KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

ISLAMIC CAPITAL MARKETS

(ECON 6862)

CASE STUDY:

THE INVESTMENT DAR (TID) : DEFAULT OF TID

GLOBAL SUKUK I LIMITED

PREPARED BY:

GUSTINA G0820164

SAKEEYAH MATEEYOH G0826296

IYLIA HANIS G0916656

SUTHINEE SUAYNGAM G0916798

SUBMITTED TO:

PROF. DATO’ DR. MOHD AZMI B. OMAR

SEMESTER I, 2010/2011
1) THE BACKGROUND AND PRINCIPAL BUSINESS OF THE
ORIGINATOR AND THE ISSUER

1.1) The background and principal business of the Originator

The Investment Dar Company (TID) was established in 1994 and started actual
operations a year later as one of the first shareholding companies in the Gulf
Cooperation Council (GCC) specialized in consumer Islamic finance. Since 1999,
TID established several new companies and acquired many others. The company's
diversified activities through three distinct phases. In the first phase, from
incorporation until 1999, TID was engaged almost exclusively in consumer financing
activities, mainly Sharia-compliant car financing. In the second phase, from 2000
through 2002, TID added real estate development and additional financing as well as
direct investment to its existing activities. In the third phase, 2002 until present, TID
restructuring its various existing businesses into separate and independent companies
and has retained overall control of each.

In 2007, the company led a consortium of local and international investors purchasing
the majority shares of the British prestigious cars producing company of Aston
Martin from Ford Motor. One year earlier, TID made the second largest Islamic
finance deal in the UK history when it acquired one of London's most historic
buildings, Grosvenor House Apartments.

Today, TID employs a staff of over 400, and is a diversified holding company with
interests in consumer finance, investment and investment management, asset
management, banking, real estate, insurance, consulting services and logistics.

As a result of its growth, TID is currently one of the largest finance and real estate
companies in Kuwait as well as in the GCC (the Gulf Cooperation Council). It has
achieved such growth while continuing to adhere to principles of Islam in all of its
activities. Moreover, TID was the first Sharia-compliant company to obtain the ISO
 9001 International Quality Standards Certification in 1999, which was upgraded to
ISO 9001:2000 in 2005.

Being listed in Kuwait Stock Exchange market (KSE), and its operations are based
predominantly in Kuwait and partly in the other GCC states. As of the date of this
offering circular, TID has an issuer rating of A- by ICRA Limited, an Asian Associate
of Moody’s Investor Service, and BBB- long term rating by Capital Intelligence.

TID’s main activities by sector are:

1. Investment & Assets Management:

TID invests directly in subsidiaries and associated companies whether these

companies are newly established by TID or acquired. These investment activities are
performed by TID’s holding company and its affiliates Al Madar Finance &
Investment Company (Al Madar) and Al Dar Asset Management Company (ADAM),
who collectively maintain a diversified portfolio of shares, listed on the Kuwaiti
Stock Exchange, for trading. Moreover, the business activities cover assets and
investments management in all international, Arab and local markets.

Consumer Finance:
TID’s affiliates Wared Lease & Finance (Wared), and Al Madar engage in finance
activities by offering a wide range of financing and leasing solutions to customers at
every stage of their life cycle. The company’s diverse range of products include a
host of personal and business finance solutions, insurance, investment and operating
leases.

Wared is the main provider of consumer financing, and it strives to tailor products
according to its customer needs, with a personal income as prime consideration.
 Wared has several subsidiaries in the vehicles leasing and services industry, including
Autociti and Drive Car Rental.

Al Madar is the main provider of real estate financing and has been active particularly
in Kuwait where the government has recognized it for its assistance in addressing the
chronic housing shortage problem.

Investment services and other fee based services

Investment and other fee-based services are comprised of asset management, project
management and debt collection and ratings services, which are mainly provided by
TID’s affiliates ADAM, Proman Project Management Company (Proman) and Credit
Rating & Collection Company (CRC) respectively.

Asset management is mainly a fee generating income activity provided by ADAM

and includes portfolio management, funds management, private placements and
advisory fees. Proman is a limited liability Kuwaiti company established with the
objective of project planning and management, cost control, project structuring and
development. In addition, Credit Rating & Collection (crc), the company aims to
assist other companies and corporations in recovering their debts from the market,
enabling them to focus more on their specialized business. CRC also provides risk
management and debt recovery services, protecting the banking and commercial
process by fulfilling the cycle of unpaid debts. It is the first listed company in the
region that provides professional credit rating services and the first credit rating
agency licensed in Kuwait.

2. Real Estate
Real estate activities are primarily provided by TID’s affiliates Manazel Holding
Company (Manazel), Al Dar National Real Estate Company (ADNREC), Oqyana
Real Estate Company (Oqyana) and Khabary Holding Company (Khabary) and
include real estate investment, real estate trading and large real estate projects.

Real estate investment are mainly real estate project development where TID, acting
through one of its subsidiaries or associates, acquired either an existing property or a
plot of land and engage in development of construction of residential or commercial
properties. Furthermore, TID engage in real estate trading by investing in plot of land
and properties either through purchase from the market or by auction and then
typically acts such properties within three month if the acquired asset was a plot of
land or a built property. Since 2004, TID has also focused on participating in very
large real estate developments both in Kuwait and in the GCC region.

1.2) The background and principal business of the Issuer

TID Global Sukuk I Limited was incorporated as an exempted limited liability

company in The Cayman Islands on 1 June 2006, and as is registered office at the
offices of Maples Finance Limited, Queensgate House, South Church Street, P.O.
Box 1093 GT, George Town, Grand Cayman, Cayman Islands with Registration
number 168 167. The Issuer has been formed solely for the purpose of issuing the
Sukuk and entering into the Musyarakah and, in this respect, participating in the
transaction and activities contemplated by the Transaction Document. Moreover,
pursuant to the terms of the Transaction Documents, the Issuer may not issue any
securities other than the Certificate or otherwise incur in any indebtedness, except as
contemplated in the Transaction Document. Besides that, the issuer has no
subsidiaries.

2) WHY DID THE ISSUER DECIDE TO SELECT A PARTICULAR SUKUK

STRUCTURE?

The issuer decide to select a particular sukuk structure ( Sukuk Musharakah) because
is to utilize the capital contribution to earn profit, through entering into Islamic
financing arrangements with clients of The Investment Dar Company K.S.C.
Moreover, under the Musharakah, each of the Issuer and TID shall have an undivided
interest in the Musharakah Assets, subject to the sharing of profit and bearing of
losses, pursuant to the terms of the Musharakah Agreement.

3) DESCRIBE AND EXPLAIN THE SUKUK STRUCTURE AND ITS MAIN

FEATURES.

Sukuk Musharakah: financing under which both the investors and the client/
contractor must contribute capital either in term of cash or asset. These are investment
that represents ownership of Musharakah equity. The profit distribution is negotiable,
while in case of losses, both parties will loss in proportion to the size of their
investment pursuant to the terms of the Musharakah Agreement. The purpose of
Sukuk Musyarakah are use to mobilize funds to establish new projects, or to develop
an existing one, or to finance a business activity on the basis of partnership contracts.
The main features of Sukuk Musyarakah are flexibility of application, prospect of
higher than average returns without significantly higher risks. Moreover, it can be an
excellent mode of finance particularly for short term transactions.
 Musyarakah Sukuk structure (TID global sukuk I):

Pursuant to the Musharakah Agreement, TID and the Issuer agree to enter into the joint
venture, or Musharakah, established pursuant to the terms of the Musharakah Agreement.
The Musharakah will commence on the date of the Musharakah Agreement and will
terminate on the date falling five years and six months of the Musharakah End Date. TID
and the Issuer have appointed TID to act as the Management Agent of the Musharakah
for the purpose of servicing agency that include: maintenance, collections, insurance,
Operating Account, Musharakah revenues, Musharakah Accounts, Taxes, Authorisations,
Marketing and Business Plan. The Management Agent have no right or authority to
imposed any obligation or liability on either Musharakah Partner in connection with the
Services, save as expressly set out in the Management Agreement. In addition, the
Management Agent shall provide the Services in accordance with all applicable laws and
regulations, with the degree of skill and care that it would exercise in respect of its own
assets, and in a manner that is not repugnant to Sharia.

In consideration for acting as management agent, the Issuer and TID shall pay the
Management Agent an initial fee of US$100 (payable on the Closing Date) and Incentive
Fees in respect of any Accounting Period, the Musharakah Accounts show a Net Cash
Profit payable to the Issuer greater than the Periodic Distribution Profit Amount.

The SPV Company (TID Global Sukuk I Limited) as an Issuer will enter into a
Musharakah agreement with the Investment Dar Company K.S.C (TID) as an Originator.

1. The SPV Company issues the Musharakah Sukuk from the Sukuk holders of
US$150,000,000 Trust Certificates (Sukuk al-Musharaka).

2. Sukuk Holders will proceed with cash US$150,000,000 to the Issuer.

3. The SPV Company will contribute 48.78% of the capital in cash to the
Musharakah Joint Venture for the purpose of purchasing specific assets on the
basis of Sharikat al-Melk.

4. Investment Dar Company will contribute 51.22% of the capital in-kind in the
form of vehicles and real estate, on the basis of Sharikat al-Melk which will be
valued at their actual value.

5. The amount of US$307,500,000 of the underlying assets will invest in accordance

with purchasing specific asset.

6,7. Profit will distribute among the partners (SPV and Investment Dar Company) in
proportion to their respective capital contribution. In case the profits exceed a certain
percentage agreed upon in the management agreement, the Manager is entitled to
such excess amount as a bonus in consideration for its good management.

8. SPV pays the coupon payment to the Sukuk holders.

Country Kuwait

Sukuk Name TID Global Sukuk I ( Sukuk Al-Musyarakah)

Name of Issuer TID Global Sukuk I Limited, a Cayman Island exempted limited
liability company

Principal activities The issuer has been form solely for the purpose of issuing sukuk
of issuer and entering into the Musyarakah and participating in the
transaction and activities contemplate by the transaction document

Name of The investment Dar Company K.S.C (TID), a Kuwait

Originator/Obligor shareholding company

Principal activities 1) Investment

of Originator /
Obligor 2) Finance

3) Investment and other fee-based services

4) Real estate

Date of Issue 20th September 2006

Issue size US$150 million Trust Certificates

Tenor (years) 5 years and 6 months ( due 2011)

Issue Price 100 per cent of the aggregate principal amount of the certificate

Listing Status Dubai International Financial Exchange (DIFX)

Shariah Principle Sukuk Al-Musyarakah

Used sukuk
issuance

Rating The issuer rating of A- by ICRA Limited, an Asian associate of

Moody’s Investor Service, and a long-term rating of BBB by
Capital Intelligence.

Profit/Coupon Years 1-3: 6-month LIBOR + 125 bps p.a.

Years 4-5: 6-month LIBOR + 175 bps p.a.

Profit / Coupon Semi-annual coupon payment

Payment Frequency

Underlying/ Type of asset: Vehicles and real property

Identified assets
Value of underlying asset: US $157,500,000

Location: Kuwait

Purpose of Issue / The objective of the Musyarakah is to utilize the capital

Utilization of sukuk contribution to earn profit, through entering into Islamic Financing
proceeds arrangements with clients of TID in accordance with business plan
 Historical Graph

Historical Chart

Month 2007 2008 2009 2010

Jan 5.4014% 4.5963% 1.7500% 0.42969%
Feb 5.3723% 3.0413% 1.6600% 0.38438%
Mar 5.3212% 2.9313% 1.8031% 0.38688%
Apr 5.3581% 2.6144% 1.7356% 0.44438%
May 5.3844% 2.9650% 1.5650% 0.53063%
Jun 5.3817% 2.9106% 1.2400% 0.75188%
Jul 5.3863% 3.1088% 1.11125% 0.75250%
Aug 5.3269% 3.0838% 0.92500% 0.66781%
Sep 5.5350% 3.1175% 0.75500% 0.49669%
Oct 5.1325% 3.9813% 0.62875% 0.46250%
Nov 4.8063% 3.1213% 0.56438%
Dec 4.9100% 2.5913% 0.48813%
In the case of TID, during the first 3 years the coupon/profit rate is 6-month LIBOR +
125 bps per annum. For example in September 2007, LIBOR rate is 5.5350%. Thus, the
coupon for TID’s sukuk is 5.5350% + 1.25% = 6.785%

The coupon/profit rate during the following years is 6-month LIBOR + 175 bps per
annum. For example in September 2008, LIBOR rate is 3.1175%. Thus, the coupon for
TID’s sukuk is 3.1175% + 1.75 = 4.8675%

4) IS THIS SUKUK ASSET-BASED OR ASSET-BACKED? EXPLAIN.

Sukuk musyaraka issued by TID is an asset-based sukuk. There is no real

ownership in the Musharaka Assets by the certificate holders. This is clearly stated
in the Covenant that under no circumstances shall the Trustee or any
Certificateholders have any right to cause the sale or other disposition of any of the
Trust assets, except pursuant to the Purchase Undertaking.

The sole right of the Trustee or any Certificateholders against the Obligor shall be to
enforce the obligation of the Obligor to pay the Exercise Price or Early Redemption
Amount thereunder.

Moreover, the nature of the sukuk is limited recourse. Sukuk holders have no
rights to any assets of the Obligor in the event of any shortfall in the expected
amounts from the trust assets.
 Finally, the existence of purchase undertaking, in which the Issuer has the right
to enforce the Obligor to purchase the Issuer’s Units at the Dissolution amount or
Early Redemption Amount, as the case maybe.

1) DESCRIBE THE RISKS INVESTORS MIGHT FACE IN INVESTING IN

THIS SUKUK. WHAT ARE THE RISK MITIGATIONS MEASURES
PROVIDED BY THE ISSUER TO INVESTORS?

a) Risks Related to the offering

1) Certificates are limited recourse obligations

• Represents entitlements solely to the Trust Assets.

• Recourse to the Issuer is LIMITED to the Trust Assets and proceeds of

the Trust Assets are the sole source of payments on the certificates.

• In the event of dissolution, the only remedy available to sukuk holders

will be for the Issuer to exercise the option under the Purchase
Undertaking to require the Obligor to purchase the Issuer’s Units at the
Dissolution amount or Early Redemption Amount, as the case maybe.

• Sukuk holders will otherwise have NO RECOURSE to any assets of

the Obligor of the Management Agent ( to the extent each fulfills all
its obligations under the Transaction Documents to which it is a party),
the Joint Lead Arrangers or the Agents or the Agents or any affiliate of
any of the foregoing entities in respect of any shortfall in the expected
amounts from the trust assets.

• The Issuer, as the trustee for the benefit of the sukuk holders, will have
DIRECT recourse against TID to recover payments due to the Issuer
from TID.
 • Nevertheless, there can be no assurance that the net proceeds of the
realization of, or the enforcement with respect to the trust assets will
be sufficient to make all payments due in respect of the certificates.

2) No public market for the sukuk

• Sukuk are NEW issues of securities and currently, there is no available

market for the certificates.

• An active trading market is not expected to develop for the sukuk or

that such market will last if established.

• Sukuk holders may not be able to sell or trade their certificates at a

price that reflects thier full value.

3) Risk of emerging markets such as Kuwait

• These markets may be subject to significantly more risks than

developed markets, including legal, economic, regulatory and political
risks.

4) Difficulties in enforcing foreign judgments in Kuwait

• The court of England have jurisdiction to settle any dispute arising

from the Certificates.

• No treaty between Kuwait and the UK for reciprocal enforcement of

judgments.

5) Difficulties in enforcing foreign judgments in the Cayman Islands

• The courts of the Cayman Islands will recognize a foreign judgment as

the basis for a claim at common law in the Cayman Islands provided
such judgment:

i. Is given by a competent foreign court;

ii. Imposes on the judgment debtor a liability to pay

liquidated sum for which the judgment for which the
judgment has been given;

iii. Is final;

iv. Is not respect of taxes, a fine or a penalty; and

 v. Was not obtained in a manner and is not of a kind the
enforcement of which is contrary to the public policy of
the Cayman Islands.

b) Risks related to TID Group

1) There is no assurance that TID Group’s financial performance can be

sustained in the future

• Kuwait stock Exchange has experienced an approximately 13%

decline in its index value since beginning of 2007. It is a steep change
from proceeding years of constant growth.

• Further decreases or volatility in the KSE or in other regional markets

may adversely affect the results of operations of TID Group.

2) Credit risks

• Arise from general deterioration in local or global economic

conditions, from systemic risk within financial systems or from
deterioration in the credit quality of specific issuers.

• TID’s trade receivables are considered the asset most vulnerable to

credit risk. Unforeseen events could trigger a decline in the
creditworthiness associated with a transaction, resulting in a decline in
the value of TID’s assets and requiring an increase in TID’s
provisions.

• RISK MITIGATION: Management of Exposure to Doubtful Debt.

• The applied credit policies include the insistence on the provision of a

guarantee and the setting up of direct debit arrangements for
repayments.

3) Market risks

• This risks includes interest rate risk and foreign exchange risk.

• Changes in interest rates may affect the margin realized between

TID’s investment and borrowings.

• Changes in foreign exchange rates may affect the values of TID’s

investment and trading portfolio.

• For Kuwait, the importance of foreign exchange flows goes back to

the pre-oil period, when it was even then tied to both trade and
 investments. The small Kuwaiti economy depends heavily on imports
of goods and services, and although the trade balance in goods and
services has traditionally registered surpluses, the private sector
balance has consistently been in deficit.

• For example the surplus in the balance of trade in goods and services
during 1988 was estimated at KD 2.45 billion. Yet the total imports of
goods were estimated at about KD1.92 billion. Normally, the gap in
private sector transactions with the rest of the world is more than
offset by the surplus of the public sector, but the past year (1990) has
been exceptional.

• RISK MITIGATION: TID employed interest rate swaps as a

method of hedging, whereby TID and another company located in
different country agree to exchange or swap debt-servicing
obligations.

4) Operational risks

• Potential for financial and reputational loss arising from a breakdown

in internal controls, oprational process or the various system that
support them.

• Includes human errors, criminal acts and natural disasters.

• RISK MITIGATION :

(i) Internal risk: establishment of effective seggregation of

responsibilities, infrastructure and controls within TID.

(ii) External risk: anticipating the occurrence of adverse events,

preparing contigency plans, and implementing sound back-up
system.

5) Liquidity risks

• TID may be unable to meet commitments associated with financial

instruments when they fall due.

• RISK MITIGATION: dealing with reputed counterparties,

diversifying its investment and matching maturities of financial assets
and liabilities.

6) Legal and regulatory changes

• Changes in Kuwait’s regulatory regime may have material adverse

effect on the results of operations of TID.
 7) TID is in a competitive environment

• TID competes with global and local specialist investment

management companies, banks and financial service companies.

• A failure to compete effectively may result in the loss of exixting

clients, as well as missing oppoturnities to capture new venture.

RISK MITIGATION

TID employed Ernst & Young Kuwait in order to produce regular reporting on risk
management. It is very fundamental to obtain an independent and professional advice
on different risk management issues (eg: credit concentration, general makrket risk,
credit policies, foreign currency, economic sector, etc).

The consultants provided TID’s board of directors (BOD) with a monthly report
addressing the findings of their review and suggesting mitigating actions. The
board’s recommendations are then passed on to the Investment Directorate as well as
other relevant departments.

Investment Directorate is mainly responsible for investing part of TID’s funds in

different sectors. Among the main duties are :

• Reseaching and addressing investment opportunities

• Establishing and managing specialized investment funds

• Managing investment portfolios

• Monitoring existing investments and preparing the required

performance analysis reports along with necessary
recommendations.
2) EXPLAIN HOW THE ISSUER PROPOSES TO PAY OR DISTRIBUTE
PERIODIC PROFIT/COUPON TO INVESTORS IN THE EVENT THAT
THE ACTUAL EARNINGS FALL SHORT OF EXPECTED EARNINGS
AS WELL AS WHEN ACTUAL EARNINGS IS HIGHER THAN
EXPECTED EARNINGS.
(i) Actual earnings fall short of expected earnings.
• The issuer proposes that sukuk holders will have no recourse for the
payment of any amount owing in respect of the certificates against the
Trustee (other than the trust Assets) or the Trust in respect of any
shortfall in the expected amounts from the Trust assets.
• However, each of the management agent and the Obligor is obliged to
make payments under the Transaction Documents to which it is a party
directly to the Issuer, and the Issuer, as trustee/agent for and on behalf
of the sukukholders will have direct recourse against the Obligor to
recover payments due to the Issuer from the Obligor.
• The proceeds of the enforcement with respect to the Trust Assets may
not be sufficient to make all payments due in respect of the
certificates. If, following distribution of such proceeds, there remains
a shortfall in payments due under certificates,subject to Condition 9
and Condition 12, no sukuk holder will be able to petition for, or join
in any other person in instituting proceedings for the winding up of the
Trust or directly against either the Management Agent or the Obligor
as a consequence of such shortfall.
• TID as the Obligor does not establish any Reserve Acount in order to
cover any shortfall of periodic distributions due to the sukuk holders

(ii) Actual earnings is higher than expected earnings.

• The Management Agent is entitled to certain fee (Incentive Fees)
when, in respect of any Accounting Period, the Musharaka Accounts
 show a Net Cash Profit payable to the Issuer greater than the Periodic
Distribution Profit Amount.
• According to AAOIFI under Musharaka venture, any excess profit
should be distributed proportionatley according to profit sharing ratio
between partners. Thus pursuant to a Tanazul (waiver), the holders of
the Sukuk Musharaka will amongst themselves agree from the outset
that they shall waive any profit from the Musyarakah Venture in
excess of the expected profit rate based on the agreed profit sharing
ratio. Any loss in the Musyarakah Venture shall be shared between the
holders of the Sukuk Musyarakah in proportion to their capital
invested in the MusharakaVenture.
• If the active partner demands an ‘Incentive fee’ due to its performance
in managing the venture, it should be clearly stated upfront in the
agreement that the active partner shall contribute a marginal capital to
the musharaka venture (since the profit/loss ratio is based on capital
contribution ratio in the case of TID).

3) WERE THERE ANY SALE AND/OR PURCHASE UNDERTAKING IN

THE STRUCTURE? WHY DID THE STRUCTURE CONTAIN
PURCHASE AND SALE UNDERTAKING?

Usually, the sukuk based have the sale or purchase undertaking. The reason to have sale
and / or purchase undertaking is to mitigate the credit risk and default event. If the
defaults occur, the investors can exercise option to sale or purchase undertaking.
According to same literature, under purchase undertaking, generally, the obligor
undertakes that. In this case, TID as obligor act like that. In the maturity date, the issuer
(TID Global Sukuk I Limited) exercising its option to oblige the obligor to purchase all
or part of the issuer’s units, the obligor will purchase the issuer’s interest, in such unit
then held on all assets at the dissolution distribution amount.

The issuer may exercise the option:

a. In respect of all of the units, following the occurrence of a dissolution event.

 b. (i) in respect of five units, on each date falling no later than three business days
and no earlier than five business days, prior to each periodic distribution date at a
specified price, (ii) in respect of the balance of the issuer’s units at the dissolution
distribution amount, on the date falling no later than three business days and no
earlier than five business days prior to the final maturity date ( in each case
regardless of whether or not a dissolution event has occurred or is continuing on
that date).

4) EXPLAIN THE UTILIZATION OF COLLATERAL AND SECURITIES IN

THE SUKUK. DID THE ISSUER OFFER ANY COLLATERAL OR
SECURITIES TO BE CHARGED OR ASSIGNED? WAS THERE ANY
GUARANTEE GIVEN TO INVESTORS IN CASE OF DEFAULT?

In Islamic law, collateral is not compulsory for the musharaka contract. However,
collateral is important to protect the provider of fund from any misconduct. According to
handbook of Islamic Bank, generally, there are some purposes of collateral in Islamic
contract, as follow:

1.Collateral and securities are used in sukuk to ensure rental payment, or we can say to
against misuse of the leased assets by the lessee ( in case in the ijarah contract).

2.Usually, underlying assets used as collateral to make sure the investor get their money
back if the originator default.

3.Sometime, reserved account also use as collateral to ensure or getting confidence/ trust
from the investors.

According to this case musharaka agreement between TID Global Sukuk I Limited and
The Investment Dar Company, there is no collateral and securities in this sukuk.
Moreover, in case of default, there is no guarantee to investors since in this agreement
does not have collateral. Certificates holders are not guaranteed that they will receive
their periodic distribution profit. Other from that, issuer and Obligor did not establish any
Reserve Account in the case of shortfall in the profit. This is clearly stated in the
prospectus and since the certificates is LIMITED RECOURSE, sukuk holders will have
no direct recourse against the Issuer or the Obligor. Therefore, the only possible remedial
action for sukuk holders in the event of default is to exercise their rights in the Purchase
Undertaking, by obliging the Obligor to redeem all the Certificates at Dissolution
Distribution Amount.
 5) EXPLAIN THE MECHANISM AND VALUATION OF TRANSFER OF
ASSETS UPON MATURITY OF THE SUKUK AS WELL AS WHEN AN
EVENT OF DEFAULT HAS OCCURRED.

The explanation divided by two part, at the maturity date and at the default time.

1.In The Maturity Date Of Sukuk

TID Global Sukuk I Limited has 5 year tenor plus 6 month after the date of this
agreement ( Musharaka Agreement). If the maturity date, the certificates will be
redeemed by the Issuer on the Scheduled Dissolution Date at the Dissolution
Distribution Amount and the Trust will thereafter be dissolved in sequence of the
Musharaka JV. In this prospectus stated that Dissolution Distribution Amount equal to
aggregate nominal value of certificates then in issue and not redeemed or otherwise paid
plus any unpaid periodic distribution.

2.Occurence Of Event Of Default

According to what the agreement between TID Global Sukuk I Limited and The
Investment Dar Company, in the event of default, the sukuk holders or investors cannot
go directly to the assets since the assets is does not belong to them (LIMITED
RECOURSE). What the certificates holders can do is to exercise their rights under
Purchase Undertaking, by obliging the Obligor to redeemed all the Certificates at
Dissolution Distribution Amount.

6) EXPLAIN THE EVENTS LEADING TO THE SUKUK DEFAULT AND

THE REASONS FOR THE DEFAULT. WILL THE INVESTORS BE
ABLE TO RECOUP THEIR INVESTMENT? EXPLAIN.

The events leading to the sukuk default are the economic crisis (the subprime mortgage
crisis) and failing to make a coupon payment. Firstly, the subprime mortgage crisis is an
ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage
delinquencies, foreclosures, overheating of real estate and debt markets, and failures in
CDSs and more generally in reverse trading in The United States, with major adverse
consequences for banks and financial markets around the globe. After U.S. house prices
peaked in mid-2006 and began their steep decline thereafter, refinancing became more
difficult. Due to declining in the price of the houses, the company got loss and failed to
pay a periodic distribution amount or the coupon to the certificate holders. Moreover, the
default has continued unremedied for a period of 14 days. After that The Investment Dar
and TID Global Sukuk I Limited have been negotiated with debt holders restructuring
plans that could give them fresh loans to refinance debt repayment or reschedule
payments. The company was seeking to borrow up to $1billion to refinance debts and
also sold some of its assets to meet its obligations.
By the way, if this sukuk default, the investors or the certificate holders will have no right
to claim directly. Furthermore, they also have no recourse to any assets of the Issuer.
However, Management Agent and the Obligor is obliged to make payment under the
Transaction Documents directly to the Issuer, and the Issuer as agent for and/or on behalf
of the Certificate holders appoint to replace the Trustee pursuant to the Declaration of
Trust transferring to the Certificate holders.

7) EXPLAIN WHETHER THIS SUKUK MEETS THE REQUIREMENTS OF

THE AAOIFI FEBRUARY 2008 SUKUK PRONOUNCEMENT AND
OTHER AAOIFI STANDARDS

Sukuk Al-Musharakah of the TID Global Sukuk I Limited was certified following
on the basis of Sharikat Al Melk. It also met the requirements of AAOIFI standards. Post-
pronouncement of AAOIFI February 2008 (sukuk); however, has affected directly to the
sukuk, especially Sukuk Musharakah. According to the Shari’ah Board of Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI), they issued the
requirements as followed;

1. Sukuk, to be tradable, must be owned by Sukuk holders, with all rights and
obligations of ownership, in real assets, whether tangible, usufructs or services,
capable of being owned and sold legally as well as in accordance with the rules of
Shari'ah, in accordance with Articles (2)1 and (5/1/2)2 of the AAOIFI Shari'ah
Standard (17) on Investment Sukuk. The Manager issuing Sukuk must certify the
transfer of ownership of such assets in its (Sukuk) books, and must not keep them
as his own assets.

2. Sukuk, to be tradable, must not represent receivables or debts, except in the case
of a trading or financial entity selling all its assets, or a portfolio with a standing
financial obligation, in which some debts, incidental to physical assets or usufruct,
were included unintentionally, in accordance with the guidelines mentioned in
AAOIFI Shari'ah Standard (21) on Financial Papers.

3. It is not permissible for the Manager of Sukuk, whether the manager acts as
Mudarib (investment manager), or Sharik (partner), or Wakil (agent) for
investment, to undertake to offer loans to Sukuk holders, when actual earnings fall
short of expected earnings. It is permissible, however, to establish a reserve
account for the purpose of covering such shortfalls to the extent possible,
provided the same is mentioned in the prospectus. It is not objectionable to
distribute expected earnings, on account, in accordance with Article (8/8)3 of the
AAOIFI Shari'ah Standard (13) on Mudaraba, or to obtaining project financing on
account of the Sukuk holders.
 4. It is not permissible for the Mudarib (investment manager), sharik (partner), or
wakil (agent) to re-purchase the assets from Sukuk holders for its nominal value,
when the Sukuk are extinguished, at the end of its maturity. It is, however,
permissible to undertake the purchase on the basis of the net value of assets, its
market value, fair value or a price to be agreed, at the time of their actual
purchase, in accordance with Article (3/l/6/2)4of AAOIFI Shari'ah Standard (12)
on Sharikah (Musharaka) and Modern Corporations, and Articles (2/2/1)5 and
(2/2/2)6 of the AAOIFI Shari'ah Standard (5) on Guarantees. It is known that a
Sukuk manager is a guarantor of the capital, at its nominal value, in case of his
negligent acts or omissions or his non-compliance with the investor's conditions,
whether the manager is a Mudarib (investment manager), Sharik (partner) or
Wakil (agent) for investments.

5. It is permissible for a lessee in a Sukuk al-Ijarah to undertake to purchase the

leased assets when the Sukuk are extinguished for its nominal value, provided he
{lessee} is not also a partner, Mudarib, or investment agent.

6. Shari'ah Supervisory Boards should not limit their role to the issuance of fatwa on
the permissibility of the structure of Sukuk. All relevant contracts and documents
related to the actual transaction must be carefully reviewed (by them), and then
they should oversee the actual means of implementation, and then make sure that
the operation complies, at every stage, with Shari'ah guidelines and requirements
as specified in the Shari'ah Standards. The investment of Sukuk proceeds and the
conversion of the proceeds into assets, using one of the Shari'ah compliant
methods of investments, must conform to Article (5/1/8/5)7 of the AAOIFI
Shari'ah Standard (17).

According to this pronouncement, there are some effects to TID’s Sukuk. In

Sukuk Musharakah of the TID Global Sukuk I Limited, the Sukuk holders are merely the
certificate holders not to have rights and obligation of ownership in real assets. That is
different from the matter no.1said about the ownership of the sukuk holders.
Furthermore, this sukuk is able to repurchase undertaking the assets at the maturity at
nominal value or par value while the requirement is that sukuk can repurchase at market
value. Hence, this Sukuk is not fulfilled the requirements of the AAOIFI February 2008
pronouncement.

CONCLUSION
Following the default of the sukuk musharaka, The Investment Dar (TID), which holds
stakes in companies such as carmaker Aston Martin and Boubyan Bank, said in
December 2009 it was seeking to borrow up to $1 billion to refinance debts.

TID said the $150 million of sukuk in default were part of the 1 billion Kuwaiti dinars
($3.45 billion) in debt under restructuring. The firm said that it may sell some assets to
meet its obligations as a part after it has presented foreign and local banks and investors
with a restructuring plan.

Lebanon's Blom Bank has agreed to join force in the restructuring plan despite a court
case between the two firms, adding that Blom's investment in the firm was small.

Blom Bank sued TID in a British court in 2009 to recover $10.7 million it invested in the
company in 2007 under the wakala agreement, as well as a 5 percent return promised in
the terms of the Islamic contract. TID, however, refused to pay, arguing the deal was not
sharia-compliant.

It was reported that in 2009, TID had reached a deal with 80 percent of its creditors. The
government facility would help it get the consent of the rest of the creditors on its
restructuring plan.
Consequently, TID’s foreign currency long and short-term ratings has been demoted from
SD (Selective Default) to as low as D (Default).

In February 2009, Capital Intelligence downgraded TID to SD from BB with a negative

outlook following the default on one of its obligations.

Many challenges remain for TID in agreeing and completing the debt restructuring.
Credit and capital markets throughout the region remain tight and appetite for risk
continues to be low. Capital Intelligence will continue to monitor progress in TID's
negotiations with creditors and debt holders.

REFERENCES
1. http://zulkiflihasan.wordpress.com/2010/05/06/why-islamic-finance-has-not-yet-
reached-critical-mass/, accessed on October 9th, 2010.

2. http://kuwaitobserver.com/news/newsfull.php?newid=284453 , accessed on
October 12th, 2010.

3. http://www.islamica-me.com/login.asp?cntnt=351, accessed on October 14th,

2010.

4. http://www.islamicfinancenews/print_ID.asp?nm_id=13786, accessed on October

5th, 2010.

5. http://www.zawya.com/story.cfm/sidZAWYA20091210063837, accessed on
October 13th, 2010.