GOP Ijarah Sukuk Training.pptx

GOP Ijarah Sukuk By Jawad Tahsin Unit Head Shariah Compliance Department Meezan Bank Limited Outline Introduction to Sukuk Outline Introduction to Sukuk Types of Sukuk and their Tradability Outline Introduction to Sukuk Types of Sukuk and their Tradability Islamic Money Market Outline Intr...

GOP Ijarah Sukuk By Jawad Tahsin Unit Head Shariah Compliance Department Meezan Bank Limited Outline Introduction to Sukuk Outline Introduction to Sukuk Types of Sukuk and their Tradability Outline Introduction to Sukuk Types of Sukuk and their Tradability Islamic Money Market Outline Introduction to Sukuk Types of Sukuk and their Tradability Islamic Money Market Benefits of Sovereign Sukuk Outline Introduction to Sukuk Types of Sukuk and their Tradability Islamic Money Market Benefits of Sovereign Sukuk GOP Ijarah Sukuk and reopening Structure Outline Introduction to Sukuk Types of Sukuk and their Tradability Islamic Money Market Benefits of Sovereign Sukuk GOP Ijarah Sukuk and reopening Structure Sovereign Sukuk Issuance in Pakistan Outline Introduction to Sukuk Types of Sukuk and their Tradability Islamic Money Market Benefits of Sovereign Sukuk GOP Ijarah Sukuk and reopening Structure Sovereign Sukuk Issuance in Pakistan Global Sukuk Issuance Outline Introduction to Sukuk Types of Sukuk and their Tradability Islamic Money Market Benefits of Sovereign Sukuk GOP Ijarah Sukuk and reopening Structure Sovereign Sukuk Issuance in Pakistan Global Sukuk Issuance The Future – Asset Light Sukuk Issuances Why Sukuk? Why Sukuk?  Securities representing a loan or debt (such as Bonds) cannot be sold or purchased. “Every Loan that draws benefit is Riba  If they are sold at a price higher or lower than their face value, it is considered as “Riba”  If they are purchased/sold, it is termed as Bai al Dayn (Sale of Debt), which is prohibited.  Therefore, trading of any debt based securities and interest paid thereon is not allowed in Islamic Shariah. Sukuk- Definition What is Sukuk Distinguishing Features Sukuk- Definition What is Sukuk Sukuk (plural of Sak) is an Arabic word which means “certificates”. Sukuk are certificates representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity. Sukuk generally represent a common share in the ownership of the assets made available for investment and does not loan owed to the issuer by the lender. Distinguishing Features Sukuk- Definition What is Sukuk Distinguishing Features Sukuk (plural of Sak) is an Arabic word which means “certificates”. Conventional bonds is a contractual obligation whereby the issuer is obliged to pay to bond holders, on certain specified dates, interest and principal. Sukuk are certificates representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity. Sukuk generally represent a common share in the ownership of the assets made available for investment and does not loan owed to the issuer by the lender. In comparison, under a Sukuk structure the Sukuk holders each hold an undivided beneficial ownership in the underlying assets. Consequently, Sukuk holders are entitled to share in the revenues generated by the Sukuk assets. The sale of Sukuk will be tantamount to the sale of holder’s proportionate share in the assets. Sukuk- Definition Sukuk- Definition Financing Sukuk- Definition Financing Sukuk- Definition Financing Syndicated Financing Sukuk- Definition Financing Syndicated Financing Sukuk- Definition Financing Syndicated Financing Sukuk Sukuk Issuance- Purpose Funding for Government Need General Financing Project/ Infrastructure Sukuk Budget Financing Conversion from Debt Shariah Compliance Promotion of IFI Alternative & Green Energy Sustainable Growth Project Sovereign and Quasi sovereign Sukuk Long/ Short Term Financing Need Tapping Retail Markets Project Financing Conversion to Islamic Modes Additional Capital Growth & Acquisition Funding for Sustainable growth Short term Equity / JV Green / ESG Sukuk Corporate / Private / FI Sector Sukuk Sukuk Issuance- Purpose Funding for Government Need General Financing Project/ Infrastructure Financing Budget Financing Conversion from Debt Shariah Compliance Promotion of IFI Alternative & Green Energy Sustainable Growth Project Sovereign and Quasi sovereign Sukuk Long/ Short Term Financing Need Tapping Retail Markets Project Financing Conversion to Islamic Modes Additional Capital Growth & Acquisition Funding for Sustainable growth Short term Equity / JV Green / ESG Sukuk Corporate / Private / FI Sector Sukuk Types of Sukuk Salam/ Istisna Musharak ah Ijarah Murabaha Services Hybrid Types of Sukuk Salam/ Istisna Ijarah Musharak ah Murabaha • For Purchase of Commodities and petroleum products • Usually Short term in Nature Services Hybrid Types of Sukuk Musharak ah Salam/ Istisna • Issued against fixed assets Ijarah Services • Can be used for infrastructure financing and project finance • Usually Long term in Nature Hybrid Murabaha Types of Sukuk Services Musharak ah • Can be used for financing of commodity operations Salam/ Istisna Hybrid • Redemption of Sukuk to be done from actual sale proceeds of Salam/ Istisna goods • Usually Short term in Nature Murabaha Ijarah Types of Sukuk Hybrid Services • Can be used for financing of new projects and Public private joint ventures Murabaha Musharakah Ijarah Salam/ Istisna • Based on revenue sharing of underlying projects and earning assets • Can be either short term or long term in nature Types of Sukuk Murabaha Hybrid • Can be issued on Rights, Usufructs and transferrable services. Services Ijarah Salam/ Istisna Musharak ah • Sukuk can be structured on the basis of either sale or sub lease of Services or usufructs • Can either be Short or Long term. Types of Sukuk Ijarah Murabaha Salam/ Istisna • Usually a combination of two modes Hybrid Musharak ah Services • A pool of tangible and intangible assets is created and it is ensured that all times a significant portion of tangible asset is available in the pool. • Usually Long term in nature. Tradability of Sukuk Tradable Ijarah Sukuk Murabaha Sukuk Musharakah Sukuk Istisna/ Salam Sukuk Services Sukuk Hybrid Sukuk Tradable With condition Non Tradable Tradability of Sukuk Tradable Ijarah Sukuk Murabaha Sukuk Musharakah Sukuk Istisna/ Salam Sukuk Services Sukuk Hybrid Sukuk Tradable With condition Non Tradable Tradability of Sukuk Tradable Ijarah Sukuk Murabaha Sukuk Musharakah Sukuk Istisna/ Salam Sukuk Services Sukuk Hybrid Sukuk Tradable With condition Non Tradable Tradability of Sukuk Tradable Ijarah Sukuk Murabaha Sukuk Musharakah Sukuk Istisna/ Salam Sukuk Services Sukuk Hybrid Sukuk Tradable With condition Non Tradable Tradability of Sukuk Tradable Ijarah Sukuk Murabaha Sukuk Musharakah Sukuk Istisna/ Salam Sukuk Services Sukuk Hybrid Sukuk Tradable With condition Non Tradable Tradability of Sukuk Tradable Ijarah Sukuk Murabaha Sukuk Musharakah Sukuk Istisna/ Salam Sukuk Services Sukuk Hybrid Sukuk Tradable With condition Non Tradable Tradability of Sukuk Tradable Ijarah Sukuk Murabaha Sukuk Musharakah Sukuk Istisna/ Salam Sukuk Services Sukuk Hybrid Sukuk Tradable With condition Non Tradable Islamic Money Market Islamic Money Market Sukuk Islamic Money Market Sukuk FI/ Interbank Placements and Acceptance Islamic Money Market Sukuk FI/ Interbank Placements and Acceptance Mutual Funds (Cash/ sovereign Fund) Islamic Money Market Sukuk FI/ Interbank Placements and Acceptance SBP Ceiling Facility Mutual Funds (Cash/ sovereign Fund) Islamic Money Market Sukuk FI/ Interbank Placements and Acceptance SBP Ceiling Facility Mutual Funds (Cash/ sovereign Fund) SBP OMO Islamic Money Market Sukuk FI/ Interbank Placements and Acceptance SBP Ceiling Facility Mutual Funds (Cash/ sovereign Fund) SBP OMO Bai Muajjal Benefits of GOP Sukuk SLR Eligible Instrument Fixed Income- Debt Security Alternative Easy Liquidation Helps in regulatory compliance for limited private sector financing A cheaper source of funds for GOP Benefits of GOP Sukuk in line with the constitution of Pakistan which requires elimination of riba from the society. Sukuks are safer alternative to conventional bonds as they are backed by actual underlying assets. Sukuk, being asset backed in nature contribute directly towards generation of real economic activity e.g. sukuk for construction of dams etc. GOP Ijarah Sukuk-Structure GOP Ijarah Sukuk-Structure • The Investors will execute the Sukuk Subscription Undertaking to record the commitments of the Investors to subscribe to the Sukuk to be issued by Pakistan Domestic Sukuk Company Limited (“PDSCL”). Under the Sukuk Subscription Undertaking, the Investors would appoint PDSCL as their agent (“Investment Agent”) for purchase of the Assets on their behalf. • PDSCL (as agent of Investors) and State Bank of Pakistan’s Banking Services Corporation (“SBP-BSC”) will execute an Agency Agreement whereby PDSCL will appoint SBP-BSC as its agent (“Paying Agent”) to collect proceeds from the Investors, collect rentals and other payments due from GoP and distribute the same to the Investors, and act as reference agent and registrar for the Investors. • A Sukuk Issuance Undertaking will be executed by PDSCL, the GoP (acting through Ministry of Finance “MoF”) and the Relevant Authority (under whom the asset is in control) i.e NHA or CAA favor of the Investors, whereby PDSCL will undertake to issue the Sukuk to the Investors. . Under the Sukuk Issuance Undertaking, PDSCL will also give its acceptance to appointment as Investment Agent of Investors. GOP Ijarah Sukuk-Structure • The PDSCL, acting on behalf of the Investors, will enter into a Purchase Agreement with GoP (acting through MoF), for purchase of undivided ownership in identified portions of the Assets at an agreed price equivalent to the Sukuk issue amount (being the amount agreed under the Sukuk Subscription Undertaking). • Subsequent to the Purchase Agreement the Relevant Authority (under whom the asset is in control) i.e. NHA or CAA will execute a Title Agency Agreement in favour of the Investors to the effect that it is holding the registered title of the Assets as Title Agent on behalf of the Investors. • PDSCL, acting on behalf of the Investors, (as “Lessor”) will enter into an Ijarah Agreement with GoP (as “Lessee” acting through MoF) wherein these Assets will be leased to GoP for a fixed period of 5 years divided in rental periods of six months (each being a “Rental Period”) against lease rental payments (“Lease Rentals”) in accordance with the terms and conditions as specified in the Ijarah Agreement. GOP Ijarah Sukuk-Structure • A Service Agency Agreement will be executed between PDSCL (as Agent of Investors/Sukuk Holders) and GoP (acting through MoF) whereby GoP will be appointed as Service Agent to undertake services relating to the leased assets during the term of the lease in consideration for a nominal fee. All routine maintenance would be done by the Lessee whereas all major maintenance will be the responsibility of the Lessor. In case any major maintenance is required, the Service Agent would be under obligation to obtain prior permission from the Lessor, to incur the necessary expenses for carrying out such major maintenance. • GoP (acting through MoF) will execute a Purchase Undertaking in favour of the PDSCL to purchase the Sukuk Assets at the Exercise Price at maturity or upon an Event of Default • GoP (acting through MoF) will execute a Cost Undertaking to pay all applicable fees and expenses and provide indemnities associated with the Sukuk issuance. GOP Ijarah Sukuk-Reopening Reopening of Sukuk refers to a concept whereby subsequent to the initial issuance, the issuer wishes to seek additional funds under the same terms and conditions. GOP Ijarah Sukuk-Reopening Reopening of Sukuk refers to a concept whereby subsequent to the initial issuance, the issuer wishes to seek additional funds under the same terms and conditions. The issue size of the Sukuk increases upon each reopening while the coupon (profit/ rental) Rate and the maturity of the complete issue remains the same. GOP Ijarah Sukuk-Reopening Reopening of Sukuk refers to a concept whereby subsequent to the initial issuance, the issuer wishes to seek additional funds under the same terms and conditions. The issue size of the Sukuk increases upon each reopening while the coupon (profit/ rental) Rate and the maturity of the complete issue remains the same. Under normal Issuance the investors bid on the coupon (profit/ rental) rate, however in case of reopening of Sukuk the investors bid on the Purchase price since the coupon (profit/ rental) rate is already determined. GOP Ijarah Sukuk-Reopening In the Islamic context the steps of reopening of existing Sukuk is similar as that of issuance of a completely new Sukuk i.e. at the time of reopening of Sukuk the transaction is concluded by purchasing additional share in the identified asset on Musha basis which is then given on rent/ Ijarah and a separate Ijarah Agreement is executed. However, since the underlying asset, maturity date, rental rate and rental payout frequency is kept same as the initial issue, therefore the new issue would be called re-opening of Sukuk instead of a new Sukuk issuance. GOP Ijarah Sukuk-Reopening The structure of reopening of Sukuk might differ from the structure of the first issue in ways as elaborated below: • At the time of reopening of the Sukuk, the remaining tenor of the Sukuk should be at least 1 year from the reopening date • For the first rental period the rental amount of the reopened Sukuk would be determined in absolute terms • The Purchase Price (at which settlement will take place) would have the following three components which can be referred to individually or collectively for the reporting purpose: • Face value of Sukuk • Market premium/ discount • Price premium due to higher first rental • On the expiry of the first lease period subsequent to re-opening of Sukuk an Asset Comingling Declaration’ shall be executed by PDSCL (as agent of investors) on the GOP Ijarah Sukuk-Reopening GOP Ijarah Sukuk Auction and Price Determination Sovereign Sukuk Issuance 1,600,000 Sukuk Issuance (PKR Millions) 1,346,809 1,400,000 Sukuk Issuance 1,200,000 1,000,000 800,000 736,328 561,442 600,000 400,000 200,000 - 196,657 163,613 163,540 117,723 89,011 71,007 43,01849,537 29,721 12,523 - - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Year Sukuk Issuance (PKR Millions) Sovereign Sukuk Issuance 1,600,000 Sukuk Issuance (PKR Millions) 1,346,809 1,400,000 Sukuk Issuance 1,200,000 1,000,000 800,000 736,328 561,442 600,000 400,000 200,000 - 196,657 163,613 163,540 117,723 89,011 71,007 43,01849,537 29,721 12,523 - - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Year Sukuk Issuance (PKR Millions) In In 2023 2023 till till date date more more than than PKR PKR 349 349 bn bn worth worth of of GOP GOP Ijarah Ijarah Sukuk Sukuk has has been been issued. issued. GOP GOP further further intends intends to to issue issue Sukuk Sukuk worth worth PKR PKR 670 670 bn bn in in the the next next 33 months! months! Sovereign Sukuk Issuance Status: Multiple Sukuks issued under Ijarah structure on various assets listed hereunder: • • • • • • • • • Jinnah International • Airport • M1 M4 (Pindi bhattian -FSD)• • E35 M3 • M5 complete • M4 (FSD-MUX) CPEC WC, CPEC NC Lahore Airport Multan Airport Islamabad Airport Nowshera - Peshawar N5 Portion Makran Coastal Highway Indus Highway Sovereign Sukuk Issuance Status: Multiple Sukuks issued under Ijarah structure on various assets listed hereunder: • • • • • • • • • Jinnah International • Airport • M1 M4 (Pindi bhattian -FSD)• • E35 M3 • M5 complete • M4 (FSD-MUX) CPEC WC, Challenges / Steps CPEC NC Lahore Airport  Multan Airport Islamabad Airport  Nowshera - Peshawar N5 Portion  Makran Coastal Highway Indus Highway  Asset must be unencumbered, NOC is needed from the Title holding entity Legal title need to be clear Sukuk are over 1 year tenure  Difficulties can be faced to identify new assets Global Sukuk Issuance Total Global Issuance of Sukuk USD 1,247 Billion (Jan 2001- Dec 2019) Issuance in USD 145.70 2019 Bn Issuance in USD 123.15 2018 International Bn Issuance of Total Sukuk USD 289.92 Bn (Jan Issuance in USD 38.47 2001Dec 2019) 2019 Bn Issuance in USD 32.98 2018 DOMESTIC BnIssuance of Sukuk Total USD 957.28 Bn 2001Dec Issuance in 2019) USD 107.22 2019 Bn Issuance in USD 90.16 2018 Bn (Jan Global Sukuk Issuance Global Sovereign Sukuk Issuances (in USD millions) Sovereign Sukuks one of the most popular ways to raise funds for the Government operations by multiple leading economies all over the globe. 54.5% of Total Sukuk Issuances is Sovereign Sukuk since 2001 to 2019 Over 190 BN Quasi Sovereign Sukuk Issued till Dec 2019 (15% of Total Global Sukuk Issuance 1st Malaysia , 2nd Saudi Arabia, 3rd The Future- Asset Light Sukuk The Future- Asset Light Sukuk Underlying Mode Salam / Istisna Issuance Capacity / Potential Between Rs. 500 billion – 1500 billion Time Horizon Short term (3 months, 6 months & 9 months) Asset Crude Oil / Refined Oil Profit Source Through proceeds of sale of oil Tradability Not tradable Sukuk Redemption After payment of sale proceeds of oil to Sukuk holders Parties Involved State-owned OMCs, Oil Refineries, Min of Petroleum, OGRA & MoF The Future- Asset Light Sukuk Background Government of Pakistan (GOP) imports approximately $8-10 billion worth of Crude/ Refined Oil annually. A large portion of oil is imported through Murabaha arrangement with by ICD (International Corporation for Development) Saudi Arabia. In the second leg, GOP sells oil to Refineries/ OMCs. The proposed short term Sukuk is based on Salam structure that will be based on the use of Crude/ Refined Oil as underlying assets which are readily available through imports. Based on regular shipment size of approximately Rs. 25-50 billion every fortnight, Sukuk al Salam may be issued on this basis. Brief Structure As per Salam/ Istisna structure, Sukuk holders will make advance payment for purchase of Crude/ Refined Oil from the GOP. GOP will make PARCO/PSO its agent who will purchase Crude/ Refined Oil from international suppliers. GOP will give delivery of oil to Sukuk holders, who will then sell to OMC or Oil Refinery on cash GOP can directly purchase the oil from local suppliers like PSO or PARCO. GOP will give delivery of oil to Sukuk holders, who will then make GOP their agent to sell the oil in the market. The Future- Asset Light Sukuk Underlying Mode Murabaha Issuance Capacity / Potential Between Rs. 2000 billion – 3000 billion Time Horizon Short term (3 months, 6 months) Asset Crude Oil and Petroleum Products Profit Source Purchase price payment Tradability Not tradable Sukuk Redemption Through payment of Murabaha Price at maturity Parties Involved State-owned OMCs, Oil Refineries, Min of Petroleum, OGRA & MoF for Oil products The Future- Asset Light Sukuk As per Murabaha structure, Sukuk holders will make authorize Investment Agent for purchase of Oil products. The Investment Agent (IA) will make PARCO/ PSO or any other company its agent who will import petroleum based products. Sukuk holder will make payment to the IA Upon receipt of the Petroleum based products, Investment Agent will sell the acquired Oil products to GoP on deferred Murabaha The Future- Asset Light Sukuk Sukuk or Govt canstructure, be explored on AsFinancing per Murabaha  FBR Tax Receipt Sukuk holders will make authorize Investment Agent for purchase of Oil  Bai Muajjalproducts. of Sukuk (done under Islamic OMO) Thelink Investment Agent (IA) willCommercial make  Retail Equity Sukuk with Profitable Projects PARCO/ PSO or any other company its agent who will import petroleum based  Green Sukuk for Sustainable Development products.  Warehouse Receipt Based Sukuk Sukuk holder will make payment to the IA  Provincial Sukuk based on projects Upon receipt of Provincial the Petroleum based products, Investment Agent will sell the  Metropolitan acquired Oilfor products to GoP on deferred Sukuk Development and linked with local revenue collection Murabaha Jazak’Allah and Thank You