When sukuk (plural for the Arabic word sak) were first innovated in the early 1990s, the sukuk market was discerned as a substitute to conventional bonds in terms of its features as a fixed income instrument with preservation of the capital. In the Malaysian market, until 2004, the prevailing type of sukuk in the market was the sale-based sukuk, better known as Islamic debt securities.
The most common types of contracts used in sale-based sukuk structuring are murabahah and bay’ bi thaman ajil (BBA). From the Shariah perspective, there is no significant difference between these two contracts. However, from a technical point of view, BBA is generally referred to as long term sukuk, while murabahah sukuk, Islamic debt securities (IDS), are used for short and medium term sukuk. Unlike conventional bonds, whereby the debt is created through lending with interest-unacceptable in the Shari’ah-debt in murabahah sukuk is created through a transaction.
Murabahah sukuk are certificates that represent debt from the issuer owed to the investors arising from the deferred mark-up sale transaction of an asset. Hence, the debt is not a loan per say, rather it is created from a deferred sale contract whereby the mark-up is paid on a deferred basis upon maturity. Thus, the relationship between the parties in this contract is not regarded as a lender and a borrower, but rather as a seller and a buyer.
This article intends to give readers a brief snapshot on murabahah sukuk by explaining the concept of murabahah and how this contract is used in structuring murabahah sukuk. It further illustrates the basic structure of murabahah sukuk, in which it is structured using two approaches: ‘inah (bay-back sale) and tawarruq (monetization) arrangements. Pursuant to this, two real cases of study are illustrated as samples for each structure giving readers a clear picture of how it works.
Murabahah is defined as a sale contract whereby the seller sells an asset at a higher price than the purchased price, in which both the cost price and the mark-up are disclosed to the buyer. The expected profit from the sale can be quoted either in the form of a figure or a percentage. Therefore, the prominent feature that distinguishes it from other types of sales is the element of disclosing the cost and the profit incurred during the purchasing of the asset by the seller. The transaction must fulfil all the requirements of a murabahah sale contract, in which it must fully describe the asset, specify the quantity and also the terms of delivery of the asset.
With regards to the mode of payment, the murabahah concept does not necessarily employ the notion of deferred in payment, as is misconceived by some people. The payment term is not the distinguishing factor between murabahah and other contracts. Though the Shariah allows both types of payment modes, i.e. spot and deferred, it is common in the Islamic finance industry that the payment mode of murabahah is fulfilled on deferred basis, which later creates a debt owed by the purchaser. Thus, murabahah is usually understood as a contractual arrangement between a financier and the customer; in which the financier acts as the seller of an asset, and the customer is the buyer of the asset, with the notion that the mark up price will be paid on a deferred basis.
