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NOVEMBER 2008

Legal Section

Structuring Sukuk Ijarah and Mudarabah


By Ahmad Lutfi Abdull Mutalip and Siti Fariza Edzua Jamaludin
DIAGRAM OF ISSUANCE OF SUKUK IJARAH AND SUKUK MUDARABAH

Shareholders

(4) Agreement to Sell


(1) Set up Mudarabah Venture
(5) Pay agreed price consideration

(6) Declaration of Trust


(2) Contribute Mudarabah Capital
Sukuk Mudarabah investors Issuer/ Mudarib/ Trust Asset Sukuk Ijarah
(Rabb al Mal) Lessee under the investors (Lessor)
Project
(3) Issue Sukuk Mudarabah
(7) Ijarah Agreement
(11) Distribute t he Distributable Profit
(8) Issues Sukuk Ijarah
(12) Purchase Undertaking (Sukuk Mudarabah)
(9) Pay Periodic Rental semi- annually

(10A) Sale Undertaking

(10B) Purchase Undertaking


(Sukuk Ijarah)

In this article, we examine the to fund the Mudarabah venture. the amount invested in the Mudarabah
issuance structure of a recent Sukuk venture. The assigned business under
issuance based on the Shariah principles Step 3 the Mudarabah venture shall be, at all
of Ijarah (leasing) and Mudarabah (d) The Mudarib shall issue the Sukuk time, developed, operated, managed
(profit sharing). Mudarabah to the Rabb al maal (also and represented by the issuer (as the
referred to as the Sukuk Mudarabah Mudarib).
SETTING UP A MUDARABAH holder), evidencing the Rabb al maal’s
VENTURE participation in Mudarabah ventures. LESSOR PARTICIPATION IN THE
(a) Pursuant to the concession MUDARABAH VENTURE
agreement, the issuer is set up to (e) The Sukuk Mudarabah shall (g) In order to carry out the assigned
undertake the assigned business. be represented by Global Sukuk business, the issuer, in the capacity of
Mudarabah Certificates evidencing Mudarib, shall also invite other investors
Step 1 the Sukuk Mudarabah holder’s to part finance the project.
(b) For the purpose of undertaking participation and beneficial interest in
the assigned business, the issuer shall the Mudarabah venture, hence entitling Step 4
invite the investors to participate in the the Sukuk Mudarabah holders to receive (h) In relation to the invitation, the
Mudarabah venture. Under this venture, the distributable profit i.e. the budgeted issuer and the investors shall enter
the issuer shall be the entrepreneur profit for the collection period based on into an agreement to sell, whereby
(Mudarib) whereas the investors shall the formula of profit equals budgeted the issuer shall sell to the investors
be the capital providers (Rabb al maal). revenue minus budgeted expenditure, (represented by the Trustee) the trust
subject to availability of the same. asset to be developed for an agreed
Step 2 price consideration and to be paid on
(c) The Rabb al maal shall contribute (f) The obligations of the Sukuk staggered basis. Pursuant thereto, the
financing capital (Mudarabah capital) Mudarabah holders shall be limited up to investors shall acquire the beneficial

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ownership of the trust asset. For the and expenses to be incurred before the Sukuk Ijarah plus the amount
purpose of the agreement to sell, the determining the exact periodic rental equivalent to the Periodic rental
issuer shall represent the Mudarabah under the Ijarah agreement. compensation on late payment
venture. (where applicable) and expenses
(n) In relation to the Ijarah incurred due and payable on such
Step 5 transaction, the lessor shall, at all times, date, whereby in this case, such
(i) Arising from the agreement to be represented by the trustee for the exercise price payable by the lessee
sell, whereby the issuer shall sell to the purpose of including, but not limited to, shall be set-off with the refundable
investors, the investors shall pay the first the execution of the Ijarah agreement, advanced periodic rental, if any, by
agreed price consideration. payment of periodic rental and the the lessor to the lessee; and
exercise of the sale undertaking and
Step 6 purchase undertaking (Sukuk Ijarah) (ii) during commercial operation
(j) The issuer shall subsequently make and the Mudarabah venture shall, at all of the trust asset, the lessee shall
a declaration of trust on the trust asset times, be represented by the Mudarib. acquire the beneficial interest of
in favour of the investors. The issuer the trust asset from the lessor at
shall declare that it shall only hold the PERIODIC RENTAL the exercise price, whereby in this
trust asset in trust for the investors and Step 9 case, such exercise price payable by
does not have any interest (beneficial or (o) Throughout the Ijarah period, the the lessee shall be set-off with the
otherwise) other than merely reflected issuer shall pay the periodic rental to refundable advanced periodic rental,
as the holder of the concession under the lessor according to an agreed fixed if any, by the lessor to the lessee.
the concession agreement. For the schedule.
purpose of the declaration of trust, the PROFIT DISTRIBUTION TO
issuer shall represent the Mudarabah (p) Notwithstanding the stage of SUKUK MUDARABAH HOLDERS
venture. construction, during the construction Step 11
period, the Issuer shall pay the periodic (s) Under the Mudarabah venture, the
Step 7 rental to the lessor under the principle Mudarib shall distribute the distributable
(k) The issuer shall then enter into an of Ijarah Mawsufah Fi Zimmah. The profit to the Sukuk Mudarabah holders
Ijarah agreement with the investors periodic rentals (payable during the based on an agreed profit sharing ratio.
(also referred to as the “lessor” and rep- construction period) are deemed as
resented by the trustee), based on the partial payment/advance rental over DISSOLUTION OF THE
principle of Ijarah Mawsufah Fi Zim- the aggregate periodic rental under the MUDARABAH VENTURE
mah (forward lease), whereby the lessor Ijarah agreement. Consequentially, the Step 12
shall lease the trust asset to the issuer future periodic rental to be paid under (t) Either upon each maturity of
within the Ijarah period. For the pur- the Ijarah agreement shall be reduced, the serial Sukuk Mudarabah or upon
pose of the Ijarah agreement, the issuer accordingly. declaration of any event of default, the
shall represent the Mudarabah venture. issuer shall acquire the interest in the
TERMINATION OF LEASE Mudarabah venture.
Step 8 Step 10(A) Upon completion of the
(l) The issuer (in its capacity as the purchase, the Mudarabah venture shall
lessee) shall issue Sukuk Ijarah to the (q) Upon expiry of the Ijarah agreement, then be dissolved.
lessor (also referred to as the Sukuk the beneficial interest of the trust asset
Ijarah holders). The Sukuk Ijarah shall shall be transferred back to the Mudarib/
be represented by Global Sukuk Ijarah lessee at a nominal value of RM1 at
certificates evidencing the lessor’s the end of the Ijarah period (i.e. upon
undivided proportionate beneficial redemption of the final Sukuk Ijarah) 14th Floor, Menara Keck Seng
interest in the trust asset and its right via an undertaking by the trustee in the 203, Jalan Bukit Bintang
to receive the periodic rental from the sale undertaking. 55100 Kuala Lumpur
issuer as the lessee. Tel: +603 2118 5000
Step 10(B)
(m) As the beneficial owner of the trust (r) Upon declaration of an event of Ahmad Lutfi Abdull Mutalip
asset, the lessor shall bear all cost(s) of default (Sukuk Ijarah): Partner
major maintenance including takaful/ (i) during the construction period, alam@azmilaw.com
insurance. In this regard, the issuer has the lessee shall acquire the beneficial
agreed to pay all the said cost(s) on interest of the trust asset from the Siti Fariza Edzua Jamaludin
behalf of lessor. The lessor shall take kessor at the exercise price i.e. the Associate
into consideration the future cost(s) amount of the nominal value of fariza@azmilaw.com

12 MIF© Monthly