The source is Todays Zaman, the author is Berk Cektir.
Sukuk under Turkish Law (1)
Author : Berk Çektir
http://www.todayszaman.com/tz-web/columnists-213661-sukuk-under-turkish-law.html
Aug 21, 2010
Islamic finance is growing in popularity and becoming a major financial instrument-setter in the world of finance. Innovative structures created one after another have triggered the ever-increasing trend towards Islamic finance.
Among these innovations is sukuk (sukuk is the plural form of “sak”), basically a trust certificate and commonly referred to as the general name for Islamic bonds that first appeared in Malaysia in 2002. Sukuk has not only been attracting the attention of Muslim investors trying to avoid interest gains but has also become a profitable investment tool for investors from Europe, North America and the Far East looking to diversify their portfolios and get a higher return and/or yield on their investments.
First of all, a sukuk transaction may be structured like a bond issue or a securitization scheme. Bond-like sukuk issues have been criticized by distinguished scholars as these structures may not fall into the permissible area drawn by the Quran: sunna (dictum/practice and decisions of the Prophet), ijma (consensus of the community of scholars) and qiyas (analogical deductions and reasoning). However, securitization, a structured finance technique born in the US in the early ‘70s that became a trillion dollar industry in less than 40 years, perfectly fits the needs of investors who want to comply with the rules of Islamic law while investing in a relatively safe instrument.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defined sukuk as certificates of equal value put to use as common shares and rights in tangible assets, usufructs and services or as equity in a project or investment activity. Sukuk are not debts of the issuer, they are fractional or proportional interests in underlying assets, usufructs, services, projects or investment activities. Furthermore, the underlying business or activity, and the underlying transactional structures (such as the underlying leases), must be Shariah-compliant (for instance, the business or activity cannot engage in prohibited business activities).
According to AAOIFI standards, sukuk must demonstrate:
* that any income arising must derive from the underlying activities for which the funding has been used, and not simply comprise interest;
* sukuk must be backed by real underlying assets and these assets must be Shariah-compliant in nature and be being utilized as part of a Shariah-compliant activity; and
* there must be full transparency as to the rights and obligations of all parties.
Sukuk structures are mainly built on traditional Islamic contract types such as ijara (lease), murabaha (cost-plus financing), mudaraba (where one party injects capital while the other puts in sweat equity), musharaka (where both parties contribute capital), istisna (where a manufacturer undertakes to manufacture a specific asset for a client), and so on. The most common Islamic contract type used for sukuk transactions is ijara.
An ijara sukuk structure basically works as follows: A single or a group of assets that are admissible for ijara contracts are selected. The originator creates a Special Purpose Vehicle (SPV) with a separate independent legal entity to whom it sells the asset(s) with the understanding that the originator will lease back the asset(s) from the SPV. Rent is negotiated and a term-specific lease contract is signed. The SPV then securitizes its assets by issuing ijara sukuk for sale to investors. The sukuk sale proceeds to provide funds to the SPV to pay for the asset(s) purchased from the originator. A rent-pass-through structure is adopted by the SPV to pass on the rents collected from the lessee to sukuk holders. At the expiry (or termination) of the lease deed the flow of rents would stop and ownership of the asset pool would be with the sukuk holders as a group. The sukuk contract embeds a put option to the sukuk holders that the originator is ready to buy the sukuk at their face value on maturity or the date of dissolution.
Next week, I will be giving details on Turkish sukuk law, which is a new chapter in the Turkish Capital Markets Law.
Sukuk under Turkish Law (2)
http://www.todayszaman.com/tz-web/columnists-213882-sukuk-under-turkish-law-2.html
Aug 23, 2010
On Monday I gave some basic information about Sukuk, a new chapter in Turkish capital markets’ law, and today I would like to go more in-depth and provide special insight into Sukuk under Turkish law.
On April 1, 2010, a communiqué (hereinafter referred to as the “Sukuk communiqué”) formed by the Capital Markets Board (SPK) was published in the Official Gazette and came into effect. The Sukuk communiqué includes provisions about certificates and Special Purpose Vehicle (SPV) instruments. These certificates are basically called “rent certificates” as the Sukuk communiqué is based on ijara Sukuk. The other structures may also be constructed under the Sukuk communiqué by way of analogy. The communiqué mainly aims to pave the way for Sukuk in Turkey.
It may well be argued that not only the scope of the structure, but also the liberty of the originator is relatively narrow in the Sukuk communiqué. For instance, the securities that have not been sold within the sales period may be sold in a years time, according to the conventional debt securities communiqué, while Sukuk that have not been sold within said period will be cancelled. SPK also has the right to scrutinize all the accounts and transactions of the originator and the SPV according to the Sukuk communiqué, while the first communiqué authorizes SPK to ask only for information and documents relating to debt securities and its financial situation.
It is difficult to understand why the originator would need to share information about all his or her accounts and transactions, including those which have no relation to the Sukuk issuance in question?
Most of the provisions in the Sukuk communiqué are expressly targeting investor protection. Obviously this is quite understandable; as we learned from the recent financial crisis that asset-backed securities may well be a trap for uninformed investors. However, I strongly believe that the originators also deserve some more attention in an undeveloped market in order to encourage corporations to issue capital markets instruments to bring the investor’s money to the market place.
Islamic finance, as a mode of financing which uses extraordinary ways to create known instruments, suffers from many tax provisions throughout the world. Islamic finance-friendly jurisdictions, such as the UK, have amended their tax laws in order to create an environment where instruments of Islamic finance are treated equally with conventional ones. This means that these instruments can still be competitive against similar conventional instruments in these jurisdictions. There is also much debate going on in countries like Germany and France about clearing up any obstacles in the way of Islamic finance.
Let us examine how the structure stipulated in the Sukuk communiqué works from a tax point of view. The originator sells the property to the SPV. There may be a tax burden for the gained value on the originator. The SPV rents the property back to the originator. The SPV will probably pay tax on its rental revenue, as it is ambiguous as to whether or not it will get any tax relief because of its payments to the investors. At the end of the rental period, the SPV shall sell the property back to the originator. If the SPV sells the property with the price it paid at the beginning, there will not be any tax burden on the parties, but then the tax authorities will be following the matter as it may not be in compliance with the arm’s length principle. And, so on and on…
There is no way that Sukuk can be competitive in an environment where there is a large tax burden on the originator. In these conditions, no corporation would be willing to issue Sukuk in order to raise debt from capital markets. One should remember that financing projects through bank credits, syndicated loans or conventional debt securities is still cheap.
I do strongly support SPK’s effort to bring innovative structures to Turkish financial markets. However, we obviously need to do some more thinking on these issues before moving ahead.
