SUKUK (ISSUANCE PROCESS)

Sukuk is an Islamic financial instrument that aims to raise capital for financial injections for a government or business entity (company). It moves on the basis of the principles of sharia rules that distinguish it from conventional instruments that move on the elements of usury, speculation, debt, gambling and profit. Briefly, a sukuk is defined as a certificate of value which is proof of ownership of an undivided asset, benefit rights or ownership over a particular investment project or activity. Securitization is a process of converting non-liquid assets to securities as instruments that can be issued and traded on the capital market. Securitization renders loan returns, receivables and other financial assets (asset cash flows) in support of payments to holders of issued securities. It involves a legal document that is proof of capital participation or proof of investment against the ownership of a transferable property.

There are various types of sukuk nowadays. According to Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the types of sukuk exist based on the purpose of the fund acquired and invested in business prospects each of which differs in terms of its shariah principles and processes. Among them are Sukuk Ijarah, Sukuk Salam, Sukuk Istisna, Sukuk Musyarakah, Sukuk Mudharabah, Sukuk Wakalah, Sukuk Musaqah and Sukuk Muzara’ah.

However, sukuk is an asset-backed financial financing then the sukuk issuance process is a process to realize sukuk to obtain capital based on business law and compliance with shariah with several processes and parties involved.

The sukuk issuance process involves the following parties:

• Originator: Parties who need funds for business purposes
• Special Purpose Vehicle (SPV): A specialized corporation established to issue sukuk
• Investor: The sukuk holder who has an interest in underlying assets through SPV

In the issuing procedure, the following steps are common:

1. A company that requires capital (referred to as the ‘originator’) establishes a special purpose vehicle (SPV). The SPV protects the underlying assets from the creditors if the originator suffers from financial problems.
2. This special purpose vehicle (SPV) issues Sukuk certificates that are sold to the investors.
3. Then the originator purchases the required asset, using the proceeds from the sale of the certificates to the investors.
4. The SPV buys the asset from the originator.
5. SPV pays the asset sale proceeds to the originator. 
6. The SPV sets up the lease of the asset to the originator. Then the originator makes lease payment to the SPV, which later distributes the payments among the holders as lease income.
7. On the termination date of the lease, the originator purchases the asset back from the SPV at its nominal value. The SPV distributes the proceeds to the certificate holders.