December 2008 Issue #22

Islamic Finance
Bulletin
..………….………………………………………………
Towards an informed market

Islamic Finance Bulletin, a …in this issue

quarterly release on the Islamic
capital market in Malaysia, is
dedicated to informing and
educating those active in the
growing market of Islamic finance
Islamic Treasury Money Market Instruments for
on issues, developments and Liquidity Management
trends in the domestic Islamic
capital market.

The contents are intended to be Shariah Aspect of Ijarah Muntahiyah Bittamleek

educational, to accelerate the
learning curve of those new to
Contract
Islamic finance and to stimulate
further discussions, research and
development - all with a view to
enabling the Malaysian Islamic Risk Associated with Islamic Financial Contracts: Part 5
capital market to effectively meet
the increasing sophistication of the
investment community.
Malaysian Sukuk Market in Review
Should you wish to share any
views or comments, or to
contribute to the bulletin by way of
editorials, please send your e-mail
to islamicratings@ram.com.my.
Market Statistics

Ringgit Sukuk Market Report

This page has been intentionally left blank
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
Islamic Treasury Money Market
Instruments for Liquidity Management
Rafe Haneef, Managing Director of Fajr Capital
Introduction
S
ince the emergence of the
contemporary Islamic finance
market, the treasury departments
of Islamic financial institutions (“IFIs”)
have been facing many challenges in
managing their surplus liquidity. The
recent surge in liquidity, primarily driven
by spikes in oil prices, has exacerbated
liquidity-management challenges. This
article, however, will only focus on
Islamic money-market-type instruments.
The key characteristics of a money-
market instrument are as follows:
(i) Enables large sums of money to be
transferred quickly, at a low cost.
(ii) Has a short maturity (1 day to 1
year).
(iii) Can be converted to cash quickly
and at a low cost (active secondary
market).
(iv) Has low price risk due to short
tenure.
(v) Has a high degree of safety with
regard to principal investment.
The attributes above are collectively
referred to as “the Five Characteristics”.
Islamic Finance Bulletin October - December 2008
Rafe Haneef
Current Islamic Liquidity
Management Tools
i) Commodity Murabaha
The earliest form of Islamic liquidity-
management tool had been commodity-
linked investments based on the
murabaha principle. The commodity
murabaha product had been principally
developed as an alternative source of
funds for the commodity desks of some
international banks. Instead of borrowing
internally from their treasury, the
commodity desks had bought the
commodities on deferred-payment terms
from IFIs. In the early days, the Islamic
deferred-payment terms had often been
more competitive than the international
banks’ internal treasury rates. This had
encouraged several international banks to
seek commodity murabaha trades with
IFIs. Commodity murabaha trades are
usually carried out in the following way:
(i) The IFI will buy “spot” certain
commodities, usually commodity
warrants traded on the London
Metal Exchange, from a supplier -
at a price of, say, X.
(ii) The IFI will then sell the
commodity to the bank at a higher
price, e.g. X+Y, payable in 3
months. The Y could be computed
based on various benchmarks,
Issue #22 1
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
e.g. the 3-month USD LIBID minus
12.5 basis points.
(iii) The bank’s commodity desk will
use the commodity acquired for its
trading book.
(iv) On the maturity of 3 months, the
bank will pay a deferred price of X
plus Y (for the commodity) to the
IFI.
This instrument only satisfies some of the
Five Characteristics; it fails to meet the
first and third ones.
Islamic Finance Bulletin October - December 2008
Rafe Haneef
The IFIs are not able to transfer large
sums at quick notice; once the commodity
murabaha trade has been concluded, the
IFIs are not able to convert the trade into
cash before maturity, due to various
Shariah restrictions on the trading of
debt. The IFI can, of course, negotiate
with the bank to pre-pay the commodity
murabaha debt before maturity, and offer
the bank a discount based on the concept
of dha wa ta’ajjal (debt discounting for
early payment). However, the process is
not as straightforward as a secondary-
market trade.
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TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
(ii) Commodity Tawarruq
Following the above, commodity
murabaha financing adopted a different
form based on the tawarruq model.
Although this new form is often known as
a commodity murabaha trade, the proper
terminology is “commodity tawarruq
trade” - because the buyer will always
subsequently sell the commodity to the
supplier. The tawarruq model has helped
IFIs conduct commodity trades directly
with the treasury departments of banks,
and has provided the IFIs with a broader
base of investors to deploy their short-
term liquidity. Commodity tawarruq
trades are normally conducted as follows:
(i) The IFI will buy “spot” certain
commodities, usually commodity
warrants traded on the London
Metal Exchange, from a supplier
- at a price of, say, X.
Islamic Finance Bulletin October - December 2008
Rafe Haneef
(ii) The IFI will then sell the
commodity to the bank at a
higher price, e.g. X+Y, payable in
3 months. The Y could be
computed based on various
benchmarks, e.g. the 3-month
USD LIBID minus 12.5 basis
points.
(iii) The bank’s treasury department
will immediately sell the
commodity to another supplier
(and sometimes to the original
supplier), for a price equal to X.
(iv) Upon maturity 3 months later, the
bank will pay a deferred price of
X plus Y (for the commodity) to
the IFI.
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TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
Although this instrument satisfies 4 of the
Five Characteristics, but the IFIs are still
not able to convert the trade into cash
before the maturity of the commodity
tawarruq trade, due to various Shariah
restrictions on debt trading, as mentioned
earlier.
Commodity tawarruq financing has been
the most widely used form of liquidity-
management instrument to date, due to its
ease of execution and wide acceptability
among IFIs and banks. In recent years,
however, some of the IFIs have been
reluctant to use commodity tawarruq
instruments due to their disapproval of
the concept of tawarruq. Commodity
tawarruq trade is often characterised as a
paper trade or “cash-for-cash contract”
since the commodity merely passes into
the accounts of the supplier or suppliers
(in some cases). The commodity title will
flow from the supplier to the IFI, and then
to the bank, before reverting to the
original supplier or to another supplier
(which invariably has a special
arrangement with the original supplier).
All these title movements often occur
within a few hours, if not minutes. In
most cases, neither the IFI nor the bank
takes possession of the commodity; the
reality is that they never intended to take
any possession. This form of financing
has attracted a lot of criticism within the
Islamic finance industry, and some have
declined to use this method.
(iii) Investment Agency
Some of IFIs, which find the commodity
tawarruq model objectionable, have
devised an alternative scheme based on
the wakalah al-istismar (investment
agency) concept.
Islamic Finance Bulletin October - December 2008
Rafe Haneef
This scheme is ordinarily structured as
follows:
(i) The IFI will appoint the bank as its
investment agent (“Agent Bank”),
and will place or deposit its surplus
funds with the Agent Bank for a
certain period.
(ii) The Agent Bank will irrevocably
undertake to invest the funds
according to Islamic principles,
with a targeted return that is at least
equal to the “expected return” of
the IFI, and will return the original
investment and expected return on
the maturity date.
(iii) The IFI’s expected return is often
linked to prevailing money-market
rates.
(iv) The Agent Bank will invariably get
a return on the investment that is
higher than the IFI’s expected
return.
(v) The Agent Bank will return the
original investment, together with
the expected return, to the IFI upon
maturity.
This arrangement often works out as
anticipated with reputable Agent Banks
with the track record of managing the
investments with a return greater than the
IFI’s expected return. However, during a
market downturn there is a possibility that
the Agent Bank may suffer losses on the
investment and may even end up losing
the entire investment. This risk however
is often intentionally not covered by the
investment agency contract and it is
uncertain whether the IFI will insist on
the undertaking of the Agent Bank to
return the original investment and the
expected return and claim damages for
the Agent Bank’s breach of undertaking.
From a Shariah perspective, the Agent
Issue #22 8
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION

Bank is only responsible for the breach of
the undertaking if it has defaulted or been
negligent in investing or managing the
funds. The IFI will have the onus of
proof to establish the willful default or
negligence of the Agent Bank.
This instrument fails to meet the first,
third and fifth characteristics. It is often
very cumbersome for the IFIs to negotiate
the agency arrangement with the Agent
Bank and this inhibits their ability to
transfer funds quickly.
Also, the IFIs could not unwind the
transaction and obtain cash before the
maturity due to the agency terms.
Further, the agency relationship opens up
the possibility that the IFIs as principal
may end up bearing the losses related to
the investments which reduces the degree
of safety of principal (the fifth
characteristic).

Islamic Finance Bulletin October - December 2008 Issue #22 9

Rafe Haneef
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
(iv) Government Investment Issues
(“GII”)
In 1983, the Malaysian Central Bank
introduced an Islamic liquidity-
management programme for IFIs, based
on the concept of qard al-hasn
(benevolent loan) and voluntary hiba
(gift). This programme is structured as
follows:
(i) The IFI will deposit its surplus
liquidity as a benevolent loan to the
Central Bank, for an agreed period.
(ii) The agreement will clearly set out
that the IFI is contractually not
entitled to receive any return on the
loan.
(iii) The Central Bank will use the loan
to undertake development projects
for the benefit of the nation, and
repay the loan upon maturity.
(iv) The Central Bank will usually,
however, make a voluntary hiba to
the IFI - invariably linked to the
prevailing money-market rates.
Islamic Finance Bulletin October - December 2008
Rafe Haneef
This instrument satisfies all of the Five
Characteristics. Under Malaysian Shariah
interpretation, IFIs are able to trade GII
certificates in the secondary market
pursuant to the concept of bay al-dayn
(sale of debt). As such, their trading of
GII certificates in the secondary market is
similar to that of any conventional
money-market instrument. Nonetheless,
the voluntary hiba arrangement has not
been accepted by Shariah scholars in the
Middle East, based on the maxim that
"what is a matter of common practice has
the same effect as an express condition".
The “sale of debt” concept has also been
rejected by Middle Eastern scholars on
various Shariah grounds. Hence, this type
of instrument is only prevalent in
Malaysia, and has limited applications
elsewhere.
Issue #22 10
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
In 2001, the Malaysian Central Bank
introduced a new structure based on bay
al-inah (sale and buy-back). This
structure involves the following:
(ii)
(i) The IFI will use its surplus
liquidity to buy an identified asset
(i.e. a physical asset) from the
Central Bank, on spot-payment
basis. (iii)
(ii) The Central Bank will then buy
the asset back from the IFI at
original cost plus a profit (equal
to the prevailing money-market
rate), on a deferred-payment
basis.
(iii) The IFI will receive the original
amount and the profit on the
maturity date, from the Central
Bank.
This instrument also satisfies all of the
Five Characteristics. Under Malaysian
Shariah interpretation, both the bay al-
inah and bay al-dayn concepts are
recognised as valid Shariah contracts; (iv)
therefore, IFIs are able to trade GII
certificates in the secondary market. Like
the “sale of debt” contract, however, the
“sale and buy-back” contract has also
been rejected by Middle Eastern scholars.
As such, this type of instrument is again
only common in Malaysia and has limited (v)
applications elsewhere.
(v) Sukuk al-ijara
Most recently, the sukuk al-ijara (leasing
certificate) concept has been used to
facilitate an Islamic money-market
programme. The structure of the
programme is as follows:
(i) The Government (acting through (vi)
the Ministry of Finance or the
Central Bank) establishes a
Islamic Finance Bulletin October - December 2008
Rafe Haneef
special-purpose vehicle (which
could be a limited-liability
company) to facilitate the sukuk
issuance (“Issuer SPV”).
The Issuer SPV then buys certain
Government assets (e.g.
government administrative
buildings, education facilities,
airports).
The Issuer SPV then leases
different portions of these assets
to the Government for different
tenures and rental rates (e.g. 50%
of the undivided assets leased for
6 months at a rental rate of 3%
per annum, and 30% for 9 months
at 3.25% per annum, and 20% for
12 months at 3.5% per annum).
This form of arrangement is
based on undivided ownership of
assets and is commonly known as
sharikat al-mahassa. It has been
approved by the majority of
Shariah scholars in the Middle
East and Far East.
The Issuer SPV then issues 3
series of sukuk with 6-, 9- and
12-month tenures to different
classes of investors. The
respective sukuk will carry yields
of 3.0%, 3.25% and 3.5% per
annum.
Before the maturity of the
respective sukuk, the Issuer SPV
can renew the lease with the
Government for another term, at
a new rental rate. Upon maturity
of the respective sukuk, the Issuer
SPV will issue a new sukuk
reflecting the new term and rental
rate, and will use the sukuk
proceeds to redeem the previous
issue.
This renewal process can be
repeated until notice is given by
the Government to end the lease
Issue #22 11
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION

arrangement and buy back the Governments are often reluctant to

assets leased by the Issuer SPV.
The Issuer SPV will then sell the
assets to the Government at their
original cost; the sale proceeds
will be used to redeem the
outstanding sukuk.
This instrument also satisfies all of the
Five Characteristics. Most importantly,
the sukuk al-ijara concept is widely
accepted by most contemporary scholars
in the Middle East and Far East
(including Malaysia).
transfer national assets (e.g. government
administrative buildings, education
facilities, medical facilities, roads,
airports, and sea ports) to the programme
due to various reasons, including
prevailing political sentiments and
sensitivities. A paradigm shift is required
at the Government’s level to help develop
the Islamic finance industry, and to
support a key element of such growth by
facilitating this type of liquidity-
management programme.

This instrument may be the most ideal

solution to the prevailing liquidity-
management challenges faced by the
Islamic finance industry. The biggest
hurdle faced in implementing this
programme is the ability to source
suitable underlying government assets to
facilitate the leasing arrangement.

Islamic Finance Bulletin October - December 2008 Issue #22 12

Rafe Haneef
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION

Alternative Liquidity
Management Instruments

vi) Sukuk al-istismar

Using the khulta principle, contemporary
Shariah scholars have allowed the sukuk
In some instances, the government may
evidenced by only 30% of physical assets
not have sufficient suitable assets due to
and 70% of financial assets to be tradable
various reasons, and the sukuk al-istismar
in the secondary market. The structure of
(investment certificate) structure may
the sukuk al-istismar is as follows:
offer a feasible solution. Sukuk al-
istismar is a relatively new technique,
(i) The Government (acting through
first deployed by the Islamic
the Ministry of Finance or the
Development Bank in its sukuk issuance,
Central Bank) establishes a
where its created a portfolio comprising
special-purpose vehicle (which
30% physical assets and 70% financial
could be a limited-liability
assets, or receivables using the principle
company) to facilitate the sukuk
of khulta (in this context, the mixing of 2
issuance (“Issuer SPV”).
different asset classes into a single,
(ii) The Issuer SPV then buys a
indivisible portfolio).
portfolio of assets from the
Government, comprising a
When an object consists of 2 substances
minimum of 30% physical assets
and one of those is prohibited under
(e.g. government administrative
Shariah, the object can still be construed
buildings, education facilities,
as Shariah-compatible if the quantity of
airports) and 70% eligible
the non-compatible substance is
receivables.
insubstantial. For example, if a ring is
(iii) The Issuer SPV then leases the
made of gold and silver, it is permissible
physical assets to the
for a Muslim male to wear it if the
Government for a certain period
quantity of the gold substance is
(e.g. 5 years), with the lease
insubstantial. There are different opinions
rental payable on a, say, quarterly
among scholars as to what amounts to an
basis.
“insubstantial” quantity. Most scholars
ƒ The quarterly rental rates can
have taken the view that the non-
be mutually varied before the
compatible substance will be regarded as
commencement of each
insubstantial if the quantity of the
quarterly lease period (e.g.
Shariah-compatible substance is at least
the first quarterly rental could
30%. Some Hanafi scholars have taken a
be 3% per annum while the
more liberal view of the khulta principle.
next quarterly rental may be
They have not allocated any fixed
fixed at 3.5% per annum; this
percentage or quantity, but have left the
process can be repeated every
matter to be decided on a case-by-case
quarter during the 5-year
basis.
lease term). The returns can
be linked to prevailing
money-market rates).

Islamic Finance Bulletin October - December 2008 Issue #22 13

Rafe Haneef
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION

(iv) The Issuer SPV then issues sukuk Government at the original cost;
in the primary market, with a 3- the sale proceeds will be used to
month tenure and a 3.0% return redeem the outstanding sukuk.
per year. (x) If the lease rentals and
(v) The Issuer SPV then appoints the receivables paid by the
Government to collect the Government are not sufficient to
eligible receivables from the cover the quarterly returns/profits
creditors/payers, and distribute to to the sukuk holders, the Issuer
the Issuer SPV on a quarterly SPV has the option to terminate
basis. the arrangement and require the
(vi) The Issuer SPV will use the Government to immediately
rental and receivables paid by the purchase the entire portfolio at
Government to distribute the original cost.
quarterly returns/profits to the
sukuk holders. This instrument, although much more
(vii) The Issuer SPV will only receive complex than the prevailing structures,
an amount equal to the also satisfies all of the Five
return/profit component for the Characteristics. Most importantly, the
70% of the sukuk amount (the sukuk al-istismar concept is widely
return/profit component for the accepted by most of the contemporary
other 30% will stem from the scholars in the Middle East and Far East
lease rentals). The Issuer SPV (including Malaysia). This instrument
will instruct the Government to may be another ideal solution to the
invest all surplus funds under current liquidity-management challenges
Islamic principles, to generate a faced by the Islamic finance industry, and
return equal to the return/profit could reduce the hurdles encountered by
indicated under the sukuk. many governments in sourcing
(viii) Before redeeming the respective underlying assets that are 100% tangible.
sukuk, the Issuer SPV will issue a
new series of sukuk in the
primary market, to replace the
maturing sukuk. The new series
of sukuk may have different rates
of return and tenures. The
proceeds from the new sukuk will
be used to redeem the maturing
issue.
(ix) This renewal process can be
repeated until notice is given by
the Government to end the lease
arrangement and buy back the
portfolio of assets (30% physical
assets and 70% eligible
receivables) from the Issuer SPV.
The Issuer SPV will sell the
portfolio of assets to the

Islamic Finance Bulletin October - December 2008 Issue #22 14

Rafe Haneef
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
Eligible receivables include the
following:
ƒ Receivables due from Islamic
facilities (e.g. home financing)
extended to civil servants (i.e.
current receivables).
ƒ Receivables due from Islamic
facilities extended to various
government ministries, state or
provincial governments (i.e.
current receivables).
ƒ Receivables due from grants or
non-interest-bearing facilities
extended to various government
ministries, state or provincial
governments (i.e. current
receivables).
Islamic Finance Bulletin October - December 2008
Rafe Haneef
ƒ Taxes due and/or payable by a
list of identified Shariah-
compatible corporates (i.e.
current and future receivables).
ƒ Royalties, fees, other charges due
and/or payable by a list of
identified Shariah-compatible
corporates (i.e. current and future
receivables)
Some contemporary Shariah scholars are
agreeable to both current as well as future
receivables, although others only accede
to current receivables. There is still a lack
of consensus on this matter, and further
research needs to be conducted.
Issue #22 15
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION
(vi) Islamic Equity-linked Instrument
Another innovative solution to Islamic
liquidity management may be the
currently fashionable Islamic equity-
linked instruments. The proposed
structure of such instruments is as
follows:
(i) The Government (acting through
the Ministry of Finance or the
Central Bank) establishes a
special-purpose vehicle (which
could be a limited-liability
company) to facilitate the sukuk
issuance (”Issuer SPV”).
(ii) The Issuer SPV then issues sukuk
in the primary market, with a 3-
month tenure and a return of
3.0% per annum (the return can
be linked to the prevailing
money-market rate).
(iii) The Issuer SPV then buys a
portfolio of eligible equities from
the market and passively holds
the equities in trust.
(iv) The Issuer SPV subsequently
obtains an irrevocable
undertaking from a market
counterparty (e.g. a reputable
financial institution), to purchase
the equity portfolio at a price
equal to the sukuk issue amount
plus a profit equal to 3.0% per
annum. No fee is payable to the
counterparty in respect of the
undertaking.
(v) The Issuer SPV also provides an
irrevocable undertaking to the
market counterparty to sell the
equity portfolio at a price equal to
the sukuk issue amount
(exercisable only if the purchase
undertaking is not exercised). No
fee is payable to the Issuer SPV
in respect of the undertaking.
Islamic Finance Bulletin October - December 2008
Rafe Haneef
(vi) Upon maturity of the sukuk, the
Issuer SPV will exercise the
purchase undertaking and compel
the market counterparty to
purchase the equity portfolio at
the pre-agreed price.
(vii) Upon receiving the purchase
price from the market
counterparty, the Issuer SPV will
redeem the sukuk.
(viii) The Issuer SPV may issue many
series of sukuk in the primary
market, with each series having
different tenures and returns as
well as market counterparties.
This instrument not only satisfies all of
the Five Characteristics, but is also
reasonably easy to implement and
execute. Since the sukuk is fully
evidenced by eligible equities, it is
accepted by most of the contemporary
scholars in the Middle East and Far East.
The eligible equities can be selected
based on the prevailing Shariah
screenings applicable to equities, such as
the Dow Jones Islamic Equities Screening
Methodology. This instrument can
effectively resolve the current problems
faced by many governments in sourcing
underlying assets that are 100% physical
for sukuk issuance. However, some
Shariah scholars have raised certain
objections against the nature of the
undertaking. Again, further research
needs to be conducted in this area.
Issue #22 16
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Illustration

Islamic Finance Bulletin October - December 2008 Issue #22 17

Rafe Haneef
TOWARDS AN INFORMED MARKET
FOREX - A SHARIAH DISCUSSION

RAFE HANEEF

Rafe Haneef is currently a Managing Director

at Fajr Capital, a new Islamic investment
company based in London, Dubai and Kuala
Lumpur.

He was previously the Head of Islamic

Banking for Citigroup Asia based in Kuala
Lumpur. He was responsible for developing
Malaysia as a regional Islamic finance hub for
Citigroup and spread its Islamic business
footprint across the region.

Prior to joining Citigroup, he established the

Global Islamic Finance Department at ABN
AMRO based in Dubai and was in charge of
the Islamic wholesale and retail businesses for
the group. Prior to that, he was with HSBC
Amanah in London and Dubai focusing on
Islamically-structured cross-border
transactions and the Sukuk market. He lead
the first global sukuk offering for the
Government of Malaysia in 2002.

Rafe Haneef read law and Shariah at the

International Islamic University in Malaysia.
He was admitted to the Malaysian Bar and
was practicing law in Malaysia specialising in
Islamic finance. He then pursued his Master
of Laws at Harvard Law School and
subsequently qualified to the New York Bar.

Islamic Finance Bulletin October - December 2008 Issue #22 18

Rafe Haneef
TOWARDS AN INFORMED MARKET
SHARIAH ASPECT OF IJARAH MUNTAHIYAH BITTAMLEEK CONTRACT

Shariah Aspect of Ijarah Muntahiyah

Bittamleek Contract

Islamic Banking and Finance Institute Malaysia Sdn Bhd

Introduction Modus Operandi

I
jarah Muntahiyah Bittamleek is a
form of leasing contract which
includes a promise by the lessor to
transfer ownership of the leased property
to a lessee, either at the end of the Ijarah
term or by stages during the tenure of the
contract.
It is a lease agreement combined with an
undertaking by the lessee to purchase the
leased goods at any time during the term
of the lease, at an agreed price. The
transfer of ownership may come in
various ways, such as the following:
The customer approaches the bank to
finance a vehicle, by promising to lease
the vehicle from the bank. Based on the
customer’s promise, the bank purchases
the vehicle from the dealer.
At this juncture, the bank - as the owner
of the vehicle - will lease the vehicle to
the customer, at an agreed rental amount.
The rental will be fixed for the entire
tenure. However, if the bank wants to
change the rental rate, it must be
communicated and agreed to by the other
party beforehand.

a) By purchase of the asset at market Throughout the lease period, the

value (before maturity);
b) By the payment of the final
instalment (at maturity);
c) By way of minimal amount, e.g.
RM 1.00 (at maturity);
d) As a gift (at maturity).
ownership of the vehicle shall remain
with the bank. Ownership shall transfer to
the customer at the end of the lease
period, provided that all rental amounts
have been paid.

Illustration

2 3 

Seller  The Bank  Customer 

4  5

Islamic Finance Bulletin October - December 2008 Issue #22 19

IBFIM
TOWARDS AN INFORMED MARKET
SHARIAH ASPECT OF IJARAH MUNTAHIYAH BITTAMLEEK CONTRACT

Description 

1  The  customer  approaches the  bank  to  purchase  the  vehicle.  The 
customer agrees to lease the vehicle from the bank.  
2  The bank purchased the vehicle from the seller.
3  The bank pays the seller.
4  The bank leases the vehicle.
5  The Customer pays rental until maturity.

Shariah Aspect

Ijarah is derived from the Arabic word
ajara or ujr, meaning remuneration or
reward. Ijarah is a contract of lease in
Islamic law, which means to take
possession of some utility or services for
payment. Ijarah indicates the sale of a
benefit, use or service for a price that can
be either fixed or floating.
The Ijarah agreement is preceded
by the drawing up of a master
agreement covering a number of
Ijarah transactions between the
bank and the customer, setting out
the general terms and conditions of
agreement between the 2 parties.
Subsequently, there may be:

Ijarah Muntahiyah Bittamleek is one of • a separate lease contract for

the categories of Ijarah, which concludes each transaction, in a specific
with the sale or gift of the asset; the legal written document signed by
title of the leased asset will be transferred the 2 parties; or
to the customer after a certain period.
• the two parties exchange
The rules of the Ijarah Muntahiyah notices of offer and
Bittamleek transaction are no difference acceptance by referring to the
from those of the original Ijarah, except terms and conditions
that it is associated with a promise by the contained in the master
owner of the asset to transfer ownership agreement; or
to the hirer at the end of the Ijarah term.
• the bank leases an asset it
The validity of this form of Ijarah is already owns to the customer,
confirmed by the Resolution of the where the Ijarah contract is
International Islamic Fiqh Academy No. drawn up and signed directly;
110 (4/12). or

The ljarah contract can be executed by • the bank purchases an asset

any of the following ways: from a customer and
subsequently leases it back to
• The customer requests the bank to that customer (sale and lease-
acquire an asset, or to acquire the back).
usufruct of an existing asset which
the customer promises to lease
(promise to lease).

Islamic Finance Bulletin October - December 2008 Issue #22 20

IBFIM
TOWARDS AN INFORMED MARKET
SHARIAH ASPECT OF IJARAH MUNTAHIYAH BITTAMLEEK CONTRACT
At the end of the contract, the bank
transfers its ownership of the leased asset
to the customer via one of the following
methods:
• Selling for a specific consideration
if the customer pays all the rental
instalments. The promise to sell is
separately expressed and
independent of the underlying
Ijarah.
• As a gift, conditional upon the
fulfilment of all the Ijarah
obligations, after which ownership
shall be transferred at the end of the
Shariah tenure.
Shariah Contract
The underlying Shariah contract used to
finance a vehicle is known as Ijarah
Muntahiyah Bittamleek (Ijarah ending
with ownership). The following is the
relevant fiqh literature and supporting
evidence for the said contract.
The Basis of the Shariah Contract
The Ijarah contract is permissible based
on the Qur’an, the Sunnah, Ijma and
qiyas.
Allah SWT says:
And said one of them (the 2 women): “O
my father! Hire him! Verily, the best of
men for you to hire is the strong, the
trustworthy.”
(Surah al-Qasas: Verse 26)
The verse narrates the story of Prophet
Syuaib AS and Prophet Musa AS. The
former offered the latter a contract of
Islamic Finance Bulletin October - December 2008
IBFIM
employment for the hand of his daughter
in marriage. Allah SWT says:
“Then they both proceeded, till when they
came to the people of a village, they
asked them for food, but they refused to
entertain them. Then they found therein a
wall about to collapse and he (Khaidir)
set it up straight. (Musa) said: if you had
wished, surely you could have taken
wages for it!”
(Surah al-Kahfi: Verse 77)
From the Sunnah, Abu Hurairah RA
related that Rasulullah SAW said: “Give
the hired man his wages before his sweat
dries” (lbn Majah).
Said bin al-Musayyib RA clearly narrated
that Ijarah for asset’s usufruct is also
permissible. He said: “We used to lease
out land for some portion of the
agricultural products, and the Prophet
SAW prohibited us from such (practice).
Instead, he asked us to lease it out for
gold or money”.
There is consensus among the fuqaha
from the time of sahabah that Ijarah is
permissible because of the fact that
people’s need for the assets’ usufruct is as
much as their need to (own) the assets.
Ijarah is also acceptable by reasoning
(qiyas) because it is a convenient means
for people to acquire the right to use
assets that they do not own, since not
everyone is able to own the assets.
Issue #22 21
TOWARDS AN INFORMED MARKET
SHARIAH ASPECT OF IJARAH MUNTAHIYAH BITTAMLEEK CONTRACT

Primary Shariah Requirements Ijarah Muntahiyah Bittamleek

The validity of the Ijarah Muntahiyah Bittamleek contract depends on its compliance with
Shariah requirements. Thus, in order for a transaction to be valid, it must fulfil the essential
elements (rukn) of the contract, which has its own necessary conditions (syart) that need to
be observed.

The following are the essential elements and necessary conditions of an Ijarah contract:

Essential
Necessary Conditions
Element

• Be of sound mind (not insane)

Owner (lessor) • Have reached majority age (18 years old) i.e. has the capacity
to enter into a contract.
• Not restricted to do business, i.e. not a bankrupt
Hirer (Lessee) • Not an extraordinarily extravagant person
• Not forced to enter into the contract
• Belongs to the owner
• Specific and known
• Deliverable to the hirer
Asset • Capable of being used
• Not perishable or consumable
• Exists throughout the lease period
• Physically fit for leasing and free from any defect
• Can be valued with money.
• Used for purposes that do not contradict Shariah.
Benefit/ • Hirer can and is able to fully utilise the benefit/usage.
Usage of the • Is known and has been identified.
Asset • Benefit derived for a specific period
• Benefit derived from the asset must not lead to the asset’s
destruction
• Determined at the point of contract.
Rental
• Specified in terms of currency.

The validity of Ijarah Muntahiyah Bittamleek is endorsed by the International Fiqh

Academy of Organisation of Islamic Conference (or OIC), and the National Shariah
Advisory Council of Bank Negara Malaysia.

Islamic Finance Bulletin October - December 2008 Issue #22 22

IBFIM
TOWARDS AN INFORMED MARKET
ISLAMIC TRUSTS – LAWS, PRACTICES & ITS DISTRIBUTION

For more information, please contact:

Islamic Banking and Finance Institute

Malaysia Sdn Bhd (340040-M)

Level 3, Dataran Kewangan Darul Takaful

Jalan Sultan Sulaiman
50000 Kuala Lumpur, Malaysia
Tel: +603-2031 1010
Fax: +603-2031 9191
E-mail: info@ibfim.com
Website: www.ibfim.com.my

ISLAMIC BANKING AND FINANCE

INSTITUTE MALAYSIA SDN BHD

Islamic Banking and Finance Institute

Malaysia Sdn Bhd (IBFIM) is an institute
dedicated to producing well-trained, high-
calibre individuals and management teams
with the required expertise in the Islamic
finance industry.

Based on the industry’s demands and

customers’ needs, we provide complete
assistance to our clients through a wide
spectrum of inter-related services: training
and education, advisory and consultancy, and
research and development in Islamic finance.

Our close relationship with the industry gives

us the opportunity to share knowledge and
resources. We also enjoy a strong network
with local and international authorities and
financial institutions. Having assisted
numerous governments, financial institutions,
and other organisations in this arena, we are
driven to serve the need for further
enhancement and development of the industry
in years to come.

Islamic Finance Bulletin October - December 2008 Issue #22 23

IBFIM
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS
Risks Associated with Islamic Financial
Contracts:
Part 5
Meor Amri Meor Ayob
Bond Pricing Agency Malaysia Sdn Bhd
Introduction
As highlighted in the earlier parts (please
refer to the series of articles published in
the previous Bulletins), a competent
pricing specialist must have a strong
foundation in risk identification and
assessment. From this understanding, plus
an in-depth knowledge of financial
engineering, the fair valuation of any
financial asset can be determined. This
skill set is not only relevant to the
conventional bond market, but also to the
sukuk market.
The purpose of this series is to provide
some essential reading to anyone who is
serious about the science of sukuk
valuation. This series is the basis for the
underlying valuation methodology for
Islamic financial assets, developed by
Bond Pricing Agency Malaysia Sdn Bhd
(or BPA Malaysia).
Here, Part 5 will highlight, as completely
as possible, all the identifiable risks
associated with the Musharakah contract.
Islamic Finance Bulletin October - December 2008
BPAM
Types of Risk Associated with
the Contracts of Musharakah
A typical Musharakah contract can be
segmented into 3 transaction stages. Each
stage has its own unique risks. The
following sections detail the risks
identified for each stage of the contract.
1. Contract
The partners execute a partnership
(Musharakah) agreement that specifies:
• Offer and acceptance;
• Contracting parties:
A financing institution can enter into
a partnership with non-Muslims or
conventional institutions or
companies provided that such
partner’s capital is from permissible
sources. The operations of the
Musharakah must be in accordance
with Shariah rules and regulations;
• Amount of capital and structure:
The capital can be in the form of
cash, gold, silver or their equivalent
in value and tangible assets. Debt
(receivables) alone is not permissible
as the capital, unless the debt is
Issue #22 24
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS
inseparable from other assets that can
be presented as contribution to
capital. Funds in the current account
can be withdrawn as contribution to
capital.
Any contribution in foreign
currencies to the Musharakah capital
must be translated in to the currency
of the Musharakah, at the current
exchange rate.
A partner cannot guarantee the capital
of another.
The management of the Musharakah
can be restricted to certain partners or
a single partner. A fixed remuneration
to such “managing” partner(s) is not
allowed, although the partner(s) can
earn a greater allocation of profit, at a
higher ratio than its share of capital
contribution. A manager other than
the partner(s) can also be appointed to
administer the Musharakah, at a fixed
remuneration and a share of the
profits, if any;
• Profit sharing ratio:
The profit allocation is calculated net
of operating costs, expenses and
taxes. The ratio can be amended from
time to time.
The profit allocation can be equal to
the ratio of invested capital or
different, as agreed between the
partners provided that the ”sleeping
partner” is not entitled to more than
their ratio of invested capital. The
share of profit cannot be stated in a
lump sum or a percentage of the
capital.
Islamic Finance Bulletin October - December 2008
BPAM
The profit will be finally allocated from
the sale proceeds existing assets (actual
valuation), or based on the valuation of
assets at fair value (constructive
valuation). The allocation of profits must
be based on actual profits earned.
Profits can be carried forward and set
aside as reserves (investment risk reserves
and profit equalisation reserve), subject to
the provisions of the articles of
association of the Musharakah..
The loss shall be borne periodically by
the respective partners in accordance with
their capital contribution. It is not
permitted to hold one partner or a group
of partners liable for the entire loss, or
liable for a percentage of loss that does
not match their share of ownership.
However, a partner can take
responsibility to bear the loss at the time
of the loss without any prior condition.
A number of risks are present at this
stage. Capital recovery due to credit risk
is one of them. The Musharakah capital
may not be recovered as it ranks lower
than debt instruments upon liquidation.
Nevertheless, a third-party guarantee can
be obtained for the capital loss by some
or all the partners provided that the
legality and financial liability of the
guarantee is independent from the
contract, the guarantee is not limited in
any manner to the contract, the third-party
guarantor does not hold more than a 50%
equity in the entity to be guaranteed and
the guaranteed entity does not own more
than 50% of the guarantor.
Another form of capital recovery risk is
when it is due to market risk. Although a
third-party guarantee can be obtained for
Issue #22 25
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS
the loss of capital of some or all partners,
there are certain Shariah restrictions on
the use of this mitigation technique.
Meanwhile, counterparty risk is when the
partner does not pay the profit that the
financing institution is entitled to. The
loss-making operations that require
additional capital injection exposes the
financing institution to the risk of capital
impairment and the opportunity to
reinvest in other types of investments. A
mitigating strategy is for the Musharakah
customer to create a takaful reserve to
mitigate the risk of losses. Also,
staggered principal redemption may
reduce the overall exposure throughout
the Musharakah period.
Shariah compliance risk is another
possibility. For example capital
contribution from the current account is
not properly withdrawn and transferred
into the Musharakah fund (non-
recognition of capital).
2. Early Termination
A partner can at anytime withdraw from
the partnership by giving notice to this
effect unless the contract explicitly states
that the partnership is to survive for a
fixed period, whereby termination before
the agreed expiry date of the Musharakah
is not allowed.
A partner can enter into a binding
promise to buy at any time, all the assets
of the Musharakah based on the market
value on the acquisition date.
A partner is also allowed to give a
promise to gradually buy the equity of
another partner, until the title of the
equity is completely transferred. This
Islamic Finance Bulletin October - December 2008
BPAM
promise must not be stated in the
Musharakah contract, but in a separate
purchase and sale agreement.
There is counterparty risk present at this
stage. This occurs when the withdrawing
partners owes money to the financing
institution. Nevertheless, the financing
institution is able to buy the withdrawing
partner’s share or to find a new partner to
takeover.
There is also price risk, whereby the
financing institution as the buying partner
is exposed to fluctuations in the share
price (low investment value).
The parties should also be mindful that
the purchase and sale are effected in a
separate agreement and the acquisition
price of the equity is not fixed at the
original or face value (as it can be
construed as a price guarantee and,
therefore, non-recognition of income).
This is a Shariah-compliance risk.
3. Maturity
Upon maturity, the assets are liquidated
(sold) or undergo constructive liquidation
(valuation). The assets shall be sold at
current market values and the proceeds
will be utilised for payment in the
following order:
• Liquidation expenses;
• Financial liabilities of the net
assets;
• Distribution of the remaining assets
among the partners, in accordance
with their ratios of invested capital;
or if it falls short, on a pro rata
basis vis-a-vis the ratio of invested
capital.
Issue #22 26
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS

The next article will look at the risks

associated with the contract of
Mudharabah.

Bibliography

Ayob, Meor Amri Meor (May 1999). Rating Islamic Debt Securities: A
Primer. RAM’s Special Highlights. RAM

BNM (November 1999). The Central Bank and the Financial System in
Malaysia - A Decade of Change. BNM

BNM Annual Reports from 1996 to 2005. BNM

BNM’s website: www.bnm.gov.my

Bursa Malaysia (previously known as Kuala Lumpur Stock Exchange).

Website: www.bursamalaysia.com

Capital Market Masterplan (February 2001). Securities Commission

Ismail, Mohd Izazee (March 2002). Islamic Private Debt Securities: Issues
& Challenges. RAM’s Special Highlights. RAM

IFSB’s website: www.ifsb.org

Securities Commission (Malaysia) website: www.sc.com.my

Securities Commission’s Quarterly Bulletin of Malaysian Islamic Capital

Market (May, August, November 2006). Securities Commission

Islamic Finance Bulletin October - December 2008 Issue #22 27

BPAM
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS
The author, Meor Amri bin Meor Ayob, is the
Chief Executive Officer of Bond Pricing
Agency Malaysia Sdn Bhd (previously known
as Bondweb Malaysia Sdn Bhd). Meor has
over 16 years of professional work experience
as a regulator in Bank Negara Malaysia and as
a credit analyst with Rating Agency Malaysia
Berhad (now known as RAM Holdings
Berhad).
In RAM, his last position had been Head of
Financial Institutions Ratings. He has a wealth
of experience, especially oin the risk elements
of the bond market. He is also has vastly
experienced in the sukuk market.
For more information, please contact:
Bond Pricing Agency Malaysia Sdn Bhd
(formerly Bondweb Malaysia Sdn Bhd)
No. 17-8 & 19-8, The Boulevard
Mid Valley City
Lingkaran Syed Putra
59200 Kuala Lumpur
Malaysia
Tel: +603 2772 0899
Fax: +603 2772 0808
Website: www.bpam.com.my
Islamic Finance Bulletin October - December 2008
BPAM
BOND PRICING AGENCY MALAYSIA
SDN BHD (formerly known as BondWeb
Malaysia Sdn Bhd)
BPAM, as Bondweb Malaysia Sdn Bhd, was
incorporated on 27 September 2004 under the
Malaysian Companies Act 1965. It was
registered as a bond-pricing agency (“BPA”)
by the Securities Commission on 28 April 28
2006, and has met and exceeded the
requirements outlined in the Guideline on the
Registration of Bond Pricing Agencies.
On 15 September 2008, Bondweb Malaysia
Sdn Bhd changed its name to Bond Pricing
Agency Malaysia Sdn Bhd (or BPAM). This
coincides with BPAM’s aim of consolidating
its position as Malaysia’s pioneer bond-
pricing agency, and to further strengthen its
position by focusing on its core business -
evaluated bond pricing.
The bond-pricing agency is an initiative by
the Securities Commission of Malaysia to
boost the transparency and quality of price-
discovery mechanisms and valuation practices
in the Malaysian bond market. BPAM was
officially appointed Malaysia's first bond-
pricng sgency on 18 April 2006. With this
status, BPAM is recognised as one of the
official sources for evaluated prices on ringgit
bonds.
Issue #22 28
TOWARDS AN INFORMED MARKET
MALAYSIAN SUKUK MARKET
Malaysian Sukuk Market in Review
RAM Rating Services Berhad
Introduction
Global market turmoil, recession worries
and widening credit spreads have all
made their presence felt in the domestic
bond market. The sukuk market
contracted more than 70% in 2008 -
contrary to the initial view that the
industry would remain largely insulated
from the slump.
A total of 39 new corporate sukuk deals -
with a prospective issuance value of
RM16.1 billion – were announced last
year. This accounted for 26% of the
domestic market’s RM61.6 billion of
rated corporate bond issues for the same
period. Actual issuance, however,
declined to RM8.8 billion last year,
compared with RM39.6 billion in 2007.
Application of Sukuk Funding
The application of Islamic finance was
observed across various economic sectors
last year. Given the sheer funding
requirements typical of port and highway
projects, power plants and
telecommunication businesses, the
infrastructure sector retained its
dominance with a 55%-share.
Islamic Finance Bulletin October - December 2008
RAM Ratings
Notable issues from this sector include a
RM4.0 billion sukuk Musharakah
programme by PLUS SPV Berhad
(“PLUS SPV”), a wholly owned special-
purpose vehicle of PLUS Expressway
Berhad (“PEB”); a RM1.5 billion
medium-term notes sukuk programme by
Lingkaran Tans Kota Sdn Bhd (“Litrak”);
and RM1.0 billion Senior and Junior
sukuk programmes by MRCB Southern
Link Berhad.
In second place, the industrial sector
garnered a 14%-share of the market.
Fund-raising exercises by Hong Leong
Industries Berhad, Muhibbah Engineering
(M) Berhad, Tanjung Offshore Berhad
and Chemical Company of Malaysia
Berhad accounted for most of the sukuk
originating from this segment.
Elsewhere, the capital-raising efforts of
Gamuda Berhad, WCT Engineering
Berhad and Sunrise Berhad constituted
most of the sukuk stemming from the
real-estate and construction industry.
Issue #22 29
TOWARDS AN INFORMED MARKET
MALAYSIAN SUKUK MARKET
2008 Corporate Sukuk Programme by Economic Sector
Total Rated Facility Programme: RM16.1 billion
(excluding unrated and self-managed issues)
Property, Real
Estate &
Construction
Plantations 11%
1%
Infrastructure &
Utilities
55%
Source: FAST, various websites, RAM Ratings
The RM4.0 billion (nominal value) sukuk
programme by PLUS SPV was the largest
sukuk deal in 2008. PLUS SPV is an
independent special-purpose company
through which PEB had issued sukuk to
meet its funding requirements. Under this
transaction, PLUS SPV had issued an
initial RM1.055 billion of sukuk
Musharakah. PEB, on the other hand, is
an investment-holding company that is
primarily involved in the operation of toll
roads, both in Malaysia and abroad.
PEB’s domestic toll-road concessionaires
include Projek Lebuhraya Utara-Selatan
Berhad, Expressway Lingkaran Tengah
Sdn Bhd, Linkedua (Malaysia) Berhad
and Konsortium Lebuhraya Butterworth
Kulim (KLBK) Sdn Bhd. In addition,
PEB has ventured into overseas markets
such as India and Indonesia, with stakes
in 3 toll-road concessionaires.
Islamic Finance Bulletin October - December 2008
RAM Ratings
ABS / Structured Consumer
Finance Products &
Services Banking &
9% Financial
4%
Services
6%
Industrial
Products &
Services
14%
Meanwhile, another sizeable transaction
last year was the RM1.5 billion medium-
term notes sukuk programme by Litrak. A
single-purpose company, Litrak owns
concession rights to collect toll on the 40-
km intra-urban Lebuhraya Damansara-
Puchong. Proceeds from the sukuk
issuance had been used to refinance
Litrak’s existing debts, including
RM324.10 million of Redeemable
Unsecured Loan Stocks, and also
deployed towards upgrading works on its
concession assets, capital expenditure,
working capital, and other Shariah-
compliant purposes.
Notably, Menara ABS’s RM1.0 billion
Islamic asset-backed sukuk Ijarah
represents as the largest securitisation of
property assets to date. The transaction
involves the securitisation of properties
with a combined value of RM1.03 billion,
Issue #22 30
TOWARDS AN INFORMED MARKET
MALAYSIAN SUKUK MARKET

comprising buildings currently used as The redemption of the sukuk Ijarah is

the corporate headquarters of the expected to be met via a purchase
Telekom Malaysia (“TM”) Group, undertaking by Al-‘Aqar REIT to
specifically Menara TM, Menara Celcom reacquire the 6 hospitals upon the
and TM Cyberjaya, as well as TM Taman expected maturity of the Sukuk Ijarah, or
Desa, an office building used for TM’s via the disposal of the underlying assets
back-room operations. In this transaction, in the open market.
TM had sold the properties to Menara
ABS; in return, the latter had issued the On a separate note, RAM Ratings
sukuk to finance the purchase. published the ratings of 24 new corporate
Subsequent to the sale of the properties, sukuk issues in 2008, with an aggregate
Menara ABS had entered into a 15-year issuance value of RM12.8 billion; about
Master Ijarah Agreement with TM, as 55% or RM6.6 billion of this had already
Head Lessee for the utilisation of the been issued by the end of the year. This
properties. constituted about 74% of the entire
market’s RM8.8 billion of sukuk issued
Another noteworthy sukuk issue in 2008 as at the same date.
is Al-‘Aqar Capital’s RM300 million
Sukuk Ijarah - recognised as the first
domestic commercial–real-estate-backed
transaction involving hospital properties.
Under this transaction, Al-‘Aqar Capital
had issued medium- and short-term sukuk
Ijarah to acquire the beneficial interests in
its 6 hospitals, i.e. Ampang Puteri
Specialist Hospital, Damansara Specialist
Hospital, Johor Specialist Hospital, Ipoh
Specialist Hospital, Selangor Medical
Centre and Puteri Specialist Hospital,
from Al-‘Aqar KPJ Real Estate
Investment Trust (“Al-‘Aqar REIT”).

Islamic Finance Bulletin October - December 2008 Issue #22 31

RAM Ratings
TOWARDS AN INFORMED MARKET
MALAYSIAN SUKUK MARKET
In terms of rating distribution, the AA
rating bracket had the highest density vis-
à-vis RAM Ratings’ sukuk portfolio in
2008, skewed by the large sukuk
programmes originated by infrastructure
project-based obligors. In this regard, the
ratings are supported by the robust cash-
generating ability of the concession
assets, strong debt-protection measures,
stringent covenants and cash-trap
mechanisms to meet the periodic returns
as well as final capital repayment.
Islamic Finance Bulletin October - December 2008
RAM Ratings
Meanwhile, the creditworthiness of the
sukuk issued by Menara ABS and Al-
Aqar Capital had been rated based on the
asset-backed/structured-finance ratings
methodology. Here, the focus had been
on the robustness of the underlying assets
in generating sufficient funds to meet the
special-purpose vehicles’ ongoing profit
obligations, and in supporting the
realisable sustainable values of the
underlying assets to meet principal
redemption at the end of their tenures.
Issue #22 32
TOWARDS AN INFORMED MARKET
MALAYSIAN SUKUK MARKET

Malaysian Sukuk League Table 2008

The RM16.1 billion of sukuk issues in 2008 were successfully brought to the market by 13
financial and advisory institutions. RAM Ratings’ provisional tabulation, based on data
collated from Bank Negara Malaysia’s FAST information system and the websites of the
rating agencies, indicates that CIMB Investment Bank Berhad topped the sukuk league table
last year, with a 46.4%-share. This was followed by Maybank Investment Bank Berhad and
AmInvestment Bank Berhad, with respective 13.3% and 8.6% slices of the pie.

Islamic Finance Bulletin October - December 2008 Issue #22 33

RAM Ratings
TOWARDS AN INFORMED MARKET
MALAYSIAN SUKUK MARKET
Prospects of the Sukuk Market
in 2009
RAM Ratings expects sukuk issuance to
resume momentum once some semblance
of normalcy returns to the global financial
markets, fuelled by the massive
investment and financing needs of the
Gulf economies and emerging markets in
Asian countries. Islamic finance, sukuk in
particular, is an emerging asset class that
will sit well with investors throughout the
world.
As a pioneer in the Islamic finance
industry, Malaysia has set the standard
and led the way on many fronts.
Islamic Finance Bulletin October - December 2008
RAM Ratings
The latest development in the domestic
sukuk market - through the introduction
of new rules by Bursa Malaysia under its
Listing Requirements for Islamic
securities or sukuk and debt securities -
will further strengthen Malaysia’s
standing as a leader in the sukuk market.
Under this new framework, ringgit- and
foreign-denominated sukuk issues will be
allowed to be listed on Bursa Malaysia.
This is envisaged to enhance transparency
for investors, apart from offering valuable
profiling opportunities for the sukuk
issuers.
Issue #22 34
TOWARDS AN INFORMED MARKET
MALAYSIAN SUKUK MARKET

RAM RATING SERVICES BERHAD

For more information, please contact: (“RAM Ratings”)

Incorporated in 1990 as the pioneer in the

provision of credit-rating services for the
Malaysian capital market, RAM Ratings’
portfolio encompasses a vast range of local
and foreign corporates, multinationals, banks,
insurance companies, government-linked and
Noor Maliana Mansor other public-financed entities, myriad
Analyst – Islamic Ratings complex investment vehicles and the ringgit-
maliana@ram.com.my denominated securities they issue, structured-
finance transactions backed by receivables or
Mohamed Firdaus Kader Mohideen other financial assets, and Islamic securities
Head – Islamic Ratings (commonly known as sukuk).
firdaus@ram.com.my
As one of the region’s most experienced
Liza Mohd Noor rating agencies, RAM Ratings plays a leading
Chief Executive Officer role in providing crucial and independent
liza@ram.com.my credit opinions that are sought after by
investors and other market participants, with a
view to being more confident about their
RAM Rating Services Berhad (763588-T) investment and financial decisions.
Underscored by its renown in the rating
Suite 20.01, Level 20 business, RAM Ratings’ credit assessments
The Gardens South Tower have been habitually used as points of
Mid Valley City reference by regulators, the financial
Lingkaran Syed Putra community and the investment fraternity.
59200 Kuala Lumpur
Malaysia RAM Ratings is a public limited company
and is wholly owned by RAM Holdings
Tel: +603 7628 1000 Berhad. Its ultimate shareholders comprise
Fax: +603 7620 8251 major financial institutions in Malaysia, Asian
Website: www.ram.com.my Development Bank and Fitch Ratings.

Islamic Finance Bulletin October - December 2008 Issue #22 35

RAM Ratings
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Capital Market
         
Malaysian Rated Corporate Sukuk Market  
League Table of Lead Managers as at 31 December 2008 
 
  RM Million  %
     
  CIMB Investment Bank Berhad       6,365   39.4%
  Aseambankers Malaysia Berhad       2,432   15.1%
  AmInvestment Bank Berhad       1,100   6.8%
  OSK Investment Bank Berhad          800   5.0%
  RHB Investment Bank Berhad          721   4.5%
  MIDF Amanah Investment Bank Berhad          772   4.8%
  OCBC Bank (Malaysia) Berhad          590   3.7%
  Citibank Berhad           550   3.4%
  Bank of Tokyo‐Mitsubishi UFJ (Malaysia) Berhad          500   3.1%
  Hong Leong Bank Berhad           500   3.1%
  RHB Islamic Bank Berhad           373   2.3%
  Bank Muamalat Malaysia Berhad          370   2.3%
  HSBC Bank Malaysia Berhad          348   2.2%
  Bank Islam Malaysia Berhad          250   1.5%
  Kuwait Finance House (Malaysia) Berhad          250   1.5%
  Affin Investment Bank Berhad          150   0.9%
  KAF Discounts Berhad            70   0.4%
   
      16,139   100%
   
The value of consortium issues have been equally divided by the number of lead managers of a consortium 
 
Source : RAM Ratings/ FAST 
   

Islamic Finance Bulletin October - December 2008 Issue #22 36

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Capital Market

Islamic Finance Bulletin October - December 2008 Issue #22 37

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Capital Market

Islamic Finance Bulletin October - December 2008 Issue #22 38

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Capital Market

Islamic Finance Bulletin October - December 2008 Issue #22 39

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Sukuk Rated by RAM

Ratings

Islamic Finance Bulletin October - December 2008 Issue #22 40

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Banking Market

Islamic Finance Bulletin October - December 2008 Issue #22 41

Market Statistics
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
Sukuk - Total Traded Amount for the Quarter ended 31 December 2008

Sukuk - Total Sukuk Outstanding (RM ‘Mil) by Class: 31 December 2008

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 42
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
Sukuk New Facilities created for the Quarter ended 31-Dec-2008
Maturity
Facility Code Facility Name Instrument Facility Limit
Date

200800087 CCMB RM500.0 MILLION MMTN MTN 28-Nov-23 500000000

PLSA RM415.0M 29 YRS SUKUK

200800083 BONDS 30-Oct-37 415000000
MUDHARABAH PROGRAMME

TH GROUP RM330M ICP/IMTN

200800094 CP/MTN 31-Dec-14 330000000
PROGRAMME

PLSA RM330.0M 19 YRS SUKUK

200800084 BONDS 29-Oct-27 250000000
IJARAH PROGRAMME

OCBC Al-Amin Bank Bhd -

200800089 BONDS 24-Nov-21 200000000
RM200mil Islamic Sub Bonds II

GAMUDA RM100M ISLAMIC CP

200800090 CP 4-Dec-15 100000000
PROGRAMME

Top 10 Sukuk Tender Result for the Quarter ending 31-Dec-2008

Stock Name Issue Date Maturity Date Actual Issue Successful Yield

PROFIT- BASED GII 4/2008 31.10.2018 31-Oct-08 31-Oct-18 3500 4.295

BNMN-IDB 146/2008 65D 05.03.2009 30-Dec-08 5-Mar-09 200 2.958

BNMN-IDB 147/2008 91D 31.03.2009 30-Dec-08 31-Mar-09 200 2.963

BNMN-IDB 145/2008 42D 03.02.2009 23-Dec-08 3-Feb-09 200 2.918

BNMN-IDB 144/2008 65D 26.02.2009 23-Dec-08 26-Feb-09 200 2.924

BNMN-IDB 142/2008 42D 29.01.2009 18-Dec-08 29-Jan-09 200 2.929

BNMN-IDB 143/2008 63D 19.02.2009 18-Dec-08 19-Feb-09 200 2.952

BNMN-IDB 141/2008 63D 17.02.2009 16-Dec-08 17-Feb-09 200 2.997

BNMN-IDB 140/2008 37D 22.01.2009 16-Dec-08 22-Jan-09 200 2.995

BNMN-IDB 138/2008 40D 20.01.2009 11-Dec-08 20-Jan-09 200 2.96

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 43
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
10 Most Active Bonds Traded between 01-Oct-2008 and 31-Dec-2008
STOCK NAME LAST TRADED LAST TRADED TOTAL
PRICE YIELD/DISCOUNT VOLUME
TRADED LAST
QTR
PROFIT-BASED GII 2/2008 30.06.2011 102.95 3.13 3263

PROFIT- BASED GII 4/2008 31.10.2018 108.8 3.24 2888

PROFIT- BASED GII 3/2008 14.02.2014 104.73 3.26 1563

PROFIT-BASED GII 1/2006 14.04.2009 100.25 3.1 1432

MITB 19/2008 364D 27.11.2009 97.37 2.9 1270

SBNMI 1/2008 12.02.2009 99.98 3.55 742

BNMN-IDB 35/2008 182D 20.11.2008 99.88 3.5 680

RANTAU IMTN 15.03.2011-MTN 1 101.87 3.5 659

BNMN-IDB 132/2008 63D 29.01.2009 99.71 2.9 620

BNMN-IDB 105/2008 28D 04.11.2008 99.9 3.45 599

YTM Curves as at 31 December 2008

LT Islm- LT Islm- LT Islm-

LT Islm-
Tenure Quasi Gov- Corporate- Corporate-
Gov-GII
Khazanah AAA AA2

3m 2.81 2.97 3.65 3.98

6m 2.83 3 3.7 4.06
1y 2.9 3.06 3.92 4.36
2y 3.03 3.12 4.17 4.68
3y 3.11 3.18 4.44 5.02
5y 3.17 3.3 4.73 5.37
7y 3.2 3.42 5.03 5.73
10y 3.26 3.6 5.35 6.1
15y 3.55 3.89 5.71 6.49
20y 3.82 4.17 6.08 6.9

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 44
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
5-YEAR YTM Historical Chart (weekly closing, last 6 months)

YTM Spread (5-YEAR GII) as at 31 December 2008

YTM Matrix – Item Spread
Principle: Islamic
Date: 31 December 2008

Class1 Class2 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y

Government GII 2.81 2.83 2.9 3.03 3.11 3.17 3.2 3.26 3.55 3.82

Quasi
Khazanah 0.16 0.17 0.16 0.09 0.07 0.13 0.22 0.34 0.34 0.35
Government

Corporate AAA 0.84 0.87 1.02 1.14 1.33 1.56 1.83 2.09 2.16 2.26

Corporate AA2 1.17 1.23 1.46 1.65 1.91 2.2 2.53 2.84 2.94 3.08

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 45
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
Malaysian Sukuk Market Handbook 
Your Guide to the Malaysian Islamic Capital Market 
 
 
ISBN: 978‐983‐44255‐0‐0  

Published by RAM Rating Services Berhad 

As a pioneer in the Islamic finance industry, Malaysia has been setting benchmarks while 
assuming  a  pivotal  role  on  the  sukuk  pitch.  The  nation’s  Islamic  capital  market  has  been 
experiencing exponential growth, and we are well poised as the world’s most competitive 
and attractive sukuk market, underscoring Malaysia’s significance as the largest and most 
innovative global sukuk marketplace.  

The Malaysian Sukuk Market Handbook, published by RAM Rating Services Berhad (“RAM 
Ratings”),  is  a  comprehensive  guide  that  serves  as  a  practical  tome  for  institutions  and 
professionals keen on unlocking maximum value from the domestic Islamic capital market. 
The  contributors  to  this  handbook  are  eminent  personalities  from  various  backgrounds, 
well known in their respective fields of expertise. This handbook – the first of its kind ‐ also 
strives to broaden the sukuk investor and issuer bases, and covers inter alia the applicable 
Shariah principles, the Malaysian regulatory framework, the role of Shariah advisors, legal 
and  tax  considerations,  rating  approaches,  market  infrastructure  and  details  of  hallmark 
sukuk transactions. 

RAM  Ratings,  a  leading  credit‐rating  agency  in  Asia,  was  incorporated  in  1990  as  the 
pioneer  of  the  Malaysian  capital  market  in  this  sphere.  In  sukuk  transactions,  our  task 
involves  both  quantitative  and  qualitative  analysis  vis‐à‐vis  evaluating  the  financial 
strength  of  obligor  institutions  with  such  underlying  structures,  as  approved  by  Shariah 
scholars. RAM Ratings’ portfolio encompasses a vast range of local and foreign corporates, 
multinationals,  Islamic  and  conventional  banks,  takaful  and  insurance  companies, 
government‐linked and other public‐financed entities, myriad complex investment vehicles 
and the ringgit‐denominated securities they issue, structured‐finance transactions backed 
by  receivables  or  other  financial  assets,  and  sukuk.  As  one  of  the  region’s  most 
experienced  rating  agencies,  RAM  Ratings  is  a  leader  in  the  provision  of  crucial  and 
independent credit opinions that are sought after by market participants as regards their 
investment and financial decisions.  

For  further  enquiries,  kindly  contact  Mr  Mohamed  Firdaus  Kader  Mohideen  at  +603‐
76281018  or  firdaus@ram.com.my;  or  Ms  Noor  Maliana  Mansor  at  +603‐76281029  or 
maliana@ram.com.my.  

 
Information contained in this publication is obtained from sources believed to be reliable and correct at
the point of writing; however, its accuracy or completeness cannot be guaranteed. Opinions in this
publication are expressed from the point of view of the writers and are not necessarily those of the
Publisher. The views or opinions expressed are subject to change at any time. No statement in this
publication is to be construed as a recommendation to buy, sell or hold securities.

All rights reserved. No part of this publication may be copied or otherwise reproduced, repackaged,
further transmitted, transferred, disseminated, redistributed or resold or stored for subsequent use for
any such purpose, in whole or in part, in any form or manner or by any means whatsoever by any
person, without prior written consent from the Publisher and/or the writers.