A New York Sukuk?
D o w
J o N E s
I s L A M I C
M A R K E T
I N D E x E s
N E w s L E T T E R
Umar F. Moghul
A New York Sukuk?
growth. Investors from these countries are seeking investment
opportunities abroad that comport with their religious beliefs as
Muslims, namely a prohibition on interest… In addition to the
potential for job growth and development, permitting the state
and private entities to issue alternative inance investment bonds
would permit communities that do not engage in interest-based
Umar F.
Moghul
transactions, the opportunity to beneit from capital inancing
facilitated by the state for the construction of education and
Murtha Cullina LLP
health care facilities as well as increase the market for those who
wish to purchase the state’s debt instruments.”3
Further, senator Parker, in proposing this legislation, comments,
“This legislation reverses an historic inequity where far too many
New Yorkers have been unable to beneit from public-private
partnerships with the state.”4 senator Parker also mentions that
such “investment vehicles might be used in economic development
generally, and speciically in distressed census tracts.”5 At the
The United states is not normally considered among the most
time of writing this article, the outcome of this precedent-setting
signiicant Islamic inance markets, and so the recently proposed
proposed legislation was not known and will likely not be known for
sukuk legislation in the New York state senate came as a welcome
some time.
surprise to many. Efforts vis-à-vis Islamic inance in the United states
have not been as conspicuous as in other western nations, but, if
senator Parker’s proposed legislation contemplates a inancing
passed, this legislation would, in our view, actually stand in a line
instrument whereby a “bond issuer undertakes (A) to make a
of important governmental and regulatory efforts to welcome and
repayment of the capital (‘the redemption payment’) to the bond
1
[i.e., AFIB] holder during or at the end of the bond term (whether
integrate Islamic inance into the prevailing U.s. legal framework.
or not in installments), and (B) to pay to the bond holder other
The Proposed Legislation
on February 1, 2011, New York state senator Kevin Parker
introduced legislation to the New York state senate allowing for
the creation of an investment vehicle termed an “alternative inance
investment bond,” or “AFIB.” The senator’s proposed legislation
deines an AFIB as “a certiicate of equal value representing
undivided shares of ownership of tangible assets, usufructs and
services or (in the ownership of) the assets of particular projects or
special investment activity.”2 As such, the AFIB appears to track the
concept of a sukuk and the shari'ah’s requirement that entitlement
to proit be coupled with a market or asset risk by specifying the
AFIB-holder’s ownership in the underlying asset.
A supporting memorandum included along with the legislation states:
“[In] the past decade, nations from the Persian Gulf, southeast
payments on one or more occasions during or at the end of
the bond term (‘additional payments’).” An “alternative inance
investment bond agreement” is to set forth the sum paid by “bond
holder[s]” to the “bond issuer,” identify the assets “which the bond
issuer will acquire,” and specify a “bond term.” Interestingly, this
agreement is also to specify that “the amount of the additional
payments does not exceed an amount which would be a
reasonable commercial return on a loan of the capital.” “Additional
payments” thus appear to be intended as an interest equivalent for
New York law purposes. Lastly, the proposed legislation calls for the
AFIB to be “regulated in a manner consistent with traditional bonds
and other debt instruments.” Certain of these requirements seem
to implicate some of the shari'ah-based criticisms leveled against
sukuk, including guaranteeing the return of principal and pricing the
return with interest-rate benchmarks,6 and also raise the oftendiscussed issue of form vs. substance.
Asia, and other emerging markets have experienced tremendous
1
D o w
J o N E s
I s L A M I C
M A R K E T
Potential Markets
I N D E x E s
N E w s L E T T E R
upon the sale of a sukuk. The sale or sharing of title to government
assets, as we have seen from recent events, may also have political
An important question this legislation raises is: what is its
ramiications that must be accorded due weight.
contemplated set of issuers and target investors? The proposed
legislation appears to target issuances by the state as well as
second, governmental bonds have a speciic and beneicial
municipal entities. with regard to potential investors, the legislation
exemption from the registration requirements of the securities Act
explicitly discusses making AFIBs available to American Muslims for
of 1933, as amended (the “1933 Act”).8 Under most state securities
purchase. To our knowledge, this is an untapped market but one
laws, which remain applicable to a limited extent, tax-exempt
that probably would have to irst be educated and organized. Non-
governmental bonds also receive exemptions from registration. If
U.s. investors may very well seize upon U.s. sukuk offerings, though
a sukuk failed to meet the governmental bond exemptions from
a tax-exempt issuance may be unattractive if they are untaxed in
registration under the 1933 Act, it would either have to be registered
their home jurisdictions (since they usually carry a lower return).
or its sale limited by the rules of private placement exemptions.
Tax-Exempt Sukuk
Third, every governmental authority must issue bonds in accordance
with its authorizing legislation and its state’s laws, both of which
A tax-exempt AFIB offering—apparently contemplated by this
may vary widely. Among such variances may be concepts of, and
legislation—would certainly be an exciting and challenging
rules relating to, permitted borrowers, permitted projects, permitted
undertaking. In the United states, there are multiple layers of
structures, ownership and control of the underlying project, the
regulation complicating the issuance of governmental bonds in
ability to create afiliates, and authorization procedures.9 The issue
7
general and tax-exempt governmental bonds in particular. These
of ownership makes certain economic development and housing
impact any sukuk offering in the United states and create challenges
inancings viable in the Islamic context because they typically involve
with the shariah’s requirements regarding asset-backed inancing.
private ownership, and tax exemption is not always expected or is
statutorily authorized in spite of private ownership. similarly, certain
First, in order for governmental bond interest to be exempt from
small-issue industrial development bonds are tax exempt despite
federal taxation, the bond issue must comply with a number of
private ownership. If a sukuk offering were undertaken to beneit a
complex rules including the requirement that only governments,
501(c)(3) organization, the Islamic ownership requirements might
governmental authorities, nonproit organizations, and a very limited
also impact rules relating to private use of and private beneit from
range of speciic for-proit projects are eligible for tax-exempt bond
property. If these rules were violated, the 501(c)(3) entity could lose
inancings. In all of these cases, the bond must be issued by a
its tax-exempt status and/or be subject to other sanctions.
government or a governmental authority either for its own account
or as a conduit issuer for the beneit of some eligible project or
nonproit organization. The sharing of title to property owned by
a governmental entity or a nonproit corporation with a private
citizen as a for-proit entity may be prohibited under some U.s.
laws (depending on the jurisdiction) and may cause the loss of the
interest tax exemption (which presumably would apply to the sukuk
return). This of course could have a signiicant adverse impact
Umar F. Moghul is an international inance attorney and partner at Murtha Cullina LLP
in the United States, where he practices in Islamic inance and investments, real estate,
and private equity. Mr. Moghul is also a lecturer in law at the University of Connecticut
School of Law, where he teaches Islamic law and jurisprudence, and a trustee of the
Hartford Seminary.
1
These regulatory successes include the New York state Banking Department’s approval of Islamic residential mortgage inancing structures, the Board of Governors of the Federal
Reserve’s decision to allow U.s. inancial institutions to engage in Islamic transactions in countries, and New York tax authorities' issuing of rulings eliminating the additional tax that
might otherwise result from a murabaha-based home inancing structure. see e.g., Umar Moghul, Regulating Islamic Finance in the U.s., Global Islamic Finance Report (forthcoming).
2
sen. Kevin Parker, Legislative Bill Drafting Commission 08345-02-1, section 2(1) (on ile with the author).
3
sen. Kevin Parker, New York state senate Introduces Memorandum in support, submitted in accordance with senate Rule VI, section 1, Page 2 (on ile with the author).
4
Press release, available at: http://www.longislandexchange.com/press/2011/01/31/senator-parker-creates-new-opportunities-for-investment/ (accessed February 9, 2011).
5
Id. at p. 4.
6
see e.g., Taqi Usmani, sukuk and Their Contemporary Applications (translator Yusuf DeLorenzo) (discussing the author’s views on certain sukuk from an Islamic perspective).
7
Tax-exempt governmental bonds provide returns exempt from federal income taxation, and in many cases, state income taxes as well.
8
see section 3(a)(2) of the securities Act of 1933 (48 stat. 74, 15 U.s.C. 77a-77mm). It should also be noted that the exemption for a bond under the 1933 Act may or may not
exempt any other related rights or property interests that may be deemed to be securities for purposes of the 1933 Act.
9
As with any business transaction, the United states' extensive and far-reaching tax code makes general tax issues an additional consideration.
2
J o N E s
I s L A M I C
M A R K E T
I N D E x E s
N E w s L E T T E R
Umar F. Moghul
A New York Sukuk?
growth. Investors from these countries are seeking investment
opportunities abroad that comport with their religious beliefs as
Muslims, namely a prohibition on interest… In addition to the
potential for job growth and development, permitting the state
and private entities to issue alternative inance investment bonds
would permit communities that do not engage in interest-based
Umar F.
Moghul
transactions, the opportunity to beneit from capital inancing
facilitated by the state for the construction of education and
Murtha Cullina LLP
health care facilities as well as increase the market for those who
wish to purchase the state’s debt instruments.”3
Further, senator Parker, in proposing this legislation, comments,
“This legislation reverses an historic inequity where far too many
New Yorkers have been unable to beneit from public-private
partnerships with the state.”4 senator Parker also mentions that
such “investment vehicles might be used in economic development
generally, and speciically in distressed census tracts.”5 At the
The United states is not normally considered among the most
time of writing this article, the outcome of this precedent-setting
signiicant Islamic inance markets, and so the recently proposed
proposed legislation was not known and will likely not be known for
sukuk legislation in the New York state senate came as a welcome
some time.
surprise to many. Efforts vis-à-vis Islamic inance in the United states
have not been as conspicuous as in other western nations, but, if
senator Parker’s proposed legislation contemplates a inancing
passed, this legislation would, in our view, actually stand in a line
instrument whereby a “bond issuer undertakes (A) to make a
of important governmental and regulatory efforts to welcome and
repayment of the capital (‘the redemption payment’) to the bond
1
[i.e., AFIB] holder during or at the end of the bond term (whether
integrate Islamic inance into the prevailing U.s. legal framework.
or not in installments), and (B) to pay to the bond holder other
The Proposed Legislation
on February 1, 2011, New York state senator Kevin Parker
introduced legislation to the New York state senate allowing for
the creation of an investment vehicle termed an “alternative inance
investment bond,” or “AFIB.” The senator’s proposed legislation
deines an AFIB as “a certiicate of equal value representing
undivided shares of ownership of tangible assets, usufructs and
services or (in the ownership of) the assets of particular projects or
special investment activity.”2 As such, the AFIB appears to track the
concept of a sukuk and the shari'ah’s requirement that entitlement
to proit be coupled with a market or asset risk by specifying the
AFIB-holder’s ownership in the underlying asset.
A supporting memorandum included along with the legislation states:
“[In] the past decade, nations from the Persian Gulf, southeast
payments on one or more occasions during or at the end of
the bond term (‘additional payments’).” An “alternative inance
investment bond agreement” is to set forth the sum paid by “bond
holder[s]” to the “bond issuer,” identify the assets “which the bond
issuer will acquire,” and specify a “bond term.” Interestingly, this
agreement is also to specify that “the amount of the additional
payments does not exceed an amount which would be a
reasonable commercial return on a loan of the capital.” “Additional
payments” thus appear to be intended as an interest equivalent for
New York law purposes. Lastly, the proposed legislation calls for the
AFIB to be “regulated in a manner consistent with traditional bonds
and other debt instruments.” Certain of these requirements seem
to implicate some of the shari'ah-based criticisms leveled against
sukuk, including guaranteeing the return of principal and pricing the
return with interest-rate benchmarks,6 and also raise the oftendiscussed issue of form vs. substance.
Asia, and other emerging markets have experienced tremendous
1
D o w
J o N E s
I s L A M I C
M A R K E T
Potential Markets
I N D E x E s
N E w s L E T T E R
upon the sale of a sukuk. The sale or sharing of title to government
assets, as we have seen from recent events, may also have political
An important question this legislation raises is: what is its
ramiications that must be accorded due weight.
contemplated set of issuers and target investors? The proposed
legislation appears to target issuances by the state as well as
second, governmental bonds have a speciic and beneicial
municipal entities. with regard to potential investors, the legislation
exemption from the registration requirements of the securities Act
explicitly discusses making AFIBs available to American Muslims for
of 1933, as amended (the “1933 Act”).8 Under most state securities
purchase. To our knowledge, this is an untapped market but one
laws, which remain applicable to a limited extent, tax-exempt
that probably would have to irst be educated and organized. Non-
governmental bonds also receive exemptions from registration. If
U.s. investors may very well seize upon U.s. sukuk offerings, though
a sukuk failed to meet the governmental bond exemptions from
a tax-exempt issuance may be unattractive if they are untaxed in
registration under the 1933 Act, it would either have to be registered
their home jurisdictions (since they usually carry a lower return).
or its sale limited by the rules of private placement exemptions.
Tax-Exempt Sukuk
Third, every governmental authority must issue bonds in accordance
with its authorizing legislation and its state’s laws, both of which
A tax-exempt AFIB offering—apparently contemplated by this
may vary widely. Among such variances may be concepts of, and
legislation—would certainly be an exciting and challenging
rules relating to, permitted borrowers, permitted projects, permitted
undertaking. In the United states, there are multiple layers of
structures, ownership and control of the underlying project, the
regulation complicating the issuance of governmental bonds in
ability to create afiliates, and authorization procedures.9 The issue
7
general and tax-exempt governmental bonds in particular. These
of ownership makes certain economic development and housing
impact any sukuk offering in the United states and create challenges
inancings viable in the Islamic context because they typically involve
with the shariah’s requirements regarding asset-backed inancing.
private ownership, and tax exemption is not always expected or is
statutorily authorized in spite of private ownership. similarly, certain
First, in order for governmental bond interest to be exempt from
small-issue industrial development bonds are tax exempt despite
federal taxation, the bond issue must comply with a number of
private ownership. If a sukuk offering were undertaken to beneit a
complex rules including the requirement that only governments,
501(c)(3) organization, the Islamic ownership requirements might
governmental authorities, nonproit organizations, and a very limited
also impact rules relating to private use of and private beneit from
range of speciic for-proit projects are eligible for tax-exempt bond
property. If these rules were violated, the 501(c)(3) entity could lose
inancings. In all of these cases, the bond must be issued by a
its tax-exempt status and/or be subject to other sanctions.
government or a governmental authority either for its own account
or as a conduit issuer for the beneit of some eligible project or
nonproit organization. The sharing of title to property owned by
a governmental entity or a nonproit corporation with a private
citizen as a for-proit entity may be prohibited under some U.s.
laws (depending on the jurisdiction) and may cause the loss of the
interest tax exemption (which presumably would apply to the sukuk
return). This of course could have a signiicant adverse impact
Umar F. Moghul is an international inance attorney and partner at Murtha Cullina LLP
in the United States, where he practices in Islamic inance and investments, real estate,
and private equity. Mr. Moghul is also a lecturer in law at the University of Connecticut
School of Law, where he teaches Islamic law and jurisprudence, and a trustee of the
Hartford Seminary.
1
These regulatory successes include the New York state Banking Department’s approval of Islamic residential mortgage inancing structures, the Board of Governors of the Federal
Reserve’s decision to allow U.s. inancial institutions to engage in Islamic transactions in countries, and New York tax authorities' issuing of rulings eliminating the additional tax that
might otherwise result from a murabaha-based home inancing structure. see e.g., Umar Moghul, Regulating Islamic Finance in the U.s., Global Islamic Finance Report (forthcoming).
2
sen. Kevin Parker, Legislative Bill Drafting Commission 08345-02-1, section 2(1) (on ile with the author).
3
sen. Kevin Parker, New York state senate Introduces Memorandum in support, submitted in accordance with senate Rule VI, section 1, Page 2 (on ile with the author).
4
Press release, available at: http://www.longislandexchange.com/press/2011/01/31/senator-parker-creates-new-opportunities-for-investment/ (accessed February 9, 2011).
5
Id. at p. 4.
6
see e.g., Taqi Usmani, sukuk and Their Contemporary Applications (translator Yusuf DeLorenzo) (discussing the author’s views on certain sukuk from an Islamic perspective).
7
Tax-exempt governmental bonds provide returns exempt from federal income taxation, and in many cases, state income taxes as well.
8
see section 3(a)(2) of the securities Act of 1933 (48 stat. 74, 15 U.s.C. 77a-77mm). It should also be noted that the exemption for a bond under the 1933 Act may or may not
exempt any other related rights or property interests that may be deemed to be securities for purposes of the 1933 Act.
9
As with any business transaction, the United states' extensive and far-reaching tax code makes general tax issues an additional consideration.
2