Compliant Instrument CASABLANCA STOCK EXCHANGE MOROCCO M A Y 2 0 T - - PowerPoint PPT Presentation
SMEs/SMIs Financing via Shari'ah Compliant Instrument CASABLANCA STOCK EXCHANGE MOROCCO M A Y 2 0 T H , 2 0 1 4 BY DR. NIDAL ALSAYYED, CEO WWW.INAYAH.ORG A M M A N , J O R D A N Prepared by iNayah CEO: NIDAL ALSAYYED ( Email:
CASABLANCA STOCK EXCHANGE MOROCCO
M A Y 2 0 T H , 2 0 1 4
BY
WWW.INAYAH.ORG
A M M A N , J O R D A N
SMEs/SMIs Financing via Shari'ah Compliant Instrument
www.inayah.org
Prepared by iNayah CEO: NIDAL ALSAYYED ( Email: nidal@inayah.org )
About INAYAH.org &Dr. Nidal Alsayyed
Background Contribution to Islamic Finance Strengths and Focus areas Industry recognition
2
May, 2014
INAYAH RESEARCH & CONSULTING| www.inayah.org
3
Socio-Economic ventures ةريغصلا تاكرشلا ليومتل ةمعادلا رواحملا
MICRO FINANCE
WAQF
تيتاسسؤًنا ةرظُناو وىهفًنا( .براجتو ثايجهُيو مداريو ةأشَ) اهيهع سايمنا ٍكًي براجتو برغًنا يف ريغصنا ميىًتنا علاو. لىذتنا تيجهُيو ريداغلؤ قوذُص حرتمي.
تسارذنا خيتافيو ثابهطتي:
دارفلؤا مخد يىتسي ثاجايتدلبا ذيذذت. تفهتخًنا ٌاذهبنا يف ةذذتًنا ىيلؤن تيئاًَلئا جياربنا.
ثاذبلؤن تينوذنا كيداُصناو زكارًنا..مثي : ICARDA
WWW.INAYAH.ORG
Policymakers and bankers worldwide are increasingly
focusing on micro-, small and medium-sized enterprises.
(IDB) is making important efforts to nurture the micro-
enterprise and SME sector and its export activities. Three important subsidiaries serving the sector: the
International Islamic Trade Finance Corporation (ITFC),
Islamic Corporation
for the Development of the Private Sector (ICD) and the
Islamic Corporation
for Insurance of Investments and Export Credit (ICIEC).
Each of the IDB
WWW.INAYAH.ORG
The brief survey of possible funding gaps affecting
smaller enterprises suggested that SMEs in the developed world could generally expect to receive funding if they have a commercially viable
funding and a lack of collateral might result in credit rationing in some cases. ييلبسلئا ميىًتنا لود يتأي اُه
Islamic Banking for SME ةريغصلا تاكرشلا يف ةيملبسلئا ةفريصلا
Wide range of Islamic financial instruments, each with a specific purpose:
ensure that the instrument used is suitable for the
economic purpose that a company seeks to achieve. There are two main categories of transaction types: ❑ Profit- and loss-sharing partnership equity investments; and ❑ Transactions with a predictable or fixed return structure.
SMEs is a natural niche for Islamic banking as it deals directly
with the real economy, creates employment, involves the productive use of resources, especially capital and finance, and contributes to the alleviation of poverty.
Ethical and moral values. Islamic banking also advocates entrepreneurship and risk
the financier and the beneficiary share the actual or net profit/loss, rather than leaving the risk burden to the entrepreneur.
The principle of fairness and justice requires that the actual
parties.
For micro-enterprises and SMEs looking for financing, Islamic
banking can help promote entrepreneurial development
WWW.INAYAH.ORG
AAOIFI: “Investment Sukuk are certificates of equal
value representing undivided shares in
services or (in the ownership of) the assets of particular projects or special investment activity, however, this is true after the receipt of the value of Sukuk, the closing of subscription and the employment of funds received for the purpose of which the Sukuk were issued” (standard
Further reading: AAOIFI Sharia Standard No. 17
10
DAY ONE : SESSION I – BRIEF INTRODUCTION ON THE TOPIC
Fixed Return Vs. Variable return: Choosing the
right underlying structure;
Mapping cash flows to the transaction, Sukuk
is not an interest paying instruments, therefore a clear link must be established between the return and the underlying transaction;
Documentation perspective – Commercial consideration – matching
requirement with limitations
Assessing the role of security / Collaterals
11
DAY ONE : SESSION IV – EXAMINING RETURN OR PRICING IN SUKUK AND SECURITIZATION TRANSACTIONS
Asset
Asset Type
jurisdiction for tax efficiency and
Jurisdiction and Regulations
Return Investor considerations
12
DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
Asset Backed Sukuk (ABS) =
Securitization + Certificates Backed by Assets + SPV (independent) (So the recourse to the Assets due to True Sale)
Asset Based Sukuk (AbS) =
Securitization + Certificates Backed by Collaterals+ SPV (credit interlinked) (So the recourse to the Originator)
www.inayah.org
15
Distribution Distribution
Sukuk Holders
Declaration Of Trust
Proceeds
Distribution
Return on Investment
Issuer/Trustee SPV [●]
(As Obligor/Undertaking)
Proceeds Investment
Investment (Sharia compliant transaction)
Underlying Transaction: Any Sharia compliant contractual relationship between the Issuer representing Sukuk Holders and the Obligor Securitization
Shari'ah compliant Contract
Sukuk Vs. Other Investments
ىرخلؤا رامثتسلبا تاودأو كوكصلا
Characteristics Sukuk Equity Bonds Securitizat ion Covered Bonds Ownership of Assets
√ √ X X/√ X/√
Performance linked return
√ √ X √ X
Underlying transaction
√ √ X √ X/√
Equity Risk
√ √ X √ X/√
Fixed Returns
√ X √ √ √
Risk Mitigation
√ X √ √ √
16
Based
approved Shari'ah compliant structures/contracts/instruments
Mimic the commercial aspects of the conventional
instruments, however structurally and documentation wise significantly different
Meet the short & long term liquidity and investment
needs of the SME project
Fund generation for various stakeholders in a
Shari'ah compliant way
Essential component for Society overall Economics
growth
17
DAY ONE : SESSION I – BRIEF INTRODUCTION ON THE TOPIC
18
asset based and asset backed Sukuk
similarities
19
DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
Basic requirement to decide the structure of the Sukuk
include the following:
Asset: Availability/non availability, nature and type, Return: Fixed, floating, …. Risk Appetite: Jurisdiction / Regulatory framework: Nature of Obligor/Issuer : Utilization of proceeds: Convertibility, multiple issuances, and other special
features:
Redemption: Enforcement: Other considerations for Morocco?
20
DAY ONE : SESSION II – FUNDAMENTAL SHARIAH REQUIREMENTS FOR THE ISSUANCE OF SUKUK
Discuss Role of each of the parties:
Investors Obligor / Issuer Lead Manager (Investment Bank) Regulators / Relevant Authorities Sharia Board / Sharia Consultants Legal Counsel (for each party/transaction) Service Providers (as required) Auditors/clearing stream Others specific for any particular Sukuk issue
21
DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
What assets are required? Asset based Vs Asset backed
What is meant by Asset Based / Asset Backed Based on availability of Asset
Sale of Asset? Lease of Asset? Other Investments (Musharakah, Mudarabah, Wakalah)
Regulatory requirement
Issues with fees and taxes for Asset transfer
Based on the underlying transaction type
Discuss the requirement based on transaction type: Ijara,
Mudarabah, Wakalah, Salam etc (more details and discussions will follow when we deal with the transaction type)
22
DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
Islamic Securitization vs. Sukuk: Differences & Similarities
Sukuk is in essence securitization of the underlying
transaction;
However there exists a very important difference
between a simple Islamic Securitization and Sukuk;
Recourse to the Asset:
In securitization the recourse of the investors is only to the
asset securitized
Whereas in a Sukuk the recourse for the investors is both to the
Obligor and the underlying assets/receivables
23
DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
Market operational and Regulatory framework. Fixed Income mentality! Debt based Sukuk Training. Restructuring of Defaulted Sukuk.
11/05/2014
25
Questions for Discussion
Why is there a need for innovation - Are the basic
structures in Islamic Finance able to address the commercial requirements?
Is replicating conventional structures actually
innovation?
What is the scope for innovation in Islamic Finance
and what are the parameters and rules for such innovation?
26
DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK | INNOVATION
Innovation and the factors driving innovation
Need for continuous innovation Major hindrances to adaptability – Challenges and
Solutions
Regulations and legal framework Conventional approach of the market players Risk mitigation techniques
External Vs Internal Factors
External environment Internal Islamic financial institutions readiness
27
DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK | INNOVATION
Innovation under Islamic Finance
Need for Innovation Commercial considerations Specific requirements of the Parties. Commercial viability. Legal considerations Local law restrictions. Enforcement issues. Taxation issues Limitations of the various basic Sharia structures
28
DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK | INNOVATION
11/05/2014
29
DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
Issuer/Trustee
Pursuant to Declaration of Trust
Company (As Purchaser ) Sukuk Holder
Declaration
Assets / Property
Sale Agreement Deferred Sale Price
Assets / Property
Distribution Cash Proceeds
Third Party (Seller)
Purchase Price
30
DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
صاخ ضرغ تاذ ةكرش
SME’s SPV
SME’s Company (As Lessee رجأتسملا) Public Sukuk Holders
ةينوناق ةيقافتا
تاكلتمملاو لاملا سأر
ريجأت ةيقافتا تاراجيلئا دئاوع
Purchase Undertaking حابرلؤا عيزوت تامهاسم ةينيعو ةيدقن
Company (As Seller)
ءارشلا نمث
Company (ثلاث فرط نم مزلم دعو)
31
DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
Issuer/Trustee
Pursuant to Declaration of Trust
SME Company (As Lessee) Sukuk Holder
Declaration
Assets / Property
Lease Agreement Lease Rentals Purchase Undertaking Distribution Cash Proceeds
Company (As Seller)
Purchase Price
Company (As Obligor)
32
DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
First Distribution (Pro-rata) First Distribution (Pro-rata)
Second Distribution (Mudaraba Agreement)
(Tacit Musharaka) Purchase Undertaking
Sukuk Holders
(As Rab Al Maal)
Declaration Of Trust
Rab Al Maal Contribution
Second Distribution (Mudaraba Agreement) ((Rab Al Maal Share) (Capital at Marturity)
1 9 Return on Investment (& Joint Cap) Mudaraba Agreement
Issuer/Trustee
(As Rab Al Maal)
[●]
(As Obligor) Mudarib Contribution
Joint Capital Common Investment Pool
Investment
[●]
(As Mudarib) 2 3 4 5 6 7 7 8 Mudaraba Contribution Sale Undertaking
33
DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
Issuer/Trustee
Pursuant to Declaration of Trust
Company Sukuk Holder
Declaration
Contribution in-kind/cash Contribution in-cash
Musharaka Agreement
Management Agreement Managing Partner
(Company)
Musharaka Entity
Investments as per Musharaka Business Plan
Return on Investment Distribution Distribution Purchase
Undertaking
Distribution Cash Proceeds
11/05/2014
34
Master Wakala Agreement
$ Returns $ Investments
Sukuk Holders Funding
Declaration
Issuer SPV Trustee & Muwakkil (Principal) Company Wakil (Agent) & Obligor
Master PU
Master SU
Portfolio of Wakala Assets Financing
Returns – S/A; On Maturity
PU or SU Investments – Payments by the Sukuk Holders & pursuant to Wakala Agreement through Trustee investment into Wakala Assets PU – Purchase Undertaking SU – Sale Undertaking
DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
Distinction between various Sukuk structures – Pricing/Return/Risk
Fixed Return Variable Return Valuation Risk Musharaka
Yes* Yes
Underlying Assets
High risk
Mudaraba
Yes* Yes
Underlying Assets
High risk
Wakala
Yes* Yes
Underlying Assets
High risk
Istisna
Yes No
Receivable
Low Risk
Salam
Yes No
Receivable
Low Risk
Murabaha
Yes No
Receivable
Low Risk
Ijara
Yes Yes
Underlying Assets / Receivables
Moderate Risk 35
DAY ONE : SESSION IV – EXAMINING RETURN OR PRICING IN SUKUK AND SECURITIZATION TRANSACTIONS
Shariah position on shortfall, default and documentation requirements
Remedies available to investors: AAOIFI guidelines
and Sharia position
Discuss concept of return based on underlying
transaction
Events of Default: Shariah position and limitations Triggering the Event of Default Establishing default of the obligor under various underlying
transaction types: Ijara, Musharaka, Mudaraba, etc
Mitigation of risk – return shortfall and default
Additional documents?
36
DAY ONE : SESSION IV – EXAMINING RETURN OR PRICING IN SUKUK AND SECURITIZATION TRANSACTIONS
relation to financing SMEs via Sukuk/Securitization? (Do we need specific authorization)? If yes, what type of authorization?)
requirements in issuances.
legal and regulatory requirements (example, if any)
37
DAY ONE : SESSION V – LEGAL & REGULATORY ISSUES CONCERNING ISSUANCE OF SUKUK & SECURITIZATION
CEO Inayah Research and Consulting Jordan, UK, and Qatar nsayed70@gmail.com