FAQ - Sakuk issuance

1. How are sukuk (Islamic bonds) different from conventional bonds?
Sukuk is a trust certificate whereas a bond is a contractual debt obligation. Generally, sukuk represents a beneficial ownership interest in the underlying asset. Returns on sukuk are tied to the returns earned through the underlying assets. For bond, the issuer is contractually obliged to pay bond holders, on certain specified dates, interest and principal.

2. How do we ensure the sukuk structure conform to Shariah principles?
The structure of sukuk must be approved by a Shariah adviser appointed by the issuer. In the case of ringgit sukuk issuance, the sukuk can be structured by applying various Shariah principles and concepts that are listed in Appendix 1 of the Guidelines on the Offering of Islamic Securities (Guidelines) which have been endorsed by the Securities Commission Shariah Advisory Council (SAC). For new Shariah principle structure which has yet to be introduced in the market, the SAC’s approval is required.

For non-ringgit issuance, Malaysia will accept the Shariah opinion of other jurisdictions and the issuer need not obtain a Shariah endorsement from the SAC.

Who can become an independent Shariah adviser for sukuk and what are the requirements?
Approval by the Securities Commission (SC) for an independent Shariah adviser for sukuk is based on satisfying the criteria stipulated in paragraph 6.01 of the Guidelines. For companies, the criteria stipulated in paragraph 6.02 must also be satisfied. For approval, please write to:

Head, Islamic Capital Market Department
Securities Commission
3 Persiaran Bukit Kiara
Bukit Kiara
50490 Kuala Lumpur

4. What is the advantage of sukuk compared to conventional bond?
Sukuk is based on an underlying transaction which creates a close link between financial and productive flows. The financing must be channeled for productive purposes such as project financing, rather than for speculative activities. Thus, the risk exposure is to the project and not to the uncertainties or activities that have no real economic benefits. This contributes to greater stability of the financial system. Moreover, under the risk sharing principle required, there is an explicit sharing of risk by the financier and the borrower. This arrangement will entail the appropriate due diligence and the integrating of the risks associated with the real investment activity into the financial transaction. The real activity is expected to generate sufficient wealth to compensate for the risks.

In contrast, conventional bonds generally separate such risks from the underlying assets. As a result, risk management and wealth creation may, at times, move in different or even opposite directions. Conventional bonds also allow for the commoditisation of risks. This has led to its proliferation through multiple layers of leveraging and disproportionate distribution, in turn, which could result in higher systemic risks, thus, increasing the potential for instability in the financial system.

In addition, transparency represents a basic tenet underlying all Islamic financial transactions. The profit-sharing feature of Islamic financial transactions imposes a high level of disclosure in the financial contract. The accountabilities of the respective parties involved in the transaction are clearly defined in the contract.

Issuing sukuk also give access to a wider investor base as the instruments attract not only the Islamic investors but also conventional investors. It was reported that more than 80% of sukuk investors are conventional institutional investors. Sukuk is also considered as a new asset class with a relatively attractive pricing. The growing demand for sukuk is attributed by growing awareness, increased in petrodollars, wealth and reserves as well as the massive development of infrastructure projects.

5. Why should I choose Malaysia to issue sukuk?
Malaysia has a well-developed sukuk market where more than 60% of sukuk outstanding globally are from Malaysia. Malaysia offers the following benefits:

* Breadth and depth of the Islamic capital market with wide range of Islamic financial instruments and diversified players
* Wide investor base from Islamic and conventional financial institutions, pension funds and fund management companies
* Pool of talent in structuring new innovative Islamic financial instrument
* Comprehensive legal, regulatory and Shariah framework to ensure the integrity and confidence level remain high
* Competitive pricing, which may be better as compared to conventional bond pricing due to the high demand of sukuk in the market
* Flexibility to issue sukuk in Ringgit and foreign currencies
* Full tax deductions on issuance cost for all Islamic securities until 2010
* Stamp duty exemption on documentation
* Tax neutrality on all Islamic instruments and transactions
* Liberal foreign administration policy – free to use proceeds in and out of the country
* Mutual recognition of Shariah opinions issued in other jurisdictions by a recognized Shariah committee
* International credit rating is allowed

6. Are there exchange control restrictions for foreigners intending to issue sukuk in Malaysia?
Malaysia maintains a liberal foreign exchange regime. Foreign issuers are free to issue sukuk in any currency. They are also free to repatriate the proceeds from raising Ringgit or foreign currency sukuk to any country outside Malaysia and free to swap to other currencies and hedge their positions.

7. Can a non-Islamic company issue a sukuk?
Any institution or company can issuer a sukuk so long as its activities are considered as permissible activities under Shariah. Some prominent non-Islamic companies that have issued sukuk in Malaysia are Shell MDS, Nestle, the World Bank, Tesco and AEON Credit, a Japanese-based company.

8. How long does it take to get approval for a sukuk application?
Application for issuance with AAA local rating or BBB international rating will be deemed approved upon submission to the SC. Otherwise, the normal approval process by the SC will take not more than 14 working days from the date of the full submission. For application to issue foreign currency sukuk or issuance by a foreign institution, an approval from the Controller of Foreign Exchange, Bank Negara Malaysia must also be obtained.

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