SHARIAH PRINCIPLES IN

ISLAMIC SECURITIES : BBA,

MURABAHAH, ISTISNA &
SALAM

CONTENTS

Bond : an overview
Feature of Bond
Islamic Securities (IS) Additional features
Structuring Islamic Securities
IS Based on Bay Bi Thaman Ajil
IS Based on Murabahah
Shariah Observations on BAIDS/MUNIFS
IS based on Istisna
IS Based on Salam

LEGAL FRAMEWORK FOR ICM &IS

IN MALAYSIA
The main regulator for ICM & IS is the
SC, similar with the conventional
capital & securities market
The legislation governing ICM & IS is
generally similar with the overall
market (ICM & IS part and parcel of
overall capital market)
However, there are some special
provisions for the Islamic instruments
to ensure their Shariah compliance
JJ FUU UKM

LAW AND REGULATIONS

KEY LEGISLATIONS
Capital Market and
Services Act 2007
Securities Commission
Act 1993 (SCA)
Securities Industry
(Central Depository)
Act 1991 (SICDA)
Companies Act 1965
(CA)

OTHER RULES AND

GUIDELINES

Regulations;
Ministerial Orders
Orders and directives
given by the Securities
Commission;
Guidelines

JJ FUU UKM

EXAMPLES OF SOME OF THE

GUIDELINES

Guidelines on the Offering of Private Debt Securities

(PDA Guidelines) 200 (including IPDS until 2004)
Guidelines on the Offering of Asset-Backed Debt
Securities (including IABS)
Guidelines on the Minimum Contents Requirements
for Trust Deeds
Guidelines on Contents of Prospectus for Debentures
Guidelines on the Offering of Islamic Securities 2004
(the guidelines take way IS from the PDS Guidelines
after 2004)

JJ FUU UKM

IMPLEMENTATION OF SHARIAH
REGULATION
Through the supervision of the SCs Shariah Advisory
Council (SAC)
The SAC basically:
Advice on operation and development
Advice on compliance criteria and guideline
Review proposals and inquiries and give legal opinions
Promote harmonisation and convergence of Shariah
principles
Provide general guidance on matters related to
Islamic investment and transactions
Through independent Shariah advisory for Islamic
securities & unit trusts
JJ FUU UKM

REGULATION OF IS CENTRES ON
THE SHARIAH ADVISER &
PRINCIPLES
USED
Must appoint an
independent Shariah

advisor
Shariah adviser or Shariah consultant must
be approved and registered by SC
Ensure IS is structured along any SAC
approved Shariah principles
Any new principles not listed in the
Guidelines must consult SCs SAC
Ensure harmonisation of Shariah principles
and practices
JJ FUU UKM

WHAT IS SUKUK ?

JJ FUU UKM

SUKUK
Sukuk (plural of Sakk)
certificate/securities
AAOIFI Shariah Standard on Sukuk:
Certificates of equal value representing, after closing
of subscription, receipt of the value of the certificates
and putting it to use as planned, common title to
shares and rights in tangible assets, usufructs and
services, or equity of a special investment activity

Guidelines on IS 2004 Sukuk:

A document or certificate which represents the value
of an asset
JJ FUU UKM

LEGAL FORM
Legal form of a traditional sukuk
requires:
An instrument or security which
represents rights in the underlying
assets (and its cash flow) primary
level
Can be traded secondary level

JJ FUU UKM

10

SHARIAH COMPLIANCE
To be Islamic, the structuring of the
securities and sukuk must ensure that
Contract creating the indebtedness /
financial obligation at the primary level is
Shariah compliant
Mode of trading of the bond/ securities /
sukuk at the secondary level is Shariah
compliance
Redemption of sukuk upon maturity is
Shariah compliant
JJ FUU UKM

11

ISLAMIC SECURITIES (SUKUK)

ADDITIONAL FEATURES
Indebtedness or financial obligation must be Islamic in origin i.e.,
contracts that lead to obligation must be Shariah compliant, e.g.

Bay Bi Thaman Ajil

Murabahah
Bay al-Inah
Bay al-Salam
Ijarah
Ijarah Thumma al-Bay

Istisna
Qard al-Hasan
Mudarabah/Musharaka
h
Muqaradah

Contd...
Supplementary principles include :
Bay Dayn
Ibra (to waive
total/parcel (rebate))
Bay Muzayadah ( sale
by tendering)
Ittifaq Dhimni (implied
Daman/Kafalah (security)
understanding)
Hak Tamalluk (required
Sanadat (certificate of
ownership)
paper securities+
Hibah (gift)
equities)
Hiwalah (tranfer of
Sukuk
debt/obligation from one
Ujrah/Ajr (Fee)
party to other)
Wakalah (agency)

Contd...
The process of securitization and
trading of the securities at the
secondary market must be lawful
bay al-dayn (sale of debt)
The purpose of issuance must be
lawful

TYPES OF ISLAMIC
SECURITIES
ISLAMIC DEBT SECURITIES

BBA papers/debt
securities
Murabahah
papers/debt securities
Istisna papers/debt
securities

NON-DEBT (EQUITYBASED) SECURITIES

Sukuk al-Ijarah
Sukuk al-Musharakah
Sukuk al-Mudarabah

JJ FUU UKM

15

BOND : AN OVERVIEW

It is an evidence of debt
issued by the
issuer/borrower to
investors/lenders
It is defined as an IOU with
promise to pay a financial
obligation at the end of a
specific period
It comes under the
definition of debenture as
per Securities Commission
(Amendment)
2000
Conclusion
: BondAct
is a
debt
instrument with fixed income
i.e., the obligation to pay the
debt is being evidenced in
securities or certificates
issued by the

Debenture in this context

includes
Debenture stock i.e., loan
stocks
Bonds
Notes
Any other evidence of
borrowed money (does not
include instruments creating
indebtedness for borrowed
moneys to defray the
considerations incurred in the
ordinary course of business
and checks, bankers draft or
any other bill of exchange

FEATURES OF BOND
Indebtedness arising out of loan or any other
financing
Securitization a process of transforming an illiquid
asset into a tradable security that gives the illiquid
asset the liquidity feature by the deployment or
creation of some market mechanism which allows:
- The borrowers/issuers to have direct access to the
capital market; and
- lenders/investors are able to liquidate their
positions or to opt for better investment
opportunities
. Creation of secondary market selling and buying

BONDS VIS A-VIS SUKUK

Bond evidence indebtedness only
Sukuk evidence any financial
obligation either debt or otherwise
Thus, sukuk are wider than bonds

JJ FUU UKM

18

CONVENTIONAL BONDS VIS-A-VIS

SUKUK
Islamic Sukuk :
Conventional Bonds :
Primary level loan contract
to create indebtedness
Return to Investors is the
extra amount charged on
the loan amount interest
charges
The loan indebtedness is
securitised with coupon /
zero coupon
Secondary level trading of
the bonds amount to
trading of debts, normally
with discounting

Primary level very rarely use loan

contract because no value-added
return from debt leveraging due to
prohibition of riba in loan
transactions
Primary level use a variety of
contract to create financial
obligations between Issuer &
Investors, e.g, : sale, lease, equity
partnership, joint venture
partnership
Return to Investors comes from the
in-built profit elements in the sale,
lease or partnership contracts
The financial rights under the
contracts are securitizable
Secondary level tradability of the
sukuk depends on the nature of the
financial rights underlying the
Islamic securities

STRUCTURING ISLAMIC
SECURITIES
Islamic Securities Based on Bay Bi
Thaman Ajil (BAIDS)
Islamic Securities Based on
Murabahah (MUNIF)

STRUCTURING ISLAMIC
SECURITIES
Islamic indebtedness/obligation must be created

first between the issuer and the investors

Islamic indebtedness must originate from one of
the above mentioned contracts (as listed in SC
Guidelines on IS)
The names or type of Islamic securities are
currently determined by the contract into which
both the issuer and investor entered at the first
place
Currently, there are many different
structures/types of IS e.g., Qard Hasan, Bay Bi
Thamanan Ajil, Murabahah, Istisna and Ijarah

ISLAMIC SECURITIES (SALEBASED)

BAIDS MINIFs
SUKUK
ISTISNA SUKUK
Bay al-Inah
Bay al-Inah
Mudarabah
&
&
&
&
Bay al-Dayn
Bay al-Dayn
Bay al-Salam

SALAM

Istisna

Bay al-Dayn

ISLAMIC SECURITIES BASED

ON BAY BI THAMAN AJIL
(BAIDS)
Arranger and Issuer shall indentify certain asset
for the purpose of buying and selling under the
principle of Bay Bi Thaman Ajil (BBA)
The Primary Subscriber on a bought deal basis,
purchase the asset from the Issuer at the
Purchase Price by cash sale
The same asset will then be resold to the Issuer
by the Primary Subscriber at the Selling Price (the
Purchase Price plus Margin of Profit) by deferred
payment sale (BBA)
By now, the Issuer owes the Subscriber worth of the
Selling Price

Contd...
The debt/financial obligation arising out of the
above deferred payment sale (BBA) is securitized by
the issuance of IS in the form of Primary and
Secondary Certificates (BAIDS)
The total face value of the Certificates shall be
equivalent to the total Selling Price
Normally the Primary Certificates represent the
Purchase Price
The Secondary Certificates which represent the
margin of profit are normally structured to mature
periodically (semi-annually or annually as the case
may be)

Contd...
These BAIDS will be traded on the
secondary market based on the
concept of bay al-dayn (sale of debt)
Examples of BAIDS are KLIA Bond,
Midciti Resources, Hualon, Penang
Bridge, TNB, KFC, SPLASH, etc.
Popular before 2005

BASIC STRUCTURE FOR BAIDS

(MALAYSIAN PRACTICE)
Creatio
n of
the
Debt

BBA
Resale of the Assets at the Selling Price
(deferred payment)

Issuer

2.

Primary
Subscriber
1.

Issuer
Identified
Assets

Issuers
Assets

Purchase of Assets
by the Primary
Subscriber at
Purchase Price

BASIC STRUCTURE FOR BAIDS

(MALAYSIAN PRACTICE)

Issuer

Primary Subscriber pays

the Purchase Price

Primary
Subscriber

1.
Trading

BAIDS

2.
Secondary
The issuer issues the IDS/Bond evidencing the Market
debt (sale price) arising from the second leg of the
sale of assets (which is a BBA)
The
Securitizatio
n process

ISLAMIC SECURITIES BASED ON

MURABAHAH
Essentially, from the Shariah perspective, there is no
major difference between IS based on BBA or
Murabahah except that the underlying contract
between the issuer and investor shall be Murabahah
instead of BBA
However, the industry (and regulators) have viewed
IDS based on Murabahah differently from BAIDS, from
structuring point of view BAIDs are normally for long
term financing needs, and Murabahah for
short/medium term financing needs
The issuance of Murabahah bonds is better known as
Murabahah Notes Issuance Facility (MUNIF) for both
underwritten and non-underwritten notes

Contd...
The mechanism of MUNIF
- The investors/financiers will start
tendering to purchase the asset of the
issuer
- The successful tenders/financiers will
purchase the identified asset by cash
sale
- The financiers will subsequently resell the
same asset to the issuer by deferred
payment sale, with mark up, known as
Murabahah

- The debt arising out of this marked-up

(Murabahah) deferred payment sale
will be securitized by the issuance of
promissory notes in the form of MUNIF
- These MUNIFS will be traded on the
secondary market under the principle
of Bay al-Dayn
. Examples of MUNIF Islamic Commercial
Papers are MISC, PKNS, Puncak Niaga,
MOCCIS, STRATAVEST, MIDVALLEY, etc

MURABAHAH NOTES
ISSUANCE FACILITY
4. Debt arising from the sale transaction is
securitised by issuance of Murabahah

Issuer &
Notes
Arranger

Primary
Subscrib
e

Disbursement of Purchase Price

1.
Identify
assets
Selling Price

3. Subsequently, Issuer
purchase back the asset at

Sell assets on tendered basis

2.

Asset

TPMs/
Underwriter
s

MURABAHAH COMMERCIAL
PAPERS

ISSUE
R

1. Tender Panel Members

Purchase Assets of up to RM xxx
Million from ISSUER
2. Tender Panel Members pays Asset Purchase
Price in cash proceeds to ISSUER
Tender Panel
5. Facility
Members/Inves
Agent
tor
3. Tender Panel members sells back
Assets to Issuer at Asset Sales Price
(with mark-up)
4. ISSUER issues MCPs of
14 days to 12 month
tenure, evidencing
obligations to pay
6. Trustee

STEPS
Steps 1 and 2 : The underlying Asset is purchased by
the successful Tender Panel Members at the Purchase
Price and cash payment shall be made to ISSUER for the
Asset Purchase Price
Step 3 and 4 : Immediately thereafter, the underlying
Asset is resold to ISSUER at the Asset Sale value of the
MCPs to be issued. ISSUER makes payment towards the
Asset Sale Price over a deferred period as evidenced by
issue of the MCPs with maturity ranging from 14 days to
12 months (short-term in nature)
Step 5 : The tender process and the issuance of the
MCPs will be through BNMs FAST and facilitated by the
Facility Agent
Step 6: Trustee shall act in trust for the benefit of the
MCP holders under the terms of the Trust Deed and of
the MCPs

SHARIAH OBSERVATIONS
ON BAID/MUNIFS
Are they really based on Bay Bi
Thaman Ajil or Murabahah?
Prima facie, they are based on Bay
al-Inah (sell and buy back)
Difference between BAIDS/MUNIFS is
technical and industry-driven, rather
than of Shariah requirement

SUKUK MURABAHAH: MURABAHAH

WITH INVESTMENT CERTIFICATES
Fixed Rate Instrument
USD 200 million
1.

Investmen
t
Certificate
4. SPC issues investment

A special Purpose Company (as

Investment Agent) buys, on a spot
Certificates to the Primary
Basis, USD 200 million worth of LME
Subscribers for USD 200m
Metal warrants (commodity) from Broker
A
2. SPC sells the commodity to the
SPC
corporate at USD 200m plus profit
(Investment
margin payable basis (6 monthly
Trading ?
Agent)
LMEpayments
Brokerof profit and bullet payment
USD 200 million
A
at maturity)

LME
Broker
USD 200 million
B

CORPORATE

3. Corporate sells on a spot basis the

Commodity to Broker B for USD 200 million

The Certificates
can be rated and
listed

Primary
Subscribers

of USD 200 million

Secondary
Market

STRUCTURING ISLAMIC
SECURITIES
Islamic Securities Based on Istisna
Islamic Securities Based on Salam

ISLAMIC SECURITIES BASED ON

ISTISNA
The Istisna bond is structured to finance
projects which will be completed/constructed in
the future e.g power plant, highways, etc
There have been a few experience of Istisna
bonds in Malaysia, e.g:
- Prai Power (2002)
- SKS/ Tanjung Bin Power (2003)
- Sarawak International Medical Centre by
SSHMC (2004)
Each of the completed Istisna bonds issue has
its own unique structure

ISTISNA BOND : 1 MODEL

st

Proceeds from the IS

issue

2. Issuer sells asset to the SPV

Issuer

3. Issuer purchases the same

1. Istisna
asset from financiers at the
Contract
marked-up price
Issues Istisna
Contractor
Notes/bonds

Project
Company
SPV

OBSERVATIONS
Personal observation : This structure is
more inclined towards BBA or Murabahah
or Inah bonds instead of Istisna because
the obligation or indebtedness of the
issuer did not arise from manufacturing
contract but from deferred payment sale.
Issue on asset used in the sale &
purchase transaction right under
concluded contract?

ISTISNA BOND : 2

ND

MODEL

Istisna bonds based on parallel istisna

The issuer, being awarded the project by
awarding party, will enter into istisna
contract with the Financiers i.e. The
Financiers are to deliver the completed
project to issuer and the issuer is supposed
to pay the Istisna Price to the Financiers
(inclusive of profit margin), to be paid
deferred at an agreed maturity date
The issuer, being indebted to Financiers,
will issue Istisna bond to the Financiers

ISTISNA BOND : 2

ND

MODEL

1st Istisna contract

(Construction Cost + Profit Margin)
Issuer

Financier
Issues Istisna bonds

Create
SPV
(Construction

2nd Istisna
contract
Project Company
(SPV)
Cost)

Contd...
The issuer will create an SPV for Project
management purposes
The Financiers will then enter into
(second) istisna contract with the SPV
where the payment of the purchase price
(equivalent to construction cost) is paid
by the Financiers based on contractually
agreed terms, e.g., by progressive
payment, one lump sum, etc.

ISTISNA SUKUK 3
FINANCIER
(On Behalf of
Investors)

4. 3.

1.

2.

ISSUER
. The RM 5.6b SKS Power Istisna
MTN was structured based on
this structure

RD

MODEL

STEP 1: Issuer and Financier will execute an

Istisna Purchase Agreement, under which
Issuer will agree to construct and deliver & sell
to the Financier a specific asset (The Asset)
STEP 2: The Istisna Purchase Price will be RMXXX
Million and will be disbursed in one lump sum
STEP 3: The Financier and Issuer will execute an
Istisna Sale Agreement, under which the
Financier will agree to construct and deliver to
Issuer the asset. Delivery to Issuer will take
place upon the Financier taking delivery of the
Asset under the Istisna Purchase Agreement .
STEP 4: The Istisna Sale Price will be equivalent
to the aggregate of the Istisna Purchase Price
and Profit
thereto. The Sale Price will be
payable according to an agreed payment
schedule
STEP 5: The Issuer issues the Istisna Bond to
evidence the future payment of the Istisna
Sale Price

SHARIAH ISSUES
In both the 2nd & 3rd models of Istisna, the istisna
bonds (sukuk) represent the sale price under the
istisna sale agreement (securitisation of the
obligation to pay the istisna sale (price)
The trading of the Istisna bond (sukuk) is the
trading of istisna debt/sale price (bay al-dayn), which
under classical Islamic law is not yet established
(ghayr mustaqir) until the istisna asset is completed
and delivered to the satisfaction of the buyer
The rule of sale of debt requires the debt to be
established (mustaqir) for the purpose of secondary
trading to avoid gharar

 Is the istisna debt an established debt?

SC indicated that contractual guarantee of
payment of istisna sale price by the issuer
is sufficient to establish the debt against
the issuer in favour of the
financier/subscribers of the istisna
bonds/sukuk, despite the nature of istisna
contract that originally depends on
successful construction of the istisna asset
in order to conform the istisna sale price.

BAY AL-SALAM SUKUK

(3-9 MONTHS)
Incorporate a
Special
Purpose
Mudarabah
-

To issue and
offer
Participation
Sukuk to the
Market

The Mudarabah
will purchase
crude oil on
Bay al-Salam
basis

BMA the Mudarib

- The Mudarib will collect
- 100% cash
payment sport
the subscription money
- Future delivery of crude
oil

At maturity after
The Mudarib will
At delivery of the
selling the crude oil
get from Bahrain
crude oil the
and receiving the
refinery a promise
Mudarib will sell the
proceeds, the
to purchase the
purchase crude oil
Mudarabah will be
delivered crude oil
@ the agreed price
liquidated
in the future @ an
to the refinery
(redeemed)
or
agreedwill
price
- Proceeds
of the sale price
- The Mudarib
get a
renewed will be collected
bank guarantee or
security for the
promise

to purchase

THANK YOU/SYUKRAN