Debt Instruments

Debt Instruments

Issuance of debt instruments is one of the most common mid-term and long-term financing. One of requirements In most arrangements of issuing corporate bonds (Sukuk), is bank guarantee. MEB with appropriate Capital Adequacy Ratio can engage in funding activities by guaranteeing bonds (Sukuk) and also assesses customer’s requirements and offers them most appropriate debt instruments to be issued.

A short list of features of some permissible Islamic debt instruments (Sukuk) is as followings:

Ijara Sukuk

Such securities are used to financing working capital or expansion projects. An underlying fixed property, not held in divided shares, as the basis for issuance of such instrument is required. Such an asset must have a lifetime longer than the maturity date of the instrument and be lawfully salable.

Murabaha Sukuk

This instrument is, in the majority of cases, issued to finance the purchase of new assets, provide working capital to purchase raw material. The issuance of (Murabaha) is backed by the assets, material and goods, which the company plans to purchase (underlying asset). In such mechanism, the funds raised are paid to the seller of goods.

Musharaka Sukuk

This structure is used to finance profit-making economic projects. The projects financed by such instruments must be feasible in all technical, financial and economic aspects.

Istisna’ security

This instrument is issued to finance contractors’ activities and manufacturing orders. In this mechanism, there should exist the capability for manufacturing and delivery of the asset, for which the security is issued, in anticipated dates. The assets which are frequently manufactured in mass scale, may not be the underlying asset for such debt issue.

Debt purchase Sukuk

Such securities are tools for purchasing long term debt of company in discounted price. The debt must arise from transactional contracts (with the exception of Salaf contracts)

Joaleh Sukuk

This instrument is used to finance construction, completion, repair/overhaul, delivery and, as the case may be, the operation of a certain project. Joaleh papers represent of an asset, where ownership (of the asset or service) is transferred to security holders at the maturity date of the Joalah contract.

Manfa’ah Sukuk

This instrument can be used to provide financial resources for durable asset purchase, working capital or expanding economic activities of companies and service- provider enterprises. Through this mechanism, the asset holder transfers, in advance, a portion of the future profits of his durable assets and relying on such profits, issues Manfa’ah securities and sells them, for a set price, to the security holders. The service-provider companies can issue Manfa’ah instrument against a portion of their future services.

Gharz-al-hasaneh (interest-free loan)

This instrument is used to finance public-interest projects or charity purposes. The instrument is based on an interest-free Gharz-al-hasaneh contract. The governments and reputable charity can use such structure to finance their non-profit activities.

Muzarabah Sukuk

This instrument helps to carry out commercial activities. Regarding the Muzarabah contract, the profit (coupon rate) of papers shall depend on the business activity. So, it generates a variable profit and the definite amount becomes clear at the end of the financial period.

Securitized loans

The issuer uses this instrument to purchase mortgage-backed and asset-backed securities. The securitized loans consist of legal persons’ term-contracts of transactional contracts such as instalment sale, hire-purchase contracts and Joaleh (excluding future/forward contracts (Salaf)), which are backed by a security.

Reinsurance Sukuk

These are registered instruments, indicating partnership of holder in the rights and liabilities originating from the reinsurance contracts and their partnership in providing the needed capital to cover the whole or a portion of insurance risks portfolio (the risks for which the insurance policy is issued or reinsurance contract is concluded) as well as partnership in the profits. To issue such instrument, the issuer is required to produce and present a feasibility report on the features and characteristics of the portfolio of transferable insurance risks, risk exposure limits, predicting loss ratio for the concerned field, hedging the exposure, conditions and exceptional cases, and anticipating profitability of the investment of funds. In addition, the (coupon) rate of these instruments, proportionate to the risk appetite of instruments’ holders may be set higher than the rate of corresponding instruments in the capital market.

Wakala Sukuk

These are registered instruments that represent ownership of assets held in undivided shares, including goods, services, specific project or interests, rights and profits arising from carrying out certain economic activities, issued based on Wakala contract agency agreement. The subject matter of wakala contract is conducting economic activities, in accordance with Islamic –compliant contracts and observing the country’s rules and regulations, financed by issued wakala instruments, for generating revenue through activities such as purchase, sale, lease, construction or provision of property, goods and service, for which related contracts are concluded. At the time of issuance of Wakala papers, the type of economic activities and details and features that are the subject of Wakala contract must be specified.