GROUP ASSIGNMENT 2:

Question 1:
1a)

A capital owner submitted her fund to be invested in a chicken poultry business. At first, she

conditioned a 15% profit margin per annum for the capital outlay. The entrepreneur could not agree and
suggests a profit sharing of 12% per annum. Finally she agrees on the proposal.
Assumption: amount invested by capital owner (startup capital) is RM250000. Profit 1 st year is
RM100000, profit 2nd year is RM150000 and 3rd year is RM50000.
Discuss in details the two proposals and identify which transaction involves riba (usury/interest) and why.
Proposal A (15% profit margin per annum for the capital outlay)
The entrepreneur: 0.15*250000 = Rm37,500 every year will get this amount
From the three year given, each year the firm gain a profit but assuming in the 4 th year the firm has a loss.
The entrepreneur still will get the amount as he request earlier even though the amount that he received is
actually consider as riba al-nasiah in Islam. This riba is not allowed in Islam.
Riba al-nasiah (a type of riba that exists in, or results from, a sale transaction which unduly benefits one
the counterparties in the form of a surplus or extra amount due to delay of delivery of his side of the
transaction. More specifically, riba al-nasi'ah arises in loan transactions (on the basis of future repayment
of more than the principal) as well as sale transactions (on the basis of deferred price).
As referred to the features of distribution of profit in mudharabah concept, the profit should independent
from the capital amount that invested by the capital provider ( rabb-ul-maal).
Proposal B (12% per annum)
Basically, this kind of profit sharing in Proposal B is allowed in Islam as there is no riba /interest included
and the profit sharing between both parties also being agreed earlier.
Profit - Year 1: RM100000, Year 2: RM150000, Year 3: RM50000
So, the profit sharing is 12% (Rabbul mal) & 88% (Mudarib)
Rabbul-mal (CP)

Mudarib (Entrepreneur)

Year 1:

RM12000

RM88000

Year 2:

RM18000

RM132000

Year 3:

RM6000

RM44000

Total:

RM36000

RM264000

Distribution of Profit in Mudharabah (Profit Sharing)

Generally, the distribution of profit must be pre-determined by the two parties. Furthermore, the amount
of profit ascribed to either of the parties must be independent of the capital amount, dependent solely on
the actual profit realized by the firm. The profit assigned to either of the parties cannot be a lump sum
amount either as this would also constitute interest. The Shari'ah does not restrict or specify proportions
to be distributed between the parties, leaving it to the best judgement of the two independent parties.

1b)

Encik Najib is a wheat planter and plant grade A wheat. Since he feels he can get by with

consuming grade C wheat, he therefore trades every kilo of grade A wheat with three (3) kilos of Grade c
wheat.
Discuss in details whether the transaction can be categorized as riba and why.

Wheat is one of the ribawi items where there are a few requirement need to be fulfill when to exchange
the commodities. Wheat can only be bought and sold in equal quantities and on spot. An unequal sale or a
deferred sale of these commodities will constitute as Riba.
The Prophet said, "Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver,
sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in
exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in
excess, it will be usury (Riba). However, sell gold for silver anyway you please on the condition it is
hand-to-hand (spot)."
It means that if wheat is exchanged for wheat, the quantity on both sides must be equal to each other and
if the quantity of any one side is more or less than the other, this transaction is also a Riba transaction,
because in the tribal system of Arab these commodities were used as money, and the exchange of one

kilogram of wheat for one and a half (1 1/2) kilogram of another wheat would stand for the exchange of
one dirham for one and a half (1 1/2) dirham. However, this transaction was termed as Riba Al-Fadl by
the Holy Prophet (PBUH). Riba Al Fadl actually means that excess which is taken in exchange of specific
homogenous commodities and encountered in their hand-to-hand purchase & sale.
So, as referred to the question En Najib is actually doing a Riba Al-Fadl of transaction as doing an
exchange between the different types of grade of wheat in an unequal of quantities as the item is a part of
ribawi items that cannot simply to be exchange. This type of transaction is bound to create Riba where
seller of higher grade wheat will take much higher quantity with lower grade of wheat. Hence, the
Prophet (pbuh) prohibited it and there are many hadith to explain it.
Narrated Ibn 'Umar: Allah's Apostle forbade Muzabana; and Muzabana is the selling of fresh dates for
dried old dates by measure, and the selling of fresh grapes for dried grapes by measure.49 [Sahih
alBukhari]

1c)

A paly station owner Puan Rusmah has asked Encik Rajam to search and collect specific coins of

Rp500 denomination. For his service, Puan Rusmah is willing to commission him with Rp500 for every
rp10000 worth of coins collected.
Discuss in details whether the transaction involves riba.

No, this transaction not involve any riba as the act of Puan Rusmah to give the commission is assuming as
the wage for the work that En Rajam did for her. This act like give sadaqah where the person who
received the money no need to repay back the amount. There is no additional commission or payment
request by En Rajam so no riba is involved.

Question 2
2a) What are Shariah stock screening processes of shares in the equity market? Discuss the different
forms of assessment considered under a typical stock screening exercise.

Screening process is design to identify the elements that violate the rules and guidelines of Shariah law,
which rooted from al-Quran, and the teaching of Prophet Muhammad. Shariah law prohibits elements
such as usury (riba or interest), gambling (maysir) and uncertainty (gharar).
Stock screening is the process of selecting a subset of stocks from the feasible investment opportunity set
comprising all the available stocks to accomplish certain investment objectives. In an Islamic or shariah
stock screening process, the universe of all possible stocks is purged of stocks that are not compatible
with Islamic investment principles so that Islamic investors can adhere to shariah guidelines and
principles while investing. Therefore, stock screening can be used as a tool of separating shariahcompliant stocks from shariah-noncompliant stocks.
When Islamic and Muslim investors investing in any Stocks and equity fund, in case of investment in
equities traded on the stock exchanges, Islamic investors need to take into account not only the structure
of the transaction but also the nature of the counter party. Thus the investor needs to consider
further issues of the company itself being involved in Shariah non-compliant financing and
structuring. Before investing in shares of any business corporation, an Islamic investor needs to
take into consideration the various aspects about the corporation to define that whether the share of
corporation is investable in the view of Shariah or not. Generally, these considerations can broadly be
categorized into the following aspects:

Activities of the business corporation: The criterion or guidelines regarding the activities of the

corporations are there to prevent an Islamic investor becoming a part of something which is
impermissible in Shariah view such as alcohol, gambling or pornography business. It is not concerned
only with main activities but also includes ancillary activities. Some time, a more extreme view, is
regarding that any hint of a haram activity is sufficient to deem the investment unacceptable. However,
some scholars have taken a more relaxed view in allowing a minimal amount of haram activity, as if it is
not the primary business of the business corporation and it is unavoidable in the conditions in which
the company operates such as interest-based borrowing for working capital.

Capital Structure: This criterion focus on the capital structure of the business corporation to examine

the ratio of Riba or non Shariah-compliant finance in corporations assets and liabilities. The purpose of
the criteria regarding the capital structure of the company is also to investigate corporations
leverage ratios. A corporation should not be over-leveraged and this is judged by either its debt-to-equity
ratio or its debt-to-assets ratio.

Tradability: in this criterion focus is on the level of liquid and financial assets. The purpose of the

tradability restrictions is to avoid assets of corporations that the majority of their assets represent either
financial assets or cash, which cannot be traded unless the trade complies with special Islamic
currency exchange rules and debt transfer rules. The liquid and debt assets ,cash or receivables,
are considered to be cash-equivalent. Although, there is a difference of opinion amongst scholars
however the majority view is that obligations on counterparties cannot be traded, except at par. Therefore,
the shares of a corporation can be traded at varying prices depending on a number of factors. A
corporation whose majority assets comprise of cash or debt assets cannot be traded according to Shariah.

Unlawful Income: Apart from income from main business of corporation, the unlawful income

criterion is meant to ensure that any impermissible income, either from interest or other
impermissible activities, is reduced into a minimum ratio required by Shariah law.

In conclusion, the criterion of screening process aimed at the formation of investment portfolios
from common stocks of listed international companies which ideally satisfy three basic criteria:
legitimate eld of economic activity, interest-free dealings in both assets and liabilities, and the
dominance of real assets. Therefore in order to pass screening process a corporation must not be engaged
in the production of illegitimate goods. It must not deal with interest rate nancing as a means to leverage
its capital structure through xed debt liabilities, or generate interest income from investment
securities; and since a companys shares represent equity rights in its assets, the latter should be real
assets, not liquid money or receivable debt as they cannot be sold freely at a prot like real goods, real
estate and machinery.

2b) what steps should be taken by a Muslim investor if the shares he is holding shifts from Shariah
compliant to non Shariah compliant?

Basically there are two factors that cause the holding shifts from Shariah compliant to non Shariah
compliant where:
i)
ii)

When there is a movement in the firm business operation

When there is a movement in the financial position

So, the steps to be done:

In this regard, if on the date the updated list takes effect (23rd July 2015), the respective market price of
Shariah non-compliant securities exceeds or is equal to the investment cost, investors who hold such
securities must dispose them off. Any dividends received up to the date of the announcement and capital
gains arising from the disposal of Shariah non-compliant securities on the date of the announcement can
be kept by the investors.

However, any dividends received and excess capital gain from the disposal of Shariah non-compliant
securities after the date of the announcement should be channelled to baitulmal and/or charitable bodies.

On the other hand, investors are allowed to hold their investment in the Shariah non-compliant securities
if the market price of the said securities is below the investment cost. It is also permissible for the
investors to keep the dividends received during the holding period until such time when the total amount
of dividends received and the market value of the Shariah non-compliant securities held equal
the investment cost. At this stage, they are advised to dispose of their holding.
In addition, during the holding period, investors are allowed to subscribe to:

a)

any issue of new securities by a company whose Shariah non-compliant securities are held by the

investors, for example rights issues, bonus issues, special issues and warrants (excluding securities whose
nature is Shariah non-compliant e.g. loan stocks)
b)

Shariah-compliant securities of other companies offered by the company whose Shariah non-

compliant securities are held by the investors, on condition that they expedite the disposal of the Shariah
non-compliant securities.
Question 3:
a) Discuss briefly of REITs to ensure the conformity to shariah requirements

A real estate investment trust (REIT) is a closed-end investment company that owns assets
related to real estate such as buildings, land and real estate securities. REITs sell on the
major stock market exchanges just like common stock. REITs raise money from a collection of
investors and provide them with access to real estate. REITs, an investment vehicle for real
estate that is comparable to a mutual fund, allowing both small and large investors to acquire
ownership in real estate ventures, own and in some cases operate commercial properties such as
apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping
malls.
REITs generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs.
Most REITs are equity REITs. Equity REITs typically own and operate income-producing real
estate. Mortgage REITs, on the other hand, provide money to real estate owners and operators
either directly in the form of mortgages or other types of real estate loans, or indirectly through
the acquisition of mortgage-backed securities. Mortgage REITs tend to be more leveraged (that
is, they use a lot of borrowed capital) than equity REITs. In addition, many mortgage REITs
manage their interest rate and credit risks through the use of derivatives and other hedging
techniques.. Hybrid REITs generally are companies that use the investment strategies of both
equity REITs and mortgage REITs. Because they often invest in debt securities secured by
residential and commercial mortgages, mortgage REITs can be similar to certain investment
companies that are focused on real estate. Generally, companies that invest a majority of their

assets in real estate are exempted from the rules that govern investment companies, such as
mutual funds.
The issuance of the real estate investment trusts (REITs) guidelines by the SC (to replace the
existing property trust fund guidelines) has helped kick-start the now blooming REITs industry
in Malaysia. Subsequently, the SC released the Guidelines for Islamic Real Estate Investment
Trusts (I-REITs Guidelines) to facilitate the introduction of Shariah-compliant REITs. Malaysia
became the first jurisdiction in the global financial sector to issue the I-REITs Guidelines. The IREITs Guidelines was set as the global benchmark for the development of I-REITs. This latest
achievement further enhances Malaysias leading role in the development of the ICM among the
international financial community. This will further promote and accelerate the growth of a
competitive ICM in Malaysia.
The thrust of the I-REITs Guidelines is to provide clear guidance on and new investment
opportunities in collective real estate investments through a Shariah-compliant capital market
instrument. Following the issuance of I-REITs Guidelines, KPJ Healthcare Bhd has assumed the
challenge and became the first Malaysian company to establish and launch IREITs. Known as
Al-Aqar KPJ REIT, the I-REIT was launched on 24 July 2006 and will be listed on the Main
Board of Bursa Malaysia Securities Bhd. KPJ Healthcare Bhd has identified seven hospitals
within the group as its main asset class for the establishment of the I-REITs. Damansara REIT
Managers Sdn Bhd was appointed as the Management Company and Amanah Raya Bhd as the
trustee. With the establishment of this I-REIT, KPJ Healthcare Bhd will be able to unlock the
value of its properties, and raise funds to reduce its borrowings and expand its business. A total
of 340 million units will be issued and KPJ Healthcare Bhd itself will hold 160 million units or
47%, while 165 million units will be issued to institutional investors and 15 million units to the
public.
The move by the government to liberalize overseas investment has positively provided new
momentum for the development of unit trust funds in Malaysia. Since the liberalization move,
we have witnessed a few pioneer global funds being introduced in the first half of year 2006.
Since then, Malaysians have invested a total of RM1.5 billion in overseas funds. The relaxed
exchange control policy set by the government has become a major factor in boosting the

demand for investment in global equity funds. Shariah based unit trust funds were not excluded
from the positive impact arising from the liberalization policy. Unit trust management companies
(UTMCs) were encouraged to introduce new and competitive Shariah based unit trust funds to
provide greater investment opportunities.
i)

Global Islamic equity fund

The first Malaysian global Islamic equity fund was introduced by AmInvestment
Management Sdn Bhd known as AmOasis Global Islamic Equity. It is a capital growth fund
established using the recently approved feeder fund framework. The fund was successfully
launched on 21 April 2006 and targeted to achieve moderate capital and income appreciation in
the medium to long term by investing in global Shariahcompliant shares. AmOasis Global
Islamic Equity invests in the Dublin-listed Crescent Global Equity Fund, which in turn invests in
shares of Shariah-compliant companies across the globe in the US, Europe and Asia. The fund
uses the Dow Jones Islamic Market Index as its investment benchmark.
ii) High net worth global Islamic portfolio fund
To take advantage of the positive impact of the liberalisation policy, RHB Unit Trust
Management Bhd recenly introduced the RHB Global Islamic Portfolio. Series 1 (GIPS 1). It is
the first wholesale closed-ended global fund for high net worth individuals and corporations
looking for capital protection. GIPS 1 will be investing in the Shariah capital principal protected
notes issued by Deutsche Bank AG of London. The note is made up of 70 global Shariahcompliant stocks with the highest earnings potential selected according to various filters and
stringent processes.
ii)

Asia Pacific fund

Apart from global funds, regional funds have also become increasingly popular with
investors. In view of this, CIMB-Principal Asset Management Bhd introduced Malaysias first
Asia Pacific Shariah-compliant equity fund known as the Asia Pacific Adil Fund. The fund is
managed by CIMB-Principal Asset Management Bhd. Generally, the fund aims to achieve longterm capital appreciation and income through Shariah compliant investments, such as Shariahcomplaint shares, profit sharing debt instruments, and deposits in emerging and developed Asia

Pacific markets. The fund has diversified access to Asia Pacific stock markets with almost 788
Shariah-compliant stocks to choose from. The stock selections are derived from the Dow Jones
Islamic Market Asia/Pacific Index.
iv) Islamic equity index fund
An Islamic equity index tracking fund is another new Islamic fund introduced in the
Malaysian unit trust industry. RHB Unit Trust Management Bhd introduced the Dow Jones-RHB
Islamic Malaysia Index Fund (DRIMIF) which tracks the performance of the Dow Jones-RHB
Islamic Malaysia Index. The fundamental objectives of the fund include achieving broad-based
equity exposure, predictable variance around the benchmark and exposure at the lowest cost.

b) What are the differences between Islamic unit trust and ETFs

The Islamic unit trusts mainly focus on the investments in portfolios of halal stocks and
bonds complying with the Syariah principles. Such halal stocks exclude companies involving in
activities, products or services related to conventional banking, insurance and financial services,
gambling, alcoholic beverages and non-halal food products and also companies whose products
can cause illness, death, disease or even promote social ills such as tobacco. From an Islamic
perspective, the above industries are avoided as they represent elements that are forbidden by
Allah and the harmful effects of such products on mankind (Smart Investor, 2002). The returns of
Islamic unit trusts also avoid the incidence of riba or usury interest through the process of
cleaning or purification by the removal of such amounts representing the interest element. In
instances where a fund has inadvertently made profits investing in non-permissible sectors, the
fund will liquidate the investments. The proceeds of the gain will then be donated to charities.
Mohd Nasir (2000) mentioned in his paper that the Syariah principle of musharakah acts
as a base for Islamic unit trust whereby it is a participatory financing involving agreement
between the contributor of capital and the user. Therefore, the providers of funds or partners are
the unit holders in an Islamic unit trust. A formal contract between the unit holders, capital or
fund, profit, the offer, the acceptance and the investment activities are also available within the
practice of the Islamic unit trust.

The concept of al-wadiah yad dhamanah or guaranteed safe custody is involved in the
operation of the Islamic unit trust fund. Prior to the funds existence, the owners of assets are the
investors, custodian holder is the fund manager, and asset is the money invested. After the
creation of the fund, the owners of assets are the unit holders, the custodian is the trustee and the
assets include all assets of the fund. Besides that, the concept of al-baibithamin ajil is also
practiced in the Islamic unit trust whereby there is a transaction of buying and redemption of
units of funds. In this case, the purchase or redemption price is the managers forward selling or
buying price at the next valuation point when investors decide to buy or unit holders decide to
redeem their shares. Moreover, the valuation point is the price at the close of business for the
day. Nonetheless, based on al-wakalah principle, the price must be determined at the time the
contract of sale or purchase is executed. As a result, the current practice of Islamic unit trust does
not conform to the al-wakalah principle. Thus, it has been suggested that daily historical price
would be more appropriate in order to observe the Syariah principles (Shariff, 2002).
Exchange-traded funds (ETFs) are securities that closely resemble index funds, but can
be bought and sold during the day just like common stocks. These investment vehicles allow
investors a convenient way to purchase a broad basket of securities in a single transaction.
Essentially, ETFs offer the convenience of a stock along with the diversification of a mutual
fund.
Exchange-traded funds are some of the most popular and innovative new securities to hit
the market since the introduction of the mutual fund. The first ETF was the Standard and
Poor's Deposit Receipt (SPDR, or "Spider"), which was first launched in 1993. Purchasing
Spiders gave investors a way to mimic the performance of the S&P 500 without having to
purchase an index fund. Furthermore, because they traded like a stock, SPDRs could be bought
and sold throughout the day, purchased on margin, or even sold short.
Whenever an investor purchases an ETF, he or she is basically investing in the
performance

of

an

underlying

bundle

of

securities

usually those

representing

particular index or sector. Unit Investment Trusts (UITs) are often organized in the same manner.
However, the unusual legal structure of an ETF makes the product somewhat unique.

Exchange-traded funds don't sell shares directly to investors. Instead, each ETF's
sponsor issues large blocks (often of 50,000 shares or more) that are known as creation units.
These units are then bought by an "authorized participant" -- typically a market maker, specialist
or institutional investor -- which obtains shares of the underlying securities and places them in a
trust. The authorized participant then splits up these creation units into ETF shares -- each of
which represents a legal claim to a tiny fraction of the assets in the creation unit -- and then sells
them on a secondary market.
Just as closed-end funds don't always trade at a price that precisely reflects the value of
the underlying assets in each share of the portfolio, it is also possible for an ETF to trade at a
premium or a discount to its actual worth. To liquidate their holdings, most investors simply sell
their ETF shares to other investors on the open market. However, it is possible to amass
enough ETF shares to redeem them for one creation unit and then redeem the creation unit for
the underlying securities. Because of the large number of shares involved, individual investors
seldom use this option.

C) Mention some criteria that differs between Islamic unit trust and conventional unit trust
I) CONVENTIONAL UNIT TRUSTS

Based on the Guidelines on Unit Trust Funds issued by the Securities Commission in October
1991, a unit trust fund company can only invest in authorized Malaysian assets, which include
listed and unlisted securities of Malaysian companies, Malaysian Government Securities,
Cagamas bonds, bankers acceptances, Negotiable Certificates of Deposits, Government
Investment Certificates and cash (Bankers Journal Malaysia, 1995). However, in March 1994,
the Commission has provided a provision by which trust funds can invest (10% of portfolio) in
overseas stock. Hence, conventional unit trust funds can invest in any of the above Malaysian
assets without any restriction as long as the funds have not reached its maximum approved size.
II) ISLAMIC UNIT TRUSTS
The Islamic unit trusts mainly focus on the investments in portfolios of halal stocks and
bonds complying with the Syariah principles. Such halal stocks exclude companies involving in

activities, products or services related to conventional banking, insurance and financial services,
gambling, alcoholic beverages and non-halal food products and also companies whose products
can cause illness, death, disease or even promote social ills such as tobacco. From an Islamic
perspective, the above industries are avoided as they represent elements that are forbidden by
Allah and the harmful effects of such products on mankind (Smart Investor, 2002).
The returns of Islamic unit trusts also avoid the incidence of riba or usury interest through
the process of cleaning or purification by the removal of such amounts representing the interest
element. In instances where a fund has inadvertently made profits investing in non-permissible
sectors, the fund will liquidate the investments. The proceeds of the gain will then be donated to
charities. Mohd Nasir (2000) mentioned in his paper that the Syariah principle of musharakah
acts as a base for Islamic unit trust whereby it is a participatory financing involving agreement
between the contributor of capital and the user. Therefore, the providers of funds or partners are
the unitholders in an Islamic unit trust.
A formal contract between the unit holders, capital or fund, profit, the offer, the acceptance
and the investment activities are also available within the practice of the Islamic unit trust. The
concept of al-wadiah yad dhamanah or guaranteed safe custody is involved in the operation of
the Islamic unit trust fund. Prior to the funds existence, the owners of assets are the investors,
custodian holder is the fund manager, and asset is the money invested. After the creation of the
fund, the owners of assets are the unit holders, the custodian is the trustee and the assets include
all assets of the fund. Besides that, the concept of al-baibithamin ajil is also practiced in the
Islamic unit trust whereby there is a transaction of buying and redemption of units of funds.
In this case, the purchase or redemption price is the managers forward selling or buying
price at the next valuation point when investors decide to buy or unit holders decide to redeem
their shares. Moreover, the valuation point is the price at the close of business for the day.
Nonetheless, based on al-wakalah principle, the price must be determined at the time the
contract of sale or purchase is executed. As a result, the current practice of Islamic unit trust does
not conform to the al-wakalah principle. Thus, it has been suggested that daily historical price
would be more appropriate in order to observe the Syariah principles (Shariff, 2002).

Apart from having the same standard criteria for other conventional unit trusts as explained
in the Securities Commissions Guidelines on Unit Trust Funds (1997), the Islamic unit 4 trust
funds must also meet the criteria as advised by the Securities Commissions Syariah Advisory
Council (SAC)2 . For example, the Islamic unit trust funds can only invest in securities approved
by the SAC. The trust funds are also required to appoint a Syariah committee or syariah
consultant who must be approved by the Commission. As at October 25th, 2002, the SAC has
approved 684 securities [543 approved securities as at January 2nd, 1999 (Arbi, 1999)] listed on
the KLSE and classified them as halal stocks thus can be bought by the Islamic trust fund
managers.

D) What is asset backed sukuk and asset based sukuk

Asset backed-sukuk involve granting the investor (sukuk holder) a share of a tangible
asset or business venture along with a corresponding share of the total risk (that is, a share
commensurate with this ownership). In this structure, there is a true sale transaction, where
the originator sells the underlying assets to a special purpose vehicle (SPV) that holds these
assets and issues the sukuk backed by them. The buyers of sukuk don't have recourse to the
originator if payments are less than usual. A true sale implies that the assets of the issuer will
not be added to the assets of the originator in the event of default and liquidation. The sukuk
holders must assume any losses in case of impairment of sukuk assets. Asset-backed sukuk
are, thus, closer to equity than debt, and for that reason are not so popular in the market of
sukuk offerings.
Asset-based sukuk, on the other hand, involve the issuer purchasing the underlying
assets and then investing, trading or leasing them on behalf the investors (sukuk holders),
using the funds raised through the issued certificates (sukuk). This structure, most often,
takes the guise of a sale-lease to the originator and is embedded with a binding promise
(wa'ad mulzim) from the originator to repurchase the underlying assets at maturity. In this
structure, the sukuk holders can only require the originator to purchase the underlying
assets. As such, the sukuk holders have an unsecured debt claim against the originator

embodied in the payment of the purchase price following an execution of the binding
purchase promise. This implies that sukuk holders don't have full recourse to the underlying
assets and the underlying assets are not used as collateral. Asset-based sukuk grant only
beneficial ownership to the sukuk holders, so that in case of default, the investor would be
left without any claim on these assets. In this structure, the originator typically transfers to
the investors only the beneficial ownership of the SPV issuer. But shari'a stipulates a transfer
of assets to sukuk holders. However, since investors have no recourse to the assets, the
structure doesn't pay any attention to the asset risk, but rather concentrates on the
creditworthiness of the sponsors of the sukuk.

Asset-Backed Sukuk

Asset-Based Sukuk

Issuer

SPV

Company

Process

Securitization of tangible assets

Securitization of receivables

Characterization

Equity-like

Debt-like

Sources of
payment

The revenues generated by the

underlying asset

The originator/obligor's cash flows

Sukuk holder's
ownership

Legal ownership with right to

dispose of underlying assets

Beneficial ownership with no right to

dispose of underlying assets

Recourse

Sukuk holders cannot recourse

to the originator (recourse only
to underlying assets)

Sukuk holders can recourse to obligor

(originator) if there is a shortfall in
payments

Shari'a nomination

Because of its equity-like

nature, this structure is
considered shari'a-compliant

This structure involves both ba'i aldayn and ba'i al-inah. Hence, it is not
compatible with shari'a