Raising Finance via Ijarah Sukuk (Islamic bonds)
A way of financing for preparation of capital asset of a special
purpose vehicle (SPV) (government, Municipality, or a private entity) is to
issue lease bonds. Lease bonds are securities whose holder jointly owns a part
of the asset the interests of which has been assigned to the user or SPV according
to a lease contract. In the leasing Sukuk, the right to use the interests of an
asset or aggregate of assets is transferred to another person (promoter) in
return for receiving the rental from the owner. Lease contract term is
specified and the renal may be paid at the beginning period, end of period,
with monthly, quarterly or annual maturities. Whereas such securities indicate
shared ownership of a person, they may be transacted at a secondary market and
at prices determined by the market factors.
The life period of financing through such bonds
is between 2 to 5 years.
The principal liability is repaid lump sum to
the holders of such bonds at the end of period. It is obvious that no profit is
accrued to the bonds after their expiration.
Payment of rental is made quarterly or
biannually, without grace period.
Holders have the option of getting access to
their money before the term of their certificate is up; in such case, the accrued
on-account profit will be calculated on daily basis until such date.
Legal Requirements & Conditions of Lease Bonds-Based Assets
Its application in the promoter’s activity,
leading to creation of cash flows or prevention of cash outflow
There should be no legal, contractual or
judicial restriction or prohibition for transference of the asset and its
There should be no restriction in its possession
and exercising ownership right for the intermediary institution.
Its ownership should not be on shared basis.
It may be assignable to a third person.
It should maintain proper and adequate insurance
coverage until transference of asset ownership to the issuer.
Types of Lease Bonds
Lease bonds may be classified from different bases:
On the basis of type of lease contract:
There are two types bonds: operational
lease bonds and hire purchase bonds.
On the basis of the type of promoter:
There are two types bonds: lease
bonds of ordinary companies and lease bonds of financial institutes (banks and
non-bank financial and credit institutes and leasing companies).
On the basis of the objectives of issuing
Asset Supplying Lease Bonds: Bonds through which
an intermediary institution purchases an asset (or aggregate of assets), and rent
out the same to a special purpose vehicle (SPV) on behalf of investor. The
procedure concerning such bonds is similar to activities carried out by the
leasing companies; the difference is that in the leasing companies, financial
resources is financed out of the company’s capital or in some limited cases,
through the received bank facilities; while in issuing such bonds, some funds
are collected from people upon issuing lease bonds.
Liquidity Supply Lease Bonds: Upon assignment of
bonds to people and collection of funds, the intermediary purchases an asset
(fixed intangible) from a special purpose vehicle (SPV) on behalf of such
people, then, hires out the same to promoter. This type of bond is based on
sale and hire.
Mortgage Lease Bonds: The companies with working
capital problem may partially resolve their financial problems by such bonds. Through
such bonds which are rather used by banks, leasing companies and
credit-providing institutes, the SPV (bank) sells to a third person
(intermediary) the facilities it has already paid in form of a hire purchase