A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Shariah or Islamic religious law 

1. A company that requires capital (referred to as the “originator”) establishes a special purpose vehicle (SPV). The SPV protects the underlying assets from creditors if the originator suffers from financial problems.
2. The special purpose vehicle (SPV) issues sukuk certificates that are sold to the investors.
3. The originator purchases the requires asset using the proceeds from the sale of the certificates to the investors.
4. The SPV buys the asset from the originator.
5. The SPV pays the asset sale proceeds to the originator.
6. The SPV sets up the lease of the asset to the originator. The originator makes the lease payments to the SPV, which later distribute the payments among the holders as lease income.
7. On the termination date of the lease, the originator purchases the asset back from the SPV at its nominal value. The SPV distributes the proceeds to the holders

Type of Sukuk

• Asset backed-sukuk involve granting the investor (sukuk holder) a share of a tangible asset or business venture along with a corresponding share of the total risk (that is, a share commensurate with this ownership).
• In this structure, there is a true sale transaction, where the originator sells the underlying assets to a special purpose vehicle (SPV) that holds these assets and issues the sukuk backed by them. The buyers of sukuk don't have recourse to the originator if payments are less than usual. 
• A true sale implies that the assets of the issuer will not be added to the assets of the originator in the event of default and liquidation.

ASSET BASED SUKUK 

• Asset-based sukuk, on the other hand, involve the issuer purchasing the underlying assets and then investing, trading or leasing them on behalf the investors (sukuk holders), using the funds raised through the issued certificates (sukuk). 
• This structure, most often, takes the guise of a sale-lease to the originator and is embedded with a binding promise (wa'ad mulzim) from the originator to repurchase the underlying assets at maturity. In this structure, the sukuk holders can only require the originator to purchase the underlying assets. 
• Asset-based sukuk grant only beneficial ownership to the sukuk holders, so that in case of default, the investor would be left without any claim on these assets

Hybrid sukuk can be classified into three types, namely:

 1. Convertible sukuk: this is a type of sukuk that gives the holder the right at a future date to convert their sukuk into new equity shares of the sukuk issuer. This is done at a specified rate of conversion and under prescribed conditions. Hence, in other word, a convertible sukuk is convertible to issuer’s shares. 

 2. Exchangeable sukuk: this is a type of sukuk that gives the holder the right at a future date to exchange their sukuk for existing equity shares of a company apart from the issuer’s sukuk (usually a subsidiary or a company that the issuer own shares). This is done at a specified rate of conversion and under prescribed conditions. In other word, exchangeable sukuk is convertible to third party’s shares. 

3. Perpetual sukuk: this is a type of sukuk that incorporates the characteristics of equity with regular return. This is done with no predetermined maturity date and with a call option at the discretion of the issuer

• In a salam contract, an asset is delivered to a buyer on a future date in exchange for full advance spot payment to the seller. 
• In salam sukuk, the sukuk holders’ (investors’) funds are used to purchase assets from an obligator in the future. The SPV provides the money to the obligator. This contract requires an agent (which may be a separate underwriter) who will sell the future assets because the investors only want money in return for their investment — not the assets themselves. 
• The proceeds from the sale (typically the cost of the assets plus a profit) are returned to the sukuk holders. Salam sukuk are used to support a company’s short-term liquidity requirements.

OVERVIEW OF STRUCTURE 

1. Issuer SPV issues sukuk salam certificate to investor. 

2. The Investors subscribe for sukuk and pay the proceeds to Issuer SPV. At the same time, issuer acts as trustee. 

3. Originator enters into a sale and purchase arrangement with Trustee, pursuant to which Originator agrees to sell, and Trustee agrees to purchase, the Salam Assets from Originator on immediate payment and deferred delivery terms. 

4. Trustee pays the sale price to Originator as consideration for its purchase of the Salam Assets in an amount equal to the Principal Amount. 

5. Originator delivers a proportion of the Salam Assets to Trustee. 

6. Originator (as Obligor) purchases the Salam Assets from Trustee for an agreed Purchase Price. 

7. Originator pays the Purchase Price as consideration for purchasing the Salam Assets.

8. Issuer SPV pays each Periodic Distribution Amount to the Investors using the Purchase Price it has received from Originator. 

9. Originator will be obliged to deliver all of the Salam Assets (which have not yet been delivered) to Trustee and Trustee will sell, and Originator will buy, the Salam Assets at the applicable Exercise Price which will be equal to the Principal Amount plus any accrued but unpaid Periodic Distribution Amounts owing to the Investors 

10.Payment of Exercise Price by Originator (as Obligor). 

11.Issuer SPV pays the Dissolution Amount to the Investors using the Exercise Price it has received from Originator.

1. In the Islamic finance industry, the term mudaraba is broadly understood to refer to a form of equity-based partnership arrangement whereby one partner provides capital (the Rab al-Maal) and the other provides managerial skills (the Mudarib). 
2. Each Investor’s purchase of mudaraba sukuk would represent units of equal value in the mudaraba capital, and are registered in the names of the sukuk certificate holders on the basis of undivided ownership of shares in the mudaraba capital. The returns to the Investors would represent accrued profit from the mudaraba capital at a pre-agreed ratio between the Rab alMaal and the Mudarib, which would then pass to the Investors according to each Investor’s percentage of investments in sukuk mudaraba. 
3. Examples of recent sukuk al-mudaraba issuances and advised upon by Clifford Chance LLP are:

• SAR1 billion issuance by Purple Island/Bin Laden in November 2008 (no purchase undertaking) 

• Abu Dhabi Islamic Bank’s AED2 billion Tier I issuance issued in February 2009 (no purchase undertaking);

Overview of Structure 

1. Issuer SPV issues sukuk mudharabah certificates, which represent an undivided ownership interest in an underlying asset, transaction or project. 

2. The Investors subscribe for sukuk and pay the proceeds to Issuer. Issuer SPV declares a trust over the proceeds and thereby acts as Trustee on behalf of the Investors. 

3. Issuer SPV and Originator enter into a Mudaraba Agreement with Originator as Mudarib and Issuer SPV as Rab al- Maal, under which Issuer SPV agrees to contribute the Principal Amount for the purpose of a Shari’a compliant Mudaraba enterprise. 

4. Originator, as Mudarib under the Mudaraba Agreement, agrees to contribute its expertise and management skills to the Shari’a compliant Mudaraba enterprise, with responsibility for managing the Rab al-Maal’s cash contribution in accordance with specified investment parameters. Overview of Structure 

5. Issuer SPV and Originator enter into the Mudaraba enterprise with the purpose of generating profit on the Principal Amount. 

6. Profits generated by the Mudaraba enterprise are divided between Issuer SPV (as Rab al-Maal) and Originator (as Mudarib) in accordance with the profit sharing ratios set out in the Mudaraba Agreement but accrued for the duration of the Mudaraba enterprise 

7. In addition to its profit share, Originator (as Mudarib) may be entitled to a performance fee for providing its expertise and management skills if the profit generated by the Mudaraba enterprise exceeds a benchmarked return. This performance fee (if any) would be calculated at the end of the Mudaraba term and upon liquidation of the Mudaraba. 

8. Issuer SPV receives the Mudaraba profits and holds them as Trustee on behalf of the Investors. 

9. Issuer SPV (as Trustee) pays each periodic return to Investors using the Mudaraba profits it has received under the Mudaraba Agreement

• The ijara contract is essentially a rental or lease contract: It establishes the right to use an asset for a fee. The basic idea of ijara sukuk is that the sukuk holders (investors) are the owners of the asset and are entitled to receive a return when that asset is leased. 
• In this scenario, the SPV receives the sukuk proceeds from the investors; in return, each investor gets a portion of ownership in the asset to be leased. The SPV buys the title of the asset from the same company that is going to lease the asset. In turn, the company pays a rental fee to the SPV.

 OVERVIEW OF STRUCTURE 

1. Issuer SPV issues sukuk ijarah certificate, which represent an undivided ownership interest in an underlying asset or transaction.

 2. The Investors subscribe for sukuk and pay the proceeds to Issuer SPV (the “Principal Amount”). Issuer SPV declares a trust over the proceeds and thereby acts as Trustee on behalf of the Investors. 

3. Originator enters into a sale and purchase arrangement with Trustee, pursuant to which Originator agrees to sell, and Trustee agrees to purchase, certain assets from Originator. 

4. Trustee pays the purchase price to Originator as consideration for its purchase of the Assets in an amount equal to the Principal Amount. 

5. Trustee leases the Assets back to Originator under a lease arrangement (ijara) for a term that reflects the maturity of the sukuk. 

6. Originator (as Lessee) makes Rental payments at regular intervals to Trustee (as Lessor). The amount of each Rental is equal to the Periodic Distribution Amount payable under the sukuk at that time.

7. Issuer SPV pays each Periodic Distribution Amount to the Investors using the Rental it has received from Originator.

8. Trustee will sell the ijarah asset to originator (obligor). 

9. Originator will buy-back, the Assets at the applicable Exercise Price, Payment of Exercise Price by Originator (as Obligor). 

10. Issuer SPV pays the Dissolution Amount to the Investors using the Exercise Price it has received from Originator. 

11. Trustee and Originator will enter into a service agency agreement whereby Trustee will appoint Originator as its Servicing Agent to carry out certain of its obligations under the lease arrangement, namely the obligation to undertake any major maintenance, insurance (or takaful) and payment of taxes in connection with the Assets. 

12. Originator (as Servicing Agent) claims any costs and expenses for performing these obligations (the “Servicing Costs”) from trustee.

• Istisna is a contract between a buyer and a manufacturer in which the manufacturer agrees to complete a construction project by a future date. The contract requires a fixed price and product specifications that both parties agree to. If the end product doesn’t meet contract specifications, the buyer can withdraw from the contract.
• Istisna sukuk are based on this type of contract. The sukuk holders are the buyers of the project, and the obligator is the manufacturer. The obligator agrees to manufacture the project in the future and deliver it to the buyer, who (based on a separate ijara contract) will lease the asset to another party for regular payments. 

 OVERVIEW OF STRUCTURE 

1. Issuer SPV issues sukuk istisna certificate, which represent an undivided ownership interest in an underlying asset or transaction. 

2. The Investors subscribe for sukuk and pay the proceeds to Issuer SPV (the “Principal Amount”). Issuer SPV declares a trust over the proceeds and thereby acts as Trustee on behalf of the Investors. 

3. Originator enters into an istisna arrangement with Trustee, pursuant to which Originator agrees to manufacture or construct certain assets and undertakes to deliver those Assets at a future date, and Trustee agrees to commission those Assets for delivery at such future date.

 4. Trustee pays a price (typically by way of staged payments against certain milestones) to Originator as consideration for the Assets in an aggregate amount equal to the Principal Amount. 

5. Issuer SPV forward lease of assets to originator (as lessee). 

6. Originator (as Lessee) makes payments of: Advance Rental prior to the delivery (i). of the Assets; and Actual Rental following the delivery (ii). of the Assets.

7. Issuer SPV pays each Periodic Distribution Amount to the Investors using the Advance Rental or, as the case may be, the Actual Rental it has received from Originator. 

8. Trustee will sell the asset to originator (as obligor). 

9. Originator (as obligor) will purchase, the Assets at the applicable Exercise Price, which will be equal to the Principal Amount Issuer SPV pays the Dissolution Amount to the Investors using the Exercise Price. 

10.Trustee and Originator will enter into a service agency agreement whereby Trustee will appoint Originator as its Servicing Agent, on and from delivery of the Assets, to carry out certain of its obligations under the forward lease arrangement, namely the obligation to undertake any major maintenance, insurance (or takaful) and payment of taxes in connection with the Assets. 

11.Originator (as Servicing Agent) claims any costs and expenses for performing these obligations (the Servicing Cost) from trustee