IICM - SEO Sukuk.pdf · 2019. 12. 10. · ijarah sukuk for financing Mahan Airlines Corporation which its nominal value exceeded USD 28 Million. Since then, the market has welcomed

IICM

Securities & Exchange Organization (SEO)

SEMI-ANNUAL BULLETIN OF IRANIAN ISLAMIC CAPITAL MARKET

An Overview on Sovereign Sukuk IssuanceVol.8 – No.2 / July – December 2016

In March 2011, Iranian capital market experienced issuance of debut ijarah sukuk for financing Mahan Airlines Corporation which its nominal value exceeded USD 28 Million. Since then, the market has welcomed other ijarah sukuk issuances for financing different private and public companies. It is noteworthy that during 1994 to 2011, musharakah sukuk was the only sukuk type in the market and subsequently murabaha and salam sukuk provided financing sources for companies.

Ijarah sukuk issuance structure was finalized on August 2, 2010 in which Securities and Exchange High Council ratified “The Regulations Governing the Issue of Ijarah Sukuk” and later on, the Council revised the regulations on November 11, 2014. According to the regulation, as a type of shariah compliant instrument, ijarah sukuk is a financial instrument which proves joint ownership of its holder in its underlying assets.

The mentioned regulations which will be more elaborated in this bulletin, identified several issuance organs such as originator, Special Purpose Vehicle (SPV), guarantor and etc. Article 2 of the regulations, emphasizes that the originator should meet following characteristics:

A- The non-governmental legal entity that:

1- should have been registered in Iran and its headquarters is also in Iran

Contributors:Majid Pireh; Head;

Islamic Finance Group; Research, Development and Islamic Studies Department,

Securities and Exchange Organization

Hossein Taheri; Expert, Research, Development and Islamic Studies Department,

Securities and Exchange Organization

Zanyar Ahmadi; Director, Statistics and Risk Analysis Group; Research, Development and Islamic

Studies Department, Securities and Exchange

Organization

Sukuk Issuance Facts and

Figures

Case study on sovereign sukuk in Iran

Sovereign sukuk

structure in Iran

Shariah aspects of sovereign

sukuk in Iran

Introduction

Sovereign sukuk issuance

in the globe

2

8

17

6

14

19

Introduction

SEMI-ANNUAL BULLETIN OFIRANIAN ISLAMIC CAPITAL MARKETT

Vol.8 – No.2 / July – December 2016IICM2

2- has been legally formed as joint-stock, or cooperative entity, mutual funds or non-governmental public entities excluding the municipalities;3- the total cash flow derived from its operations has shown uptrend (being positive) in the two recent fiscal years. When the cash flow derived from the originator's operations is positive as reflected in the audited periodic financial statements, it can be accounted for in the given total cash flow;4- its maximum total liabilities to assets ratio is ninety (90%) percent;5- the opinion expressed by the company inspector and auditor concerning the financial statements for the recent two fiscal years should not be "modified" or "disclaimer";

B- The public or governmental legal entities which include:

1-the ministries2-the municipalities3-legal entities which are subjected to the provisions of articles 3 and 4 of the Public Accounts Law

However, as private companies utilized Ijarah sukuk for their fundraising, Iran’s government faced wide range of challenges to implement available structure. Transferring assets from public sector

Each certificate of Ijarah Sukuk proves the joint ownership of its holder in the underlying assets of Ijarah Sukuk issuance.

3IICMVol.8 – No.2 / July – December 2016

SEMI-ANNUAL BULLETIN OFIRANIAN ISLAMIC CAPITAL MARKET

to private sector was one of the main challenging issues. Overcoming the problem required a new model for ijarah sukuk. the new model was proposed to the SEO shariah board to release relevant resolution. Consequently, the government posed an adjusted Ijarah Sukuk structure and on April 23, 2016 debut Ijarah based sovereign sukuk was issued. The issuance volume over valued USD 165 million which was wholly subscribed at Iran Farabourse Company.

At the end of Iranian calendar year (i.e. March 21, 2016), successful experience for issuing Sukuk to finance the government convinced the Iranian Consultative Assembly (Iran Parliament) to extend government’s fundraising licenses for next fiscal period. However, the act did not clearly examine sukuk underlying contract and the government was authorized to determine optimal sukuk structure. In coming sections of the bulletin, some information about the sukuk structure will be available.

Iran government is planning for developing its financing mechanisms and as at the moment legal and operational platforms for sovereign sukuk issuance have been provided, the government plans to benefit from them as much as possible. Simultaneously, Iran capital market is delighted for providing a platform to match the government with investors and propose sovereign sukuk issuance mechanism.

This bulletin volume concentrates on sovereign sukuk in Iran capital market and tries to provide some information about how this sukuk has been structured. Reaching to this point is due to great initiatives which many experts have done but definitely there is still a long way to pass and nevertheless, all involving parties should collaborate in order to smooth sovereing sukuk issuance.

4 IICM Vol.8 – No.2 / July – December 2016


In order to fulfill obligations and perform assigned tasks, governments need money and Sukuk structures in many jurisdictions have played a notable role in providing shariah compatible financing mechanism. Additionally, similar to private sector financing needs, governments have widespread financing needs areas which agricultural, industrial, commercial and social projects are some of important ones. Each category of government’s financing needs implies specific requirements that differ from another one. For this reason, governments should absorb money via different shariah compatible contracts such as ijarah, murabaha, wakalah and so on to match them with their preferences as much as possible. For this reason, there are different contracts which governments have used to structure the sukuk.

In terms of sovereign sukuk market value, during 2005 to 2016, a fluctuating trend proves that governments had different appetites for sovereign sukuk issuance. Following chart illustrates how sovereign sukuk market value has witnessed upwards and downwards values.

Chart 1: Global Sovereign Sukuk Issuance; Source: IIFM Sukuk Report 1

As the chart 1 shows, during 2008 to 2012, sovereign sukuk issuance in the globe witnessed an upward trend which went down for the next 4 years. Global economic conditions and some political issues were claimed as the underlying factors for such downward in sovereign sukuk issuance volume during 2012 – 2016 period.

Sovereign Sukuk Issuance in the Globe

1. Downloadable from http://www.iifm.net/about_iifm/iifm-annual-Sukuk



The meetings of shariah board with a number of capital market experts were held on 3rd and 10th of Feb 2016 and the subject of issuance of Ijarah Sukuk for settlement of government’s debts was discussed in details. In this section of bulletin, related resolution of the SEO shariah board will be offered. As the model was emphasizing on using government’s debts to private sector, the resolution was named as Issuance of Ijarah Sukuk on the creditors’ asset.

Shariah Aspects of Sovereign Sukuk in Iran



IntroductionOne of the major challenges facing the Government of the Islamic Republic of Iran

is the settlement of irrevocable claims of the natural and legal entities, cooperatives and non-governmental public institutions and governmental companies. In accordance with paragraph B of article (2) of the Law for Removing of Restrictions on the Competitive Production and Improvement of National Financial System, the government is permitted to issue Ijarah Sukuk to settle the irrevocable claims of the natural and legal entities, cooperatives and governmental companies.

However, financing via the issuance of Ijarah Sukuk needs the originator (government) to sell its own assets which is impossible for the government. So, government cannot use the prevalent model for issuing of these securities and needs to design a new model. In this model, the creditor entities may transfer their own assets to the government then Ijarah Sukuk is issued on these assets and claims could be settled.

Operational Models Ijarah Sukuk on the creditors’ assets could be issued in two models:

A) Ijarah Sukuk based on credit selling of creditors’ assets by installments.

Figure 1: Shariah viewpoint about credit selling of creditors’ assets

The relations between all parties in this model are as follows:

1-The government’s creditor sells his own asset to the government on-credit, by five year installments,



the shariah compliant model for sovereign sukuk is based on several contracts and tries to meet government’s limitations in its assets transfer to the public sector

2- The government could issue Ijarah Sukuk as the owner of the asset. So, the government finds a SPV to have the securities issued,

3- The SPV pools the funds after offering of securities,

4 and 5- The SPV pays the asset price on behalf of the investors and buy the asset in cash from the government,

6- The government settles the claims by the funds of the selling of assets,

7 and 8- The SPV transfers the asset, on behalf of the investors, to the creditor, in form of a buy-back lease contract (ex. a 5 year period) and receives the rentals and pay to the investors,

9- The creditor which has a claim for the selling of assets by installments to the government refers the SPV to the government to receive the rentals from the government.

Shariah Board Opinion

1- Selling of assets on-credit to the government by the creditor would be an on-credit contract and shall be deemed as permissible.

2- Issuance of Ijarah Sukuk on the asset which is purchased on-credit by the government would be permitted.

3- Buy-back leasing of asset to the creditor by the SPV and on behalf



of the investor shall be deemed as a buy-back lease and would be of no doubt if the sale (bai’) contract conditions are fully observed.

4- Referring the investors to the government for receiving the rentals shall be permitted if all conditions for transfer of debt contract are observed.

5- If all or some parts of the securities are not purchased during the initial public offering, government could transfer the remaining securities to the creditor so that the creditor may sell them on behalf of the government and settle his debt.

B) Ijarah Sukuk based on the buy-back leasing of the creditors’ asset.

Figure 2: Shariah viewpoint about buy-back leasing of the creditors’ asset

The relations between all parties in this model are as follow:

1 and 2- The SPV issues the securities and pools the funds.

3 and 4- The SPV purchases the creditor’s asset in cash, on behalf of the investors.

5 and 6- The SPV transfers the asset to the government in form of a buy-back leasing contract (ex. 5 year period) against seasonal rentals.

7- The government again transfers the leased asset to the creditor in form of a buy-back leasing contract (ex. 5 year period) and receives the total sum of rentals in cash.

8- The sum of rentals in cash which is paid to the government by the creditor shall be cleared by his own claim.



Shariah Board's Opinion

1-Issuance of Ijarah Sukuk on the creditor’s asset and by his own request would be permitted.

2-Buy-back leasing of asset to the government by the SPV, in form of payment by installments, would be permissible.

3- Re-leasing of asset to the creditor, in form of a buy-back leasing contract against the payment of total sum of rentals at the commencement of the contract shall be deemed correct. As in these cases the total sum of rentals is less than the previous rentals, there is no need to work on Ijarah subject.

4-Clearing of the government’s initial debt to the creditor against the government’s claim of the buy-back leasing contract would be permissible.

5- If a part of the securities is not purchased during the initial public offering, the SPV could not sell the remaining securities to the creditor.

6-When the ownership of the asset is transferred to the government by the SPV at the maturity date of the securities, transfer of asset by the government to the creditor would be correct.

As the above resolution emphasizes, the shariah compliant model for sovereign sukuk is based on several contracts and tries to meet government’s limitations in its assets transfer to the public sector.



One of the major challenges facing the government of the Islamic Republic of Iran is settlement of irrevocable claims of natural and legal entities, cooperatives and non-governmental public institutions as well as some state companies. In accordance with paragraph B of article (2) of the “Removing of Restrictions on the Competitive Production and Improvement of National Financial System” Law, the government is permitted to issue ijarah sukuk to settle its creditors’ irrevocable claims. However, financing via the issuance of Ijarah Sukuk needs originator (government) to sell its own assets to investors and this sale is undoable for the government in many areas. For example, the government is not permitted to sell public assets in education sector to the private investors. Consequently, it cannot use the prevalent model for issuing sukuk and there will be a demand for structuring new models.

In order to modify the model in a way that the government may benefit from it, financial and legal experts tried to introduce another mechanism which later resulted to a new one. In the modified model, government’s creditors will transfer their own assets to the government and in other steps, Ijarah Sukuk will be issued on the basis of these assets and claims will be settled.

This model is based on credit sale of assets to the government in which private sector sells a part of its own assets to the government in form of Murabaha sale. Later on,

Sovereign Sukuk Structure in Iran



the government utilizes the assets as underlying commodity for Ijarah Sukuk issuance. Considering the aforementioned fact, following figure shows how sovereign sukuk in Iran has been structured.

Figure 3: Sovereign sukuk issuenace structure

Relations between the parties are as follows:

1.The government’s creditor sells on-credit his own asset to the government, by for example five year installments;

2.The government could issue ijarah sukuk as the owner of the asset. So, the government finds a Special Purpose Vehicle (SPV) to have the securities issued;

3.The SPV pools the funds after offering of securities;

4.The SPV pays the asset price on behalf of the investors;

5.SPV buys the asset in cash from the government;

6.The government settles the claims by the funds of the selling of assets;

7.The SPV transfers the asset, on behalf of the investors, to the creditor, in form of a buy-back lease contract (ex. a 5-year period);

8.SPV receives the rentals and pay to the investors;

9.The creditor which has a claim for the selling of assets by

This model is based on credit sale of assets to the government in which private sector sells a part of its own assets to the government in form of Murabaha sale.



installments to the government refers the SPV to the government to receive the rentals from the government.

This model is based on credit sale of assets to the government in which private sector sells a part of its own assets to the government in form of Murabaha sale.

As figure 3 illustrates, in sovereign on-credit issuance model in Iran, the government’s creditors sell their assets to the government on the basis of Murabaha sale contract. As a result, the government as the owner of assets sells them in cash to the private sector investors. In coming steps, the investors lease the assets to the government’ s creditor. Later on, government’s creditor assigns the government to pay sukukholders the rents at due dates.



Iran government used the modified Ijarah Sukuk structure for fundraising for first time in April 23, 2016. Issuance volume reached USD 165 million which was wholly subscribed in Iran Farabourse Company. According to current year (starting March 20, 2016) Budget Act, the state of Iran is permitted to use sukuk as a shariah compliant financial instrument for fundraising. After long discussions and great initiatives, Iran government utilized sovereign sukuk structure for its own financing needs.

In the following table, a snapshot of the Iran sovereign Sukuk is provided.

Table 1: Debut sovereign sukuk in Iran

Sukuk name Tenor Profit rate Payment periods Trading market Government ijarah

sukuk Years 4 18% Semiannually Iran FarabourseCompany

The above sovereign Sukuk was issued to finance the government of Islamic republic of Iran by the ministry of Economic Affairs and Finance. Each paper’s nominal value was equal to IRR 1 million and will mature in April 23, 2020. The Sukuk was wholly subscribed at Iran Farabourse Company.

In the following table, sukuk organs are provided in more details:

Table 2: debut sovereign sukuk organs

Originator SPV Guarantor Auditor Payment Agent Ministry of

Economic Affairsand Finance

Azar Ⅱ Management and

PlanningOrganization

AuditingOrganization

Central SecuritiesDepository of Iran

As the above table shows, debut sovereign sukuk issuance was mainly arranged by state organizations and it was trying to finance the Iran government to settle some of its due debts to “Ayandehsaz Pension Fund”.

Case Study on Sovereign Sukuk in Iran



In the final part of the bulletin, some facts and figures show how Sukuk market is trending in Iran capital market. As the following chart presents, Sukuk market issuance value had some fluctuations and in 2016 the upward trend was quite noticeable.

Chart 2: Value of Outstanding Sukuk in Iran capital market

As chart 2 shows, Sukuk market value in Iran capital market has some fluctuations but in 2010 it found an upward trend and 2016 was a brilliant year for Sukuk issuance in the country. The securities and Exchange Organization of Iran hopes that development of Sukuk market takes place in upcoming years and more companies found a place for their own financing needs.

Sukuk Issuance Facts and Figures

Value of Outstanding Sukuk in Iran Capital Marlet

10000900080007000600050004000300020001000

02005

0

0

0

0

0

111

2006

0

0

0

0

0

111

2007

0

0

0

0

0

111

2008

0

0

0

0

0

111

2008

0

0

0

0

0

292

2010

0

0

0

0

0

800

2011

0

0

0

0

303

2285

2012

0

0

0

0

449

2566

2013

0

0

0

12

665

2156

2014

0

32

0

20

959

2667

2016

2848

1259

98

54

561

1128

3546

2015

318

245

54

62

936

1610

Mill

ion

USD

Islamic Treasury Bill

Salam Sukuk

MBS

Istisna Sukuk

Murabaha Sukuk

Ijarah Sukuk

Musharakah Sukuk



Karim Karimi (International Relations Senior Expert)Tel: (+98) 21 88679660Email: [email protected]

Majid Pireh (Head of Islamic Finance Group)

Tel: (+9821) 88679458E-mail: [email protected]

We appreciate your comments and feedbacks. If you would like to contact us for any comments or more information, please contact to the following persons:

Securities & Exchange Organization (SEO)Research, Development and Islamic Studies Department (RDIS)

No. 27 Mollasadra St., Vanak Sq., Tehran, Iran Tel: (+9821) 88679640-59

http://icm.seo.ir

Documents

IICM - SEO Sukuk.pdf · 2019. 12. 10. · ijarah sukuk for financing Mahan Airlines Corporation which its nominal value exceeded USD 28 Million. Since then, the market has welcomed