister Najib Razak in his budget speech.
Furthermore, Ijarah is widely acceptable among the scholars. According to RHB Research
30 | P a g e

Institute Sdn Bhd, tax exemptions on more globally acceptable structures are promoting some
form of conformity amid the varying interpretations of Islamic law across borders.
The Malaysian sukuk market is already become the worlds largest, but the market
consists largely of local currency deals which tend to rely on government linked institution as
ready buyers as Malaysias common type of sukuk format used is Murabahah structure. So
Malaysia need to reduce Malaysias reliance on Murabahah because Murabahah may be limiting
the Malaysian markets development since many international issuers and investors refer to use
other structures such as Ijarah and Wakalah. This is because, Murabahah lacked a clear link to
the asset backing the structure and was therefore not sufficiently based on real economy activity,
a key principle in Islamic finance, according to some Islamic scholars in the Gulf. Because of
that, Prime Minister sought to reduce Murabahah Malaysias reliance by extend tax reductions
as mentioned before.
3.2

MODEL OF IJARAH SUKUK IMPLEMENT IN MALAYSIA

Basically, Sukuk Ijarah originated the combination of Sukuk and Ijarah principles that

aims financing their projects in big amount especially in construction of massive buildings. The
diagram below illustrates the fundamental structure in Sukuk Ijarah.

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Sale of assets to the primary

subscribers

Issuer /Seller

Primary
Subscribers/ SPV

Primary Subscribers lease back

assets to issuer in return in Ijarah
rental (periodic distribution

Secondary Market Trading

Investors
Issue of Sukuk Ijarah which evidence undivided proportionate
ownership of leased asset+ right to Ijarah rental stream

*Securities Commision 2009

Figure 3.2: Fundamental Structure of Sukuk Ijarah

The borrower buys the asset from the seller and sells it to the special purpose
vehicle (SPV). Alternatively, SPV buys the asset directly from the seller
according to the needs of the borrower.

SPV issues sukuk to sukuk holders to pay for the acquisition.

Sukuk holders pay sukuk proceeds to the SPV. The SPV distributes the proceeds
received from sukuk holders to the borrower to pay for the asset acquisition.

If the SPV buys the asset from the seller, the proceeds are used to pay the purchase
payment to the asset seller.

The SPV leases back the asset to the borrower (the lessee).

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As a return on the lease transaction, the lessee pays regular lease payments to the
SPV. The SPV distributes the lease payment to sukuk holders as the periodic
distribution amount; this amount is equal to the lease payment received from the
borrower or the lessee.

As we know, the Sukuk Ijarah is becoming one of the most developed Islamic Finance
products in recent years. This instrument is widely accepted by the contemporary scholars in the
Middle East and Far East (including Malaysia) (Islamic Finance Bulletin, Issue 22).
Furthermore, Sukuk Ijarah has become the most ideal solution to the prevailing liquidity
management challenges faced by the Islamic Finance industry (Islamic Finance Bulletin, 2008).
But the most challenges in implementing Sukuk Ijarah are the ability to source suitable
underlying government assets to facilitate the leasing management (Islamic Finance Bulletin,
2008). For issue part will be explained in the next chapter.
This sukuk is encompasses into two main structures namely, sale and lease back (Ijarah
Mumtahiya bittamlik) and forward leasing (Ijarah Mausufah fii Zimmah). In order to facilitate
Islamic money market programmed, these concepts are applied in Malaysia, as the diagram is
shown below;

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SUKUK IJARAH

Ijarah Mumtahiya
Bittamlik
Asset based Sukuk
Ijarah

Ijarah Mausufah fii

Zimmah
Asset backed Sukuk
Ijarah

*MARC 2013

Figure 3.3: Flow of Sukuk Ijarah

In Ijarah Mumtahiya Bittamlik, according to Malaysia Rating Corporation Berhad

(MARC) 2013, they have rated a number of Sukuk structures where Ijarah Mumtahiya Bittamlik
is divided into two models, namely asset based Sukuk Ijarah and asset Backed Sukuk Ijarah.
Usually, Special Purpose Vehicle (SPV) who is owned subsidiary by the seller of the assets. The
Special Purpose Vehicle (SPV) funds the purchase of the asset by issuing Sukuk that
representing the only the beneficial ownership of the assets but not in legal ownership ones.
The assets are leased to entities affiliated to the seller or to the seller in exchange for
periodic rental payments that are matched to the periodic distributions under the Sukuk Ijarah.
So, to get the asset back, the seller issues a Purchase Undertaking due to repurchase the SPV 's
interest in the asset on the maturity or any interim date at a pre determined price. At maturity or
on a dissolution event, the SPV sells the assets back to the seller and redeems the sukuk
(MARC,2013).

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While, recently, Islamic financial institutions in Middle East have started applying
forward ijarah (al-Ijarah al-Mawsufah fi alDhimmah) to finance the usufruct which it can be
consider a new innovation of Ijarah (Khaled Morad Amer and Ninasrin Radenarmad). In
general, Malaysia has applied this structure in a few banks for home financing products whether
in standalone product or the hybrid ones like, Project Lintasan Shah Alam's Sdn Bhd in handling
Lebuhraya Kemuning Shah Alam in 2008 through the principal advisers of RHB Investment
Bank Berhad.
IJARAH CONVENIENT LEASING SCHEME

3.3

In Malayan Investment Bank Berhad (Maybank, 2014), they have prepared the modes of
operations in Sukuk Ijarah in three types of financing:

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

There are three types of assets that can be used in Sukuk especially in Sukuk Ijarah (Maybank,
2014);

Tangible assets (ain) 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,
equipment, machineries etc. Basically the characteristics of tangible asset are as follows:
Tangible and exist physically;

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o Can be used / enjoyed (manfaah);

o Can be leased and leaseback;
o Free from encumbrances/not in pledge status;
o Must be owned by the owner; and
o Known by specifications, descriptions, locations, etc

Intangible assets in term of usufruct of services (manfaat 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.

Intangible assets in term of usufruct of right (manfaat 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.
Based on the Islamic Bulletin Issue 22, they classified these operations into several form
of models,

Ijarah Mumtahiya Bittamlik (Sale to lease back)

o Asset based Sukuk Ijarah
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* Ingress Corporation Berhad

Sukuk proceeds
Assets

Periodic and dissolution

distribution amount
Leases back assets & sells
on dissolution event

Periodic lease payment

and exercise price

Net proceeds

*Malaysia Rating Agency (MARC)

2013

Figure 3.4: Asset Based Ijarah Sukuk

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Milestone of Ingress Berhad

8 June 2004

A long-term rating of AIS was assigned.

8 December Re affirmed the long-term rating of AIS

2005
12 October Reaffirmed the long-term rating of AIS with stable outlook.
2006
31

July Placed its A+IS rating on MARC Watch Developing, followed confirmation
from CIMB Trustee Berhad that a breach in the Debt to Equity Ratio had

2007

occurred based on Ingress audited account s for the FY2007

30 October Maintained A+IS rating with developing outlook,
2007
28

Lowered the rating to AIS (stable outlook). The downgraded rating reflects

December

Ingress deteriorating profitability and the breach of its debt-to-equity covenant,

2007

resulting from additional debt assumed to fund its substantial capital expenditure
in respect of its Thailand operations.

11

July Maintained A+IS rating with developing outlook

2008
25

Downgraded to A-IS with negative outlook, incorporated the deteriorating

February

liquidity position and declining profitability of Ingress and continuing existing

2009

non-compliance with certain financial covenants.

11
2008

April Placed MARC Watch developing, following Ingress announcement dated April
10, 2008 to Bursa Malaysia in response to a notice by CIMB Trustee Berhad for
non-compliance of financial covenants under the sukuk issuance.

28
2008

July Revised its MARC Watch placement to negative outlook following Ingress
failure to rectify the breach in certain financial covenants under the Ijarah

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Agreement.
Downgraded to

,
31

March

2009

10

BBB-IS rating with negative outlook due to

Ingresss

insufficient liquidity resources as well as the lack of positive developments with

regard to its refinancing initiatives and asset disposals vis--vis its upcoming
scheduled RM50 million sukuk redemption in 9 July 2009.

April Lowered its rating to BB-IS, maintained negative outlook. ISB has failed to make
a RM25 million payment into the Ijarah Service Rental Account within the

2009

required deadline.
6 July 2009.

Downgraded to CIS, with negative outlook, based on ISBs decision to postpone

RM45.0 million of the RM50.0million upcoming first tranche sukuk payment

13

July Downgraded to DIS, on missed principal payment.

2009
*RAM Rating 2010
Table 3.1: Ingres Corporation Berhad

o Asset backed Sukuk Ijarah

* Menara ABS Berhad
Menara ABS Berhad is one of the real estate backed transaction that involving
the biggest and largest securitization of properties assets executed to date with the
value combination of RM 1.03 Billion ( RAM RATINGS,Q2 2008). A property is
assigned from the good quality (high RAM Property Score) and a low capitalization
rate (Islamic Finance Bulletin, 2008). In fact, conversely, a low RAM Property Score
will correspond to a high capitalization rate.

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Transaction Parties
Lessor/ Purchaser/Issuer
Lessee/Seller/Property Manager
Principal Advisor/Lead Arranger
Shariah Advisor

Menara ABS Berhad

Telekom Malaysia Berhad
Citibank Berhad
Shariah Committee of Citibank Berhad

Source: RAM Rating 2008

Table 3.2 Information about the ABS Menara and Telekom Malaysia

Furthermore, Menara ABS Berhad as the Special Purpose Vehicle (SPV) to Telekom
Malaysia that aims to the undertaking a sale and leaseback transaction which is involving 4
properties that own by the Telekom Malaysia Berhad (Telekom Malaysia).
Sukuk Ijarah
Tranche A
Tranche A1
Tranche A2
Tranche A3
Tranche A4
Tranche B
Tranche B1
Tranche B2
Tranche B3
Tranche C
Total

Amount (RM million)

Rating

240.0
55.0
40.0
10.0

AAA
AA2
A1
A2

30.0
40.0
85.0
500.0
1,000

AAA
AAA
AAA
Unrated

Table 3.3 The money flow transaction in diversified portions.

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Figure 3.5 The Sukuk Ijarah structure in ABS Menara Berhad

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Telekom Malaysia will sell the properties to the ABS where the ABS, as issuer will issue the sukuk to
finance the purchase. It comprises in several assets, namely Menara TM, Menara Celcom, and TM
Cyberjaya as well as Taman Desa.

Subsequently to the sale, Menara ABS will binding the agreement of 15 years Master Ijarah Agreement
with Telekom Malaysia as Head Lessee, for the use of the Properties.

Concurrently, Telekom Malaysia enter into sub - lease agreement with companies including Telekom
Malaysia Group, as well as external tenants.

Under Master Ijarah Agreement, Telekom Malaysia will pay monthly leases to Menara ABS ,and the money
will then be used to meet periodic distributions under the Tranche A ,Tranches B and Tranchec C according
to the scheduled principal redemption of the Tranche B Sukuk. For, Tranches A & C are expected to met via
Telekom Malaysia's repurchase of the properties in the open market.

Zenith Transaction of Telekom Malaysia Berhad with ABS Berhad:

Redemption of Tranche C Sukuk in cash or in kind

The stockholders in Tranche C may opt to receive the shares in Menara ABS in cash or in

kind as their settlements of amount that owed to them while Tranche A become a subject to the
full redemption in this transaction.

Special funding option available to Tranche C Sukuk holders

Tranche C Sukuk holders may have an option to provide special funding to their issuers

whether upon the occurrence of the termination event, total loss event, or upon the expected

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maturity. All amounts forwarded to the Issuer under the special funding will take a form of an
advance to Menara ABS, and will be subordinated to all obligations under the Tranche A &B.

Separation of a termination event under the lease with a Sukuk trigger event.
The non payment of rental that remains remedied will automatically correspond to a

trigger event under the sukuk. As a result, the properties will be disposed of in the open market.
Whenever, the disposal process is under progress, senior cost and coupon payment will be
charged in the reserve account. The advance is provided by the Tranche C to cover the issuer's
operating costs and periodic distributions for 12 months as well as will delay the occurrence of a
trigger event and circumvent a draw on the reserve account.

Relatively longer remedy periods under the Ijarah agreement

Telekom Malaysia will be given 1 month to rectify any shortfall in rental payments. If

not, Telekom Malaysia has undertaken to seek a replacement lessee within 3 months. Failure to
procure a replacement lessee or exercise the special funding may resulted the disposal of the
properties in the open market.

Provisions for non registration of property transfer documents

The transaction provide for a one off extension of the time granted by the

Sukukholders. Whenever it is granted, Telekom must place a deposit equivalent to the future
obligations of Menara ABS on the Tranche A & B, 3 days after the expiry of the rectification
period.

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Possibility of adverse selection

Telekom has the liberty to select the properties it wishes to purchase from the issuers. For

the non purchased properties, it will be disposed in the open market.

o Ijarah Mausufah Fii Al Zimmah
Project Lintasan Shah Alam's Innovative Project Finance Sukuk Structure

Figure 3.6 The Sukuk Ijarah structure of PLSA

The diagram above is one of the structure models of Sukuk Ijarah Mausufah fii Zimmah where
this principle is combining with the Sukuk Mudharabah in one development project. This hybrid
project incorporated by one company, Projek Lintasan Shah Alam Sdn Bhd whose manage the
44 | P a g e

design, construction, operation and management in the Lebuhraya Kemuning Shah Alam
(LKSA) expressway. The projects made a combination capital and sukuk structure where Sukuk
Mudharabah earn RM415 million and Sukuk Ijarah Mausufah Fii Zimmah is provided RM330
million. The construction that earn one half billion, through Sukuk structure functionally raising
the fund as well as to repay the other facilities on existing bridge.
In Malaysia, not many banks at least two for instance, RHB Investment Bank
Berhad(2008) as well as they applied this structure of Sukuk Ijarah Mausufah fii Zimmah either
as a standalone product by its own or as a hybrid along with other products (Khaled Morad Amer
and Ninasrin Radenarmad,2012).
In this case, the joint lead arrangers or principal advisers is RHB Investment Bank
Berhad and RHB Islamic Bank Berhad aim together to fulfill this project. The main purpose of
Forward Ijarah is to meet the needs of each party in the transaction that consists of the Islamic
bank, the lessor, the lessee and the banking business in general (Khaled Morad Amer &Ninasrin
Radenarmad, 2012)
Transaction of Project Lintasan Shah Alam (PLSA)

Investor as capital providers contribute financial capital of up to RM415 million to the

Mudharabah venture (MV) (involving operation, management, maintenance, and
collection of toll revenues from the users of Lebuh raya Kemuning Shah Alam (KLSA)

Under MV, PLSA contributes its expertise in managing the toll road business while the
Mudharabah Sukuk holders (MS) provide the capital to finance the construction of the
LKSA.

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Upon the commencement of the LKSA's operations, profits will be distributed among the
PLSA and the MS with the profit sharing ratio, 90: 10 as the expected rate of return has
been agreed upon at 7% per annum under the MV.

In order to proceed the toll road business, PLSA as mudharib invited other investors e.g.
Ijarah sukuk holders to participate the construction and development of the LKSA. Upon
completion of LKSA (the trusted assets) will be leased to the mudharib for an agreed
lease period.

The lessors will be provide the capital up to RM330 million, which will be issued as
evidence its undivided, proportionate beneficial interest in LKSA, and its right to receive
the periodic Ijarah from the MV.

As the beneficial owner of the Trusts Asset, lessors will bear all the major maintenance
costs including takaful.

PLSA will pay all the said costs on the behalf of the lessors. However, the lessor will
take into consideration the future costs and expenses when determining the Ijarah
payment, so yield to maturity (YTM) will be calculated on the rental of each period till
up to 19 years.

Plus, PLSA will pay their periodic rental to the lessors under the principles of Ijarah
Mausufah fii Zimmah.

These periodic rental payments are perceived as partial payments or forward lease on the
aggregate rental under the Ijarah Agreement. Consequently, future rental payments will
be reduced accordingly under the agreed rental schedule.

Upon the expiry of the Ijarah Agreement, beneficial interest in the True Asset will be
transferred back to the lessee at a nominal value of RM1.

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Upon the declaration of an event of default under the Sukuk Ijarah.

During the construction period, the lessee/ mudharib will acquire the beneficial interest in
the Trust Asset form the Lessor, at a price equivalent to the remaining rental payments or a price
to be agreed upon exercise. During commercial operation of the Trust Asset, the lessee will
acquire the beneficial interest in the Trust Asset from the lessor at an equivalent to the remaining
rental payments or a price to be agreed upon exercise.

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CHAPTER 4
ISSUES OF SUKUK IJARAH

4.0

INTRODUCTION
Sukuk Ijarah is the instrument that arises of many issues and have been discussing by a

few of scholar. In Chapter four, we will discuss about the few issues arises regarding the
application of Sukuk Ijarah. The issue that we covered is about ownerships, head lease and sublease, lease and lease back, buys back arrangement and tradability. We will enclose with the
opinion by scholar, views regarding Shariah Advisory Board and personal opinion by trusted
people.
4.1

ISSUES ON IJARAH SUKUK

4.1.1

Ownership
As we know, Sukuk Ijarah does not represent debt but represent undivided

ownership in the lease asset (Abdullah Saeed and Omar Salah). Each of the Sukuk
holders will hold trust certificates that resemble as equities and those tradable financial
instruments reflect the value of a particular asset or assets. Since the Sukuk is not a debt
or monetary instrument, Islamic legal difficulties that accrue the sale of debts or money
do not arise in this case.
However, the problems is Sukuk Ijarah lose their Shariah compliance without a
share in ownership of the asset (Tan Wan Yean). From the Shariah perspective, it is
essential that sukuk are backed by tangible asset throughout its entire tenure and sukuk
holders must have a proprietary interest in the assets which are being financed.

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According to the Shariah Board of Accounting and Auditing Organization for

Islamic Financial Institutions (AAOIFI), sukuk holder should have a right through the
sukuk assets. They also mentions that assets should be sold legally and there must be a
process of transferring assets from the originating company or the issuer. This is because
Shariah encourages financing through trading involving specific and identifiable assets.
To ensure an actual transfer of asset was happen, the Shariah Board of AAOIFI
also ruled that the manager that issuing sukuk must certify the transfer of ownership of
such asset in its books and must not keep them as his own assets. The existing of
agreement must be there as an evidence of a binding sale transaction from the originator
to the sukuk investors. The most important thing is, the contract should be legal, valid,
binding and enforceable on all parties and the laws of the country.
Other than that, in term of asset-backed sukuk, the freehold titles to the properties
were transferred to the sukuk holder along with the associated ijarah cash flow. It means
that, the title of the properties will vary based on the amount of payments made by the
sukuk holder to the originator. In the common practice, Sukuk Ijarah shows that required
document such as Sale Undertaking (Wad) and Substitution Undertaking (Wad)
Optional prove that there a valid transfer of ownership of the assets. This is because
under sale undertaking document allows originator to buy asset back from the trustee but
in return the originator is required to pay all outstanding amounts so the trustee can pay
investors. For the substitution undertaking optional document allows originator to
substitute the assets for some other asset at lease the same value and revenue-generating
properties.

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Other than that arise argument is over the obligation the lessee to obtain
ownership of the asset at the end of the contract period. According to the requirement of
Islamic law, for stipulation of such term in the original lease not only amounts to
combining two contract in one known as al-safqah fi safqatayn (-). Moreover, there is no
objection to produce a basic memorandum of understanding or exchange of promise
between the involving parties that can help to secure the desire purposes of them, and the
term of the memorandum does not bind the lessee to acquire ownership
In conclusion, Sukuk Ijarah represents ownerships takes in existing and/or well
defined assets. Investing in sukuk can facilitate the funding of trade and production of
tangible assets. However Sukuk Ijarah holders are entitled to get the information on the
use of their investment of the underlying assets to make sure there is no party feels
injustice. AAOIFI recommend that sukuk holders must be prepared to take risk through
the asset as the ownership transfer will entail in the transfer of control and risk in such
assets. If the assets do not perform, sukuk holders must be prepared to bear the loss.
4.1.2

Head Lease And Sublease

One of the concepts that developed in the modern leasing business is head-

leasing. In this arrangement, a lessee will sub-lease the property to a number of sublessees. Then, will invite others to participate in his business by making them share the
rentals received by his sub lessees. For making them participate in receiving rentals, he
charges a specified amount from them. According to the Shariah principles, this
arrangement is not allowed. This is because the lessee does not own the property. He is
only entitled to the benefit from its usufruct only. The lessee has is right to receive rent
only. By assigns a part of this right to other persons is not acceptable in Islam because
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without the ownership right of the underlying asset, lessee cannot do another of leasing
business on that transaction (Sheikh Muhammad Taqi Usmani).
There is another condition for sublease. Sublease is defined as an agreement
between the first lessee who act as a lessor (herein referred as sub-lessor), and a new
lessee (herein referred as sub-lessee). According to this agreement, the sub-lessor will
lease the whole or part of the property rented by him or her to the sub lessee. Sub-lessee
will be responsible for payment of the rental to the sub-lessor. The sub-lessor will be
responsible for making rental payments and all charges incidental to the owner of the
asset. The original lessor will not affected by the contract obligation between them.
There are some arguments for sublease agreement whether this agreement is
acceptable and what about the rental payment in the sub-lease? To answer the questions
there are some condition need to be reveal. If the leased asset is used differently by
different users, the lessee cannot sub-lease the leased asset except with the express
permission of the lessor. If the rent is claimed from the sub-lease is equal or less than the
rent payable to the original lessor, all the recognized schools of Islamic jurisprudence are
agreed on the permissibility of the sub lease (Sheikh Muhammad Taqi Usmani).
According to the Shariah Advisory Council (SAC), the rental payment for sublease to a third party can be paid either lower, equal or higher than the head lease rental
payment, on the spot or deferred basis. This rule is consistent with the AAOIFI
practicing. But the SAC mention the rental payment for sub-lease to the original lessor
need to be either on the spot or deferred basis. However the AAOIFI view that when the

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sub-lease is between the sub-lessor and owner of the asset, rental payment has to be on
spot basis.
4.1.3

Tradability
A Shariah scholar has agree that Sukuk Ijarah can be sold and purchased except

some differences regarding Sukuk al-Murabahah and Salam Sukuk. Either sukuk can be
negotiated and traded freely on the market it remains active in the primary market. This is
because most of the sukuk hold until maturity and many sukuk held by large institutions
until the asset is not available for the average private investor. The lack of tradability is
also due because the limited number of issuance and the lack of alternative instruments in
this asset class. In addition, the sukuk are out of reach for average investor and
shareholder usually is Muslim that has a lot of property because of the large tradability
size. This may defeat the higher purpose that Islamic finance aims to achieve fair and
equal distribution of wealth among the people.
In addition, the lack of trade is also because of the revolving debt sales. It was
correct that debt is an asset and financial right. Debt and sukuk are the same in this case
as both a right that is subject to the performance or exercise by the contracting parties
concerned. In this relationship, Muslim scholars have different views of whether the debt
can be traded for example buy and sell in particular when the sale involves creditors and
third parties. Some Muslim scholars are not allowed to practice the sale of debt between
creditors and third parties because there is uncertainty or gharar in the ability of the seller
to deliver the subject matter of the contract. For some Muslim scholars, the practice was
permitted subject to certain conditions that must be met before the sale can be executed.

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According to the contemporary scholars and the Organization of the Islamic

Conference (OIC) Islamic Fiqh Academys ruling, sale of debt is permissible so long as it
is free from any element of riba and gharar. Some of the rules related to determining the
nature and status of the debt. If the debtor of the debt is in the form of finance, debt
should have been taken into account as equal money and regulations of the exchange will
be charged. This means that transactions must comply with the rule and it should be
done. If you have not received in the forms of non-ribawi goods, that will considered as a
non-monetary financial right and the rules in the exchange of money or ribawi items will
not apply.
4.1.4

Buy Back Arrangement

The term buyback arrangement refers to a business arrangement whereby one

party sells inventory to a second party, with the promise to repurchase the inventory at a
future point in time. As part of a buyback agreement, the selling party is able to finance
its inventory without reporting either the liability or asset on the company's balance sheet.
About Sukuk Al-Ijarah, the International Islamic Fiqh Academy (IFA) prohibited
the current structure of asset-based sukuk al-Ijarah because it is a form of Inah (sale and
buy-back arrangement). IFA pronounced the impermissibility sell assets in cash with the
terms of the seller Leases of assets through a lease that ends with ownership where the
total amount of rental payments and the repurchase price paid by the sukuk issuer will be
more than the cash price paid by the sukuk holders. Stipulation is impermissible and
irrespective of whether it is called explicitly or implicitly because this would be a form of
prohibited Al-Inah and therefore sukuk cannot be issued using this structure. IFA also
placed emphasis on the fact that the sukuk should establish legitimate ownership of assets
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in line with both Shariah and conventional law together with attendant legal effects such
as the power of disposal of the assets and assumed the liabilities associated with
ownership.
Most Sukuk have been sold with a buy back agreement, stipulating the borrower
will pay back the face value at maturity, mirroring the structure of a conventional bond.
Many Islamic scholars consider that the promise to pay back the capital runs counter to
Islamic law and that it is against the risk sharing principle of Shariah but the avoidable
business risks may fall into the category maslahah that decrease the position. Still that the
bonds with buy back agreements should be made more Shariah compliant, for that
purpose Sukuk should be issued for new commercial and industrial ventures. If they are
issued for established businesses, then the issuers must ensure that Sukuk holders have
complete ownership in real assets (Sukuk and their Contemporary Applications by
Muhammad Taqi Usmani, 2005). In addition, any resale of the assets must be undertaken
on the basis of the net value of the assets, or at a price that is agreed upon at the time of
purchase and not at face value.

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CHAPTER 5
CONCLUSION

Islamic finance is related to the financial affairs of Shariah have been prescribed in the
Qur'an or Sunnah. Shariah provides guidance in faith, moral conduct and legal or practical law.
According to Islam, the perfect life systems based on both legal prescriptions and good moral
behavior. There are some principles that should be applied in any Islamic financial system and
which include usury, ghahar, maysir, and unlawful goods and service. Sukuk have shown the
effectiveness of the play its role to exploit and channel funds to productive investment activities
at the global level. Big prospects, sukuk as long as Shariah compliant, sukuk it can compete in
the future with distinction because of its uniqueness, there is internal control of Islamic theology,
transparency and no doubt or uncertainty.
The rapid growth and acceptance of those Muslims and non-Muslims is a positive sign
for an Islamic-based product in the package in ways that attract and meet the needs of the market
it will be received well. Even managed to highlight the sukuk but the scholar and financial
practitioners, they still think that Muslims always must remember about the original goal of why
the sukuk are introduced. As a Muslim, we should be aware about Maqasid Shariah and
economic purposes in Islam. The financial crisis that hit the world recently opened a large
opportunity to the Islamic financial sector to appear and provide important solutions to the global
financial crisis. Of course the skills, competencies and knowledge of the sukuk and various
financial aspects are very critical. The sukuk is seen to benefit the Muslims and non-Muslims. As
a Muslims, we have to avoid usury and similar emergencies can further enhance the investment

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profit world and the hereafter. Non-Muslims are interested because the transparency, efficiency
and profitability as well as sukuk add collection or the diversity of their investments.
In terms of rating scales for agencies, the meaning and interpretation of each scale is
essentially the same except for a slight variation in the symbols used. Allocation of the sukuk by
both rating agencies categorized to long-term and short term. RAM has 20 scales while MARC
only had 13 scales given in accordance with the level of creditworthiness of instruments as well
as the Publisher. While the observation of the implementation of the rating by RAM and MARC,
found there is no much difference in terms of the implementation of a rating to sukuk. But
undoubtedly, agencies have made some judgments in terms of Shariah compliance. This can be
seen when the two agencies has its own Shariah advisory panel as an advisor to matters relating
to the Shariah. But generally, both these agencies do not reflect directly the Shariah compliance
factors in the process of rating them. They just practice a habit that has been practically by
conventional rating which is by looking at the analysis of the risk of the payment of a bond
issuance. Generally, the agencies thought the same method used for Islamic instruments is
simulated to conventional debt instruments. So in terms of cash flow and risk, the sukuk are not
much different from conventional bonds.
On the whole, to adapt with different structure the sukuk with bonds, rating agencies can
consider Shariah compliance in their rating process. RAM and MARC can apply Shariah Quality
Rating model (SQR) used by IIRA or find its own rating methodology for introduced sukuk. This
should be done if Malaysia wants to be a hub of Islamic financial markets around the world.
Advantages of Ijarah principle and how it can be used to avoid controversial feature bay 'al-'inah
and bay' al-dayn has attracted in Ijarah sukuk financing and based on these recent years. Ijarah

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can also be used as an incentive for economic development as it usually long term and offering
the potential to stimulate productive industry. The fact that the Ijarah not rely on collateral also
means that it has a greater role in fostering stability to contain inflationary pressures in the
economy. As a method of financing, Ijarah is still at an early stage of development and there is
scope for more in Malaysia, Middle East, and Asia continue to develop applications for project
funding. It seems that only a handful of Muslim countries have so far used Ijarah bonds and the
dominant majority Muslim countries have not yet started using Ijarah bonds to mobilize the
assets in the secondary market. This can be seen in the recent proposal by the Governor of Bank
Negara Malaysia for the introduction of universal Islamic bonds, preferably based on Ijarah,
with the participation of the developing countries of revenues that can be used for financing
projects in countries that participated. Ijarah can also be used as a substitute for somewhat overused bay 'al-muajjal and murabahah in the Islamic bond market.
Our analysis of the Shariah issues relating to relating to Ijarah-based funding also shows
that there is basically no major departure from the principles of Shariah in contemporary
applications of this contract. Among the issues that have been provided in this essay take
attention has been featured in the existing literature Ijarah and continue to search for better
solutions.

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APPENDIX

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