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Debt Instruments

Debt issue is amongst the most common methods of raising long/short - term funds for economic firms, to the extent that, in developed countries, debt issue takes up a bigger portion of corporations’ debt portfolio than bank loans. A main goal of the Middle East Bank is to help corporations benefit from the debt market potentials parallel to money market.
Regarding huge untapped capacity of debt market in meeting financial needs of corporations, the Middle East Bank offers services for issuance of debt instruments and underwrites securities, to reduce debt issuance costs, in order to facilitate firms access to debt market potentials. The Bank is well- prepared to study the needs of companies, provide consulting services and advise debt instruments that best fit the company. A summary of some issuable debt instruments is as follows:

• Ijarah Debt Instrument is used for financing expansion projects or to provide working capital. Existence of a fixed (physical) asset with shared-ownership, as the basis of this instrument, is essential. From the statutory point of view, the asset should be assignable (salable) and have a longer durability than maturity date of the instrument.

• Murabahah debt papers are typically used for purchase of new property, purchase of raw material or for working capital. This instrument is backed by the properties and goods which the company is going to purchase. In this method, the raised amounts are transferred to the supplier of goods.

• Participation Papers are used to finance profitable economic projects with technical, financial and economic feasibility, a positive net present value and an internal rate of return larger than the fixed interest rate of the banking system.

• Manufacturing order debt papers (Istisna) provide funds for contracting activities and manufacturing orders. In such mode of finance the capability to build and deliver the property, the underlying asset for debt issue, on the specific future time should exist. The goods which are produced frequently in mass volumes cannot be the underlying asset for issuance of this instrument.

• Debt purchase papers are instruments used for purchasing long-term legal persons’ debts in Rial. The debts should have been created by Contracts of Exchange (excluding Salaf (Salam)).

• Standard Salaf Papers can be used to raise funds for producers of goods. In this mode, the Sharia Law shouldn’t have prohibited using the underlying property for this purpose (for example, any type of coins or gold cannot act as the underlying asset for issuance of Salaf Sukuk)

• Mudharabah papers are used for carrying out trade activities. Regarding (the nature of) Mudharabah contracts, the return is directly proportional to the return of trade activity which makes it quite unsteady, so the actual return is calculated at the end of the financial period.

• Jo'aleh papers are issued for financing expansion projects, among others,  or for purchasing property. These papers represent shared-ownership of property and the title/interest ( of service or physical property) is transferred to holders of papers at the end of Jo’aleh contract period.

• Usufruct papers are used to furnish liquidity for owners of durable assets, for working capital or for expanding economic activities of companies and service providers. In this method, the property owners transfer a part of usufruct of durable property in advance, based on which the usufruct papers are issued and sold to applicants for a certain amount. Likewise, the service providers are also allowed to raise finance by issuing usufruct papers against transferring a part of their future services.

• Muzar'a Sukuk is issued to raise finance for purchase of farmland. The financial entities working in agriculture sector may benefit from these papers. The financial entity, having received the share of sukuk holders (owners of the land) from the crop
and selling it in the agricultural commodities market, collects its attorney fee and then distributes the profits among the sukuk holders.

• Musaqat papers are used to finance purchase of investible orchards  and the lands which may be converted to orchards. The financial institutions involved in agriculture sector may benefit from this instrument. Through this mode, The financial entity, having  received the share of sukuk holders from the crop and selling it in the agricultural commodities market, collects its attorney fee and then distributes the profits among the paper holders

• Gharz-ohassaneh papers are mainly used for public interest  projects and are issued based on non-usury Gharz-ol-hasaneh contracts. The governments and renowned charities can benefit from this method. Maturity period of these papers is set according to needs and requirements of the issuer but (except for one-year maturity period of Salaf papers), it is generally between 2-5 years.