Topic 7:

Accounting for
Investment
Presented by:
Siti NoorHani Bt Hazli
2015282728
Siti Nur Najhwa Bt Mohamad
2015833942
Nur Hazirah Bt Mat Rahi
2015282714
Salman Ismail
2015859402
Mohamad Shahrul Amirul Md Zaini @ Rabai 2015826796

SUKUK

 SUKUK
- Definition of sukuk - Islamic bonds. It is to generate
returns to investors without infringing Islamic law
(that prohibits riba or interest). Sukuk represents
undivided shares in the ownership of tangible assets
relating to particular projects or special investment
activity.
- Sukuk can be structured based on the principles of
contracts of exchange (e.g., ijarah, murabahah,
istisna) and contracts of participation (e.g.,
musharakah and mudarabah).

 AAOIFI FAS 17 - classifies Islamic bonds

(sukuk) into at least four types:

a) Mudarabah (Muqaradah) sukuk

b) Musharakah sukuk
c) Ijarah sukuk
d) Salam or Istisna sukuk

(a) Mudarabah Sukuk

These are investments in sukuk that represent ownership of units of

equal value in the mudarabah equity and are registered in the names of
holders on the basis of undivided ownership of shares in the
mudarabah equity and its returns according to percentage of
ownership of share. The owners of such sukuk are the rab-al-mal
(capital provider).
The flow of mudarabah sukuk are as below:
1. Investors (rab al-mal) will enter into a mudharabah arrangement with
the issuer (mudharib) to invest in a business venture which is Shariahcompliant. The investors (as the sole primary subscribers) and the issuer
shall participate in the mudharabah venture. Rab al-mal will provide the
mudharabah capital (sukuk proceeds) pursuant to the subscription of the
mudharabah sukuk (Investment Certificate) issued by the Issuer.

 2.

The Issuer will thereafter use the mudharabah capital

for the purpose of the said venture which is Shariahcompliant. In a mudharabah contract, the investor and
issuer will agree upfront the profit distribution that will be
shared based on a profit-sharing ratio. Typically in a
mudharabah sukuk, the issuer will make a Trust
Declaration over Trust Assets for the benefit of the sukukholders who are participating in the business venture. The
subscription of the mudharabah sukuk represents the
investors undivided beneficial interest in the Trust Assets
pursuant to their participation in the relevant venture.

3. The Issuer will also grant a purchase undertaking to the

Trustee whereby the Issuer will acquire the sukuk upon
maturity or dissolution event.

 4.

Income from the mudharabah venture will be

distributed periodically as agreed. The types of
mudharabah sukuk issued in the markets include:

short-term instrument @ commercial papers

(ICP) 1-12 months(Malaysia);
medium-term instrument @ medium term notes
(IMTN) 1-5 years(Malaysia); and
long-term instrument @ bond more than 5
years.

Structure of Sukuk al-Mudaraba

*special purpose vehicle (SPV)

(b) Musharakah sukuk

The term musharakah is derived from the word shirkah,

which means partnership. In its simplest form, a
musharakah arrangement is a partnership arrangement
between two (or more) parties, where each partner
makes a capital contribution to the partnership (i.e. to the
musharakah), in the form of either cash contributions or
contributions in kind. Essentially, a musharakah is akin
to an unincorporated joint venture but may, if required,
take the form of a legal entity. The musharakah partners
share the profits of the musharakah in pre-agreed
proportions and share the losses of the musharakah in
proportion to their initial capital investment.

 Musharakah arrangements that are usually utilized for the

purposes of issuing sukuk are:
Shirkat al-Aqd commonly referred to (a) as the business plan
musharaka; it is an arrangement pursuant to which the Originator
and the Trustee agree to combine their efforts and resources
(typically in the form of cash and/or other asset from the
Originator and the Trustee) towards a common objective; and
Shirkat al-Melk commonly referred to (b) as the coownership musharaka; it is an arrangement pursuant to which
either (i) the Originator and the Trustee contribute cash to the
musharaka to purchase an asset together or (ii) the Originator
sells an ownership interest in an asset to the Trustee as a result of
which the Originator and the Trustee become co-owners of that
asset.

Structure of Sukuk al-Musharaka (based upon a shirkat al-aqd

arrangement)

*special purpose vehicle (SPV)

 (c) Ijarah sukuk

represent ownership of equal shares in a
rented real estate or the usufruct (benefit) of
the real estate.
Owner have the right to own, receive the rent
and dispose the real assets.
the cost of damages and maintenance bear by
the holder of the sukuk.

Step involved in the structure

1. The obligor sell certain asset to the SPV at an agreed predetermined purchase price.
2. The SPV raises financing by issuing sukuk certificates in an
amount equal to the purchase price.
3. This is passed on to the obligor (the seller).
4. A lease agreement is signed between SPV and the obligor for
a fixed period of time where the obligor lease back the assets
as a lessee.
5. SPV receives periodic rental from the obligor. This amount
are distributed among investors ( the sukuk holders).
6. At maturity, or on dissolution event, the SPV sells the assets
back to the seller at a predetermined value. That value should
be equal to any amounts still owed under the terms of Ijarah
sukuk.

 (d) Salam or Istisna sukuk

represent a sale of a commodity on the basis of
deferred delivery against immediate payment.
The Istisna sukuk is similar to Salam sukuk,
except it is permissible to defer payment in an
istisna transaction, but not in a salam.
In both salam and istisna, the subject matter
of the sale is an obligation on the
manufacturer or builder in the case of istisna
and the seller in the case of salam.

Step involved in istisna sukuk

SPV issues sukuk certificates to raise funds for the
project.
Sukuk issue proceeds are used to pay the
contractor/builder to build and deliver the future
project.
Title to assets are transferred to the SPV.
Property/ project is leased or sold to the end buyer.
The end buyer pays monthly installments to the
SPV.
The returns are distributed among the sukuk
holders.

Step involved in salam sukuk

SPV signs an undertaking with an obligator to source
both commodities and buyers. The obligator contract
to buy the commodity, on behalf of the the sukuk
holders, and sell it for the profit of the sukuk holders.
Salam certificates are issued to investors and SPV
receives sukuk proceeds.
The salam proceeds are passed onto the obligator who
sell the commodity on forward basis.
SPV receives the commodities from the obligator
Obligator, on behalf of the sukuk holders, sells the
commodities for a profit.
Sukuk holders receive the commodity sale proceeds.

Shares

Key Concept
Delivery
The legal transfer and receipt of ownership rights.
Settlement
The date by which an executed security trade must be
settled.
Margin
Borrowed margin used to purchase securities. The
practice is referred to as buying on margin.
Initial margin
The percentage of the purchase price of securities that
the investor must pay for with with his/her own cash or
marginable securities.

 Maintenance margin
The minimum amount of equity that must be maintained in a
margin account.
Collateral
Properties or assets that are offered to secure a loan or other
credit.
Collateral becomes subject to seizure on default.
Hypothecation
When a person pledges a mortgage as collateral for a loan, it
refers to the right that a banker has to liquidate goods if he
fails to service a loan.
Margin call
A brokers demand on an investor using margin to deposit
additional money or securities so that the margin account is
brought up to the minimum maintenance margin.

Buying Shares on Margin

Rationale
Use the Leveraged Position to buy more shares
Maximize the profitability from appreciation of rates
Result
Investors can buy more shares than the money they have
Thus resulting in increased profits if prices go up
Risks
If the shares price go down, the investor bears all the
loss
Losses can be substantial and even bankrupt the investor
If investor goes bankrupt, the bank may not recover its
investment

Customer/investor approaches a financing institution

He pledges collateral ( cash, shares or others securities )
The institution hypothecates the investor and sets a limit
Margin limit = value of collateral/margin percentage
The investor can buy shares not exceeding the margin
limit

If share price drop, the investors collateral may fall

below maintenance margin
The financial issues a margin call upon which the
investor deposits more collateral
If the investor doesnt respond, the financier
liquidates the collateral to cover its position
Since the duration of contract is unknown, the interest
is charged daily

Islamic Share Financing

Murabahah ( Considerations )
Delay in payments
Penalties of fixed amount
donated to charities

Devaluation of collateral
Customer to deposited additional amount to ensure
minimum pledged collateral value

Default
Collateral liquidated by bank
Amount remaining after covering liabilities to bank is
returned to customer

Murabahah Share financing

Bank assigns credit limit to the investors
Investors request the bank to purchases shares on
murabahah basis
The bank checks the requests against allowed limit
The bank purchases the shares
After settlement, the shares are sold to the investor at
higher price

The investor pays back the full price in agreed installments

If the investor wishes to pay earlier, it is Banks discretion if
it should waive the remaining balance
If the investor pays late, the bank charge a penalty

Penalty amount cannot be treated as revenue

The investor may sell the shares anytime

REAL ESTATE INVESTMENT TRUST (REITs)

Definitions From Guidelines

 An REIT provides investors a chance to diversify and invest

their portfolios in listed real estate securities possessed and
managed by it. It invests in income- generating real estate such
as residential, commercial, retail properties, plantation land,
storage facilities, warehouses, hospitals, office buildings,
education and research, hotels, shopping malls and so on.
An important aspect of a Shariah-compliant REIT is the
Shariah committee or advisory panel. This Shariah committee
is responsible to watch over the processes of the Islamic REIT
so that it conforms with each feature of Shariah principles.
The Shariah committee is also required to oversee and
guarantee that all funds are managed and administered according
to Shariah principles.

Comparison between a Conventional and Islamic

REIT