Sukuks in the UAE

What are the Types of Sukuk in UAE?

The Sukuk issued in international capital markets have been mostly structured as trust certificates, characteristically governed by English law. The several types of Sukuk are explained below-

Sukuk al-Ijara

The Sukuk al-Ijara is observed as the most standard Sukuk structure since its allotting began in the year 2008. It is the most popular kind when you anticipate the number of issued sukuks. Shareholders prefer this structure of the Sukuk due to its uncontended agreement with Sharia law. The understanding of how it operates is added factor that draws investors to the Sukuk al-Ijara. If a corporation owns a properties that are free from any debt, the properties can be put up for sale as well as lease.

Sukuk Mudarabah

For people or organizations that does not own any actual tangible assets, it is suitable for them to opt for the Sukuk Mudarabah structure. The owners of Mudarabah sukuks provides capital and they also own equivalent shares of the same value as their invested capital in the Mudarabah pool. Possessors of such bonds can effortlessly sell their Sukuk in the securities market.

Sukuk Murabahah

In this substitute structure, the corresponding of the Western mark-up principle is utilized. The issuer of this Sukuk obtains the tangible assets and acts as a trustee on behalf of all the holders of Sukuk. The supplies are sold to the holders at a postponed payment. This model of Sukuk is not prevalent owing to its strictness and lack of negotiable instruments.

Sukuk Musharakah

The Musharakah structure is also relevant for organizations who does not have real tangible assets and consequently cannot benefit from a Sukuk al-Ijara. In this kind of structure, funds are generally mobilized for instituting or developing any business activity.

Istisna Sukuk

This type of Sukuk issues certificates to raise funds essential for producing products that are owned by the investors or shareholders.

Manafae Sukuk

The Manafae Sukuk structure is established on rights over any underlying assets. The asset has the capacity or rights to perform commercial activities, and also allows for the use of intangible.

What are the Advantages of Sukuk?

Some of the key advantages of issuing a Sukuk market consists of the following-

1. There is a possible marketing benefit for issuers who are active in Islamic markets, they must be seeking investments in those markets.
2. The investor base characterized by Islamic compliant investors is still fundamentally untapped and there has usually been significant demand that are not met for produces such as Sukuk.
3. There is a chances for crossover into other functional financial markets, such as the wider ethical investment market that can provide a reputational benefit.

What are the disadvantages of Sukuk?

Some of the disadvantages of the Sukuk in the market consist of the following-

1. As the key element for inviting investors is the credit standing of the obligator, it can be difficult to hit this market for companies or sovereigns with an insufficient credit rating.
2. A Sukuk whose fundamental funding procedure is based on Ijara that will unavoidably require the obligator to have it at its disposable income-producing assets on which the transaction will take place. Besides, except the correct mechanics are involved within the certification, the replacement of similar assets, into and out of the structure will be impossible. This might limit the obligator’s capacity to sell or deal with those asset during the transaction.
3. Not like the conventional bond market, the regularization of documents for Sukuk issuance is slow to develop. This can cause adverse cost implications on the issuance of sukuk.
4. The structure used for the Sukuk departs from the typical structures that are already well recognized in the market. Thus, the involvement of the sharia scholars is essentially required. This can add some extra cost and a component of irregularity to the transaction structuring process.
5. As sharia researchers have contradictory views as to how compliant the structures are so there is no absolute integrated and settled body of opinion on these related issues.
6. The tax treatment of Sukuk can be different from that of conventional bonds in certain jurisdictions.

Why should one choose Sukuk over Bonds?

Sukuk are supported by tangible assets rather than any debt. Sukuk possession indicates rights of an asset that has significance. Even though, bond also indicates the same. The real definition of a bond merely specifies a debt obligation. The relationship among the issuer of a bond and the purchaser is very different from that of the relationship between the issuer of Sukuk as well as the buyer of Sukuk. In case of a bond, the customer is performing as the loaner and the bond issuer acts as a loan recipient. In this case, the loan has a fixed rate of interest, consequently being considered as a Riba. In Sukuk, the buyer is buying an asset that has value rather than contributing in an implied loan agreement.

Another important difference between bonds and Sukuk is that the properties involved in Sukuk certificate fulfill with all the laws of Islam. Whereas in the case of bonds, the bond certificate can be backed up by assets that are not compliant with Shariah Law that can be hustled together with other categories of assets without the knowledge of the consumer. The customer of Sukuk is guaranteed that the value of the certificate resembles to assets that are in the public moral and not linked to activities or products that are in contradiction of Islam.

Sukuk, contrasting the bonds are priced as per the real market value of the assets that are supporting the certificate of Sukuk. Bond valuation is based on the credit rating of the issuer. This is required in the case of bonds since when you sell a bond on the secondary market then it is stated that you are actually marketing the debt in the underlying loan connection. The sale of a Sukuk on the secondary market is merely the sale of ownership of the asset.

The main benefit of Sukuk above traditional bonds is that the value surges in relationship to the assets that is supporting the Sukuk certificate. If the asset is raised in value then the value of the possession of that asset is supported by the Sukuk increases eventually. Bonds does not have this feature. It is not imaginable to raise the foremost debt in a bond and intensify the revenue from a bond. It is the direct result of the stable interest.