THE COMPREHENSIVE DESCRIPTION OF SUKUK-BBA
By: Agus Ridwan, SE, MM.
President of IBSID
Nowadays there are many Islamic securities namely Sukuk BBA, Cagamas Mudharabah bond, Sukuk Ijarah, Sukuk Musyarakah etc.
Every security has the strength and weakness. The purpose of creating that securities is to help Islamic investor and entrepreneur to get the fund with the sales bonds that suitable with the Islamic law.
One of the interesting bonds above is the Sukuk BBA ( Ba’I Bithaman Ajil ).
This Sukuk is issued by the company who want to get the fund in sales product that based on the Ba’I Bithaman Ajil contract. This sukuk is very interesting to be analyzed because many people doing the Ba’I Bi Thaman Ajil transaction nowadays.
What is the Sukuk BBA , how creating that Sukuk , how about the price mechanism, what is the risk and return of that sukuk etc all of that questions are very interesting to be analyzed and explaned.
The objective of this paper is to give the comprehensive description abou Sukuk BBA to the Islamic society in order to have the interest to joint in Islamic Money and Capital Market. So, the Islamic economy will develop progressively to increasing the Islamic society welfare.
Based on that reason above, the tittle of this paper is The Comprehensive Description of Sukuk-BBA
II. Problem Statement
In this paper, the problem statement that will be analyzed are :
a. Definition of Sukuk BBA
b. The Purpose and Reason of Creating Sukuk BBA
c. The Proses of Sukuk BBA Creation
d. The Salient Feature of Sukuk BBA
e. Parties of Sukuk BBA Instruments
f. The Obligation of Parties of Sukuk BBA
g. The Right of Parties of Sukuk BBA
h. The Cost of Creating The Instruments to the Issuer
i. The Cost of Holding The Instruments to the Subcriber
j. The Risk and Return to The Sukuk BBA Issuer
k. The Risk and Return to The Subcriber
l. The Other Cost Elements
m. The Instrument and the Proses of Trading of Sukuk BBA in Financial Market
n. The Secondary Market of Sukuk BBA
o. The Pricing Mechanism of Sukuk BBA
p. The Official Guidelines for Sukuk BBA Establishment
III. Analysis and Explanations
3.1. Definition of Sukuk BBA
According to Ghani (2003) Sukuk BBA is a Arabic word that means financial certificate based on Bai Bithaman Ajil Contract that prove the ownership right of investor to the determining assets.
Sukuk BBA is not a bond because bond shown the debt. But Sukuk BBA is an obligation that shown the financial obligation as a receivable paper.
In classical period Islam Sakk (sukuk) – which is cognate with the European root “cheque” (which itself derives from Persian)- meant any document representing a contract or conveyance of rights, obligations or monies done in conformity with the Shariah. Empirical evidence shows that sukuk were a product extensively used during medieval Islam for the transferring of financial obligations originating from trade and other commercial activities.
The essence of sukuk, in the modern Islamic perspective, lies in the concept of asset monetisation – the so called securitisation – that is achieved through the process of issuance of sukuk (taskeek). Its great potential is in transforming an asset’s future cash flow into present cash flow. Sukuk may be issued on existing as well as specific assets that may become available at a future date.
And in the general definition Sukuk are :
The securities that comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest.
3.2. The Purpose of Sukuk BBA Creation
The purpose of sukuk creation is to change the conventional obligation that using fixed interest rate that be forbidden by Islamic Law so Islamic Economic can be develop without mixing Riba variable.
Sukuk BBA created to service the needed of working capital , or to re-finance existing debt, or use in the transportation sector (especially in the shipping and aircraft sectors), real estate, construction and petrochemical projects in several countries.
3.3. Creating Proses of Sukuk BBA
The Creating Proses of Sukuk BBA is upon an accelerated Murabaha principal plus the profit payment from the obligor, the Certificate/Sukuk Holders receive the remaining sukuk principal and any accrued coupon.
For example : The issuer will sale the basic assets to the investor with cash pricing fo example RM 10,000. and then buy back again with credit way amount to RM 1000. Its means the issuer has debt to the investor amount to RM.11,000. And for approving that debt, the issuer will issue Sukuk BBA to the investor
3.4. Sukuk BBA Salient Features
One of the Salient Features of Sukuk BBA is almost all the people doing the Bai Bithaman Ajil activities in every transaction nowadays. So its very good situation that can be supporting of Sukuk BBA issuing. So Sukuk BBA become very interesting obligation that interesting society.
Actually, asset securitization represents a cost-efficient and flexible structured finance1 technique of liquidity transformation and risk transfer, which converts present or future asset claims of varying maturity and quality into tradable debt securities. The various methods of securitization have much to offer, but so far they have found only limited acceptance in Islamic finance due to religious restrictions on the sale and purchase of interest-bearing debt and legal uncertainty surrounding the enforceability of investor interest under Islamic jurisprudence. Over the last five years, the nascent Islamic securitization market has seen many positive
developments owing to the adoption of enabling capital market regulations, a favorable macroeconomic environment, and financial innovation aimed at establishing shariah compliance.
The other salient of Sukuk BBA is in selling cases where payment of price is deferred final price should be contractually agreed and known to both parties time and mode of payment should be ascertained no need to state the cost price and amount of mark-up (if disclosed also a murabahah).
3.5. Parties to the Sukuk BBA Instruments
Many parties of Sukuk BBA and One of them is Wakaf transaction in Malaysia, Trading Transaction etc.
As most Islamic bonds issued by companies today have been heavily structured using bay’ al-inah and bay’ al-dayn contracts and therefore less acceptable to some Middle-eastern investors, it can further frustrate attempts to attract the much need capital inflows especially middleeastern capital into the country when western sources are drying. It is therefore imperative to understand the underlying process of Islamic bond issuance in Malaysia, and to what extent it is not in line with the thinking of Middle-eastern jurists. It is urgent to find out the necessary steps taken by Malaysian companies to do away with these controversies so that they can source the much needed capital from the Middle-eastern investors.
3.6. Obligation of Each Parties of Sukuk BBA
Murabahah/BBA sukuk are just tradable in Malaysian domestic market or perhaps some regional markets that adopt the Malaysian fatwa on bay` al `inahand bay` al dayn .Its not suitable for global / GCC market. The obligation of each parties always based on the Ba’I Bithaman Ajil contract.
3.7. Right of Each Parties of Sukuk BBA
In Sukuk BBA, the Issuer of Sukuk have right to get fund from the Investor, meanwhile the investor have right to sale again that sukuk to another one to get the fund again with the profit addition .
If real value of Sukuk BBA is not suitable with the contract before so the investors have right to complaint and return back it to the issuer.
3.8. Cost of Creating the Instruments to the Issuer
The cost of creating the instrument to the issuer is depend on the value of that Sukuk BBA its self. And its become the responsibility of the issuer. In this case, the cost of it consist of the launching cost at the primary market, promotion cost, distribution cost and so on.
3.9. Cost of Holding the Instrument to the Subscriber
The cost of Holding the instrument to the subscriber is being responsibility of the issuer of Sukuk BBA. The cost of it is depend on the amount of the sukuk. In reality, the cost is very relative according to negotiation between the issuer and the investor.
3.10. Risk and Return to The Sukuk BBA Issuer
The risk of the Sukuk BBA is changing available of the real price of the project. If the real project cost is higher than the sukuk BBA price its self, of course it will be the responsibility of the issuer.
The return of Sukuk BBA is produced by the price times to the total quantity of Sukuk BBA sales. And the value of Sukuk BBA is determined by the Cost of Goods Sales plus the profit determined.
In particular, most structured investments (i) combine traditional asset classes with contingent claims, such as risk transfer derivatives and/or derivative claims on commodities, currencies or receivables from other reference assets, or (ii) replicate traditional asset classes through synthetication or new financial instruments.
Financial globalization facilitates greater diversification of investment and enables risk to be transferred across national financial systems. Amid a compressed spread environment caused by the shortage of investment assets and abundant global liquidity, low risk premier have encouraged investors to seek higher yields from alternative investments. Securitization plays a special role in this context, as more institutional money is dedicated to emerging markets with underdeveloped local fixed-income markets. However, only very few structured credit transactions have been executed in countries where the compatibility of capital markets with Islamic law has required the development of shariah-compliant structures. Islamic finance is governed by the shariah, which bans interest and speculation, and stipulates that income must be derived as profits from shared business risk rather than guaranteed return.
Notwithstanding these religious constraints, Islamic finance can synthesize close equivalents to equity, mortgages, and derivatives known in conventional finance. To this end, it relies on structural arrangements of asset transfer between borrowers and lenders to emulate traditional interest-bearing financial contracts. Since lending transactions under Islamic law are based on the concept of asset backing and specific credit participation in identified business risk, it also appears relatively straightforward to structure a shariah-compliant asset-backed securitization (ABS) that delivers a risk-return profile similar to a conventional structures. However, conventional securitization was developed in non-Islamic economies and invariably involves interest-bearing debt.
3.11. The Risk and Return to The Subcriber
The risk of buying of Sukuk BBA for the subscriber is the changing the real price of the Sukuk BBA in the Secondary Market. If the sales price of the Sukuk BBA in the secondary market is lower than the purchasing price it self of course it the loose will be the responsibility of the subriber.
The return of Sukuk BBA for the subscriber come from the the earning of sales back in secondary market. In this case the total of return is the price of each Sukuk BBA times to the quantity of sales in secondary market. And the profit will be created when the price of purchasing back of that sukuk in secondary market is higher than the purchasing price before.
3.12. The Other Cost Element of Sukuk BBA
The other cost element of Sukuk BBA is the opportunity cost while the subscriber do not sale the Sukuk BBA in the good price at secondary market. And cost else for the issuer is the risk cost while the total of sales is not suitable as the target.
3.13. The Instrument and Process of Sukuk BBA Traded in Financial Market.
The instrument of the Sukuk BBA in Financial Market are (1) The Issuer (2) Investor (3) Government Institution securities (4) The project offered.
The process of Trading Sukuk BBA in Financial Market are :
The First : The issuer regist the Sukuk BBA to the Government Securities Institution
The Second : The issuer make the prospectus of the project offered and publicized in news paper and Primary Market.
The Fourth : The issuer of Sukuk BBA doing promotion and sales activities in the Primary Market
The Fifth : The investor doing buying activities in the Primary Market.
The Seventh : The investor will sale back the Sukuk BBA in the Secondary Market
3.14. The Secondary Market of Sukuk BBA
The Secondary Market of Sukuk BBA in determined institution that be place to doing sales and buy securities activities, for example in Indonesia there are Bursa Securities Jakarta, Bursa Securities Surabaya and so on.
3.15. The Pricing Mechanism of Sukuk BBA
The Pricing Mechanism of Sukuk BBA is :
The First : Determining the total cost of the project that will be financed by the Sukuk BBA.
The Second : Determining the total revenue that will be reached.
The Third : Determining the Cost of Goods Sales per one obligation
The Fourth : Determining the profit that will be reached per one obligation
The Fifth : Determining the Sales Price of Sukuk BBA by adding the Cost of Goods Sales with the profit per one Sukuk BBA obligation.
The Sixth : Register that Sukuk BBA to the Government Securities Institution with the
Primary Market Price
3.16. The Official Guidelines For Sukuk BBA Establishment
The official guidelines for Sukuk BBA establishment is issued by the government Islamic securities institution , syariah institution and central bank in every country.
For example in Malaysia there is the Kuala Lumpur Automated Clearing House as one of Islamic government institution that produced the guidelines for Islamic securities.
The guidelines consist of the regulations of the Sukuk BBA sales for example :the profit determined not more than 10% per each bond, The issuer must make the real prospectus of the project that will be financed by Sukuk BBA.etc.
Ghafar, Abdul, 2003. Islamic Money and Capital Market, Universiti
Kebangsaan Malaysia Press, Kuala Lumpur Malaysia.
Ghani,Mumin, 2006. Islamic Financial System :and Application in Malaysia, Percetakan
Nasional Malaysia Berhad.Kuala Lumpur Malaysia
“http://en.wikipedia.org/wiki/Sukuk Categories: Islamic banking
Jobst, Andreas.2007. The Economics of Islamic Finance and Securitization
International Monetary Fund WP/07/117