New Potential Sukuk Structures
3.2.7 New Potential Sukuk Structures
Credit Enhancing Structured Ijarah Sukuk for Project Financing: 21
As known and in practice, Ijarah sukuk can be issued by a sovereign country on the basis of its own capacity to meet the obligations of rent, and the commitment to buy back the asset. If the underlying asset is marketable and productive enough to generate the rent obligation then the sukuk can
be issued on more favourable terms and lower cost. Another way for a country to raise funds through sukuk is to use a third party guarantee of another country or a multilateral institution like Islamic Development Bank (IDB) to enhance the credit rating. Again lowering the cost of funds.
Islamic Development Bank (IDB) is mandated to contribute in the development needs of its member countries. For this purpose it has started issuing ijarah sukuk by isolating some of its assets. The objective of this securitization is to increase the pool of funds that the IDB will use to help finance development projects in its member countries through other Islamic modes of finance such as murabaha, istisna[, and ijarah. In raising money by sukuk it is usually the better assets which are utilized; as their use can reduce the cost of funds. However, in ijarah sukuk process the same better quality assets of IDB get tied up for the duration until maturity. These assets are also taken off from its balance sheet until they are bought back. The funds raised indeed increase the liquidity of the bank but the sukuk process also increases the off-balance sheet commitments of the bank. Moreover, the composition and risk profile of the asset side will also change, more likely towards deterioration. Therefore, the sukuk issue process has its own limits, while the development needs of the member
21 The structure is proposed in Khan, Tariqullah (2005). “Resource Mobilization for Islamic Development Bank: A Note”, mimeo. April. Other alternate structure
based on sukuk on donated assets can also be found in that note.
An alternative proposal for financing specific development projects in a member country is to use some good assets of the member country requesting finance, along with some assets of the IDB to form the asset pool of a SPV. This asset pool is securitization through ijarah sukuk for utilization of funds in that specific project.
This will have the advantage that (i) IDB will be able to spare some of its good assets from getting tied-up for long period. (ii) The member country asset will be securitized which may not be liquidate-able on stand alone basis at low cost. (iii) The member country will directly participate in the fund raising which will create better incentives to utilize the funds efficiently so as to pay the obligation and get back its assets.
Another way to achieve same goal is for the member country to first transfer some good quality unencumbered assets to the IDB balance sheet. The IDB then securitize it in a pool of its assets. Thus the ijarah sukuk is issued on the full balance sheet strength of IDB. This second procedure has all the advantages of the previous proposal with the addition that (iv) the credit enhancement role of IDB is further played out. Thus more cheaper funds can become available. However, the proposal hinges on sovereign members willingness to transfer some of their assets to IDB or to a SPV.
Other alternative structures are also possible on similar lines involving assets obtained on donation. For details the reader is referred to Khan (2004).