As Sukuk is being issued, let’s look at how it works

Sukuk or shari'ah compliant bonds may be treated as an innovative financing instrument for development because many climate and environmental projects in Malaysia, Indonesia, Turkey, and some other parts of the world are financed through issuing Green Bond (Sukuk). 

Sukuk did not have a presence in Bangladesh until December 2020, when Bangladesh Bank on behalf of the government issued the first Sukuk of Tk 8,000 crores to support funding of a safe water supply project. The investors submitted bids worth Tk 15,153 crore during the auction. This oversubscription is a clear indication of the huge interest of Bangladeshi investors in Sukuk.   

Following this development, Beximco Limited's recent announcement to issue the largest Sukuk in the private sector must be remembered as another milestone in the history of Islamic financial sector in Bangladesh. The planned Tk3000 crore Sukuk will be collected through private placement, public placement, and reservation to Beximco Ltd shareholders. Half of the fund would be raised through private placement from eligible investors, 25% from existing shareholders and the rest through public offers when the Sukuk gets listed on the stock exchange. 

There are various Islamic contracts for a set of underlying assets when it comes to issuing Sukuk to generate funds. These include, Ijarah (the sale and lease-back of assets in existence), Mudaraba (a partnership/fund management contract), Musharaka (joint ownership), Murabaha (a cost-plus financing contract), Salam (spot payment with future delivery of asset), and Al-Istisna (a contract for the manufacture of a specified asset). 

Now looking closely at the structure of the Beximco Sukuk, it is seen that Beximco (originator) will form a Special Purpose Vehicle (SPV) with regulatory approval from the Bangladesh Securities and Exchange Commission (BSEC).  The SPV will then represent the originator to issue Sukuk. Investors will transfer funds to SPV. Afterward, the SPV will use the funds based on the interests of the originator. 

In this case, the Sukuk would be invested mainly in two projects: (1) implementing solar projects of Teesta Solar Ltd and Korotoa Solar Ltd; and (2) financing and refinancing the machinery and equipment required for the expansion of Beximco's textile division. For Sukuk issuance, the Beximco Asset Backed Sukuk will follow the Al-Istisna (Manufacturing) contract. 

Al-Istisna contract is a type of sale in which the purchaser pays the price to the manufacturer for specified goods that are subsequently manufactured and delivered on a stipulated date. In practice, Sukuk al-Istisna combines Ijara and Istisna structures because the returns for Sukuk-holders are generated from the Ijara structure. According to the 2013 report on developing a Sukuk market, Sukuk al-Istisna as debt instruments involves the following principal steps:

• (1) The Issuer issues Sukuk certificates to Sukuk-holders.

• (2) The Issuer enters into an Istisna contract with the Originator to construct specified assets in return for the payment of the issuance that proceeds to the Originator. At the end of the construction period, the Issuer receives title to the assets;

• (3) Under an Islamic forward lease (Ijarah Mawsufah fi al Dhimma) granted by the Issuer as lessor to the Originator as lessee, the Originator pays rent to the Issuer on the relevant periodic distribution dates. The rent payable under the following lease are staged as follows: (a) during the construction period, the Originator pays Advance Rental to the Issuer; and (b) following delivery of the assets, the Originator pays Rental to the Issuer; and

• (4) The Issuer declares a trust over its interest in the receivables under the Istisna and the forward lease in favour of the Sukuk-holders.

 According to the Accounting and Auditing Organization for Islamic Financial Institutions' (AAOIFI) guidelines, Sukuk do not represent a debt owed to the issuer by the certificate holder because Sukuk are meant to be equity-type instruments in which the owners share in the returns and bear the losses. For Sukuk to be effective, the AAOIFI offered additional guidance for Sukuk issuers while releasing on Sukuk structures in February 2008 as follows:  

• Sukuk-holders must own all the rights and obligations of the assets (tangible, usufructs or services), and the assets are to be transferred from the issuer to the Sukuk holders' books.

• To be tradable, Sukuk cannot represent receivables or debt except for trading/financial entity sales that unintentionally convey incidental debt.

• Sukuk managers may not cover loan shortfalls to Sukuk holders, but reserve accounts established for such a purpose are permissible if disclosed in the prospectus.

• The purchase of assets at maturity is permissible at the market value rather than the nominal/face value, although Sukuk issuers/managers can guarantee capital in the event of negligence;

• Shari'ah boards are to review all relevant contracts/documentation related to the transaction to ensure compliance with Shari'ah and oversee that implementation and operation complies with Shari'ah. 

It is important to mention here that Beximco Sukuk has the potential to attract foreign direct investment as Islamic banks and financial institutions from Dubai and Malaysia are expected to subscribe to this bond for solar power plants. Moreover, because of the nature of the Sukuk bond, both shariah compliant and traditional banks as well as financial institutions may invest. Through this initiative, Beximco has created an opportunity for the investors who are not comfortable with traditional interest-bearing bonds that are not permissible in Islam. 

Illustration: TBS

In Bangladesh, project developers depend on banks to obtain financing for large scale projects. It is seen that the roll out of many large-scale solar power plants has stalled in Bangladesh, because they have failed to secure the required funds and land. In response, developing Islamic bonds like Beximco's Sukuk can lower dependence on the banking system for such large-scale projects. 

Also, Beximco Sukuk may gain popularity among Muslim as well as non-Muslim investors for several other reasons. First, Sukuk can offer higher returns compared to conventional bonds particularly in times of crisis. Second, Sukuk surprisingly yields a lower risk than conventional bonds. Third, investors experience substantial losses due to significant volatility in financial markets during crisis periods such as the current Covid-19. From the experiences of earlier crises, it is evident that Sukuk was less impacted by global financial shocks and thus, investment in Beximco Asset-Backed Sukuk could be a new haven for the investors.

For this to happen, Beximco Sukuk must follow the AAOIFI guidelines stated above to explicitly maintain shari'ah standard by way of forming a strong Shari'ah board representing Islamic scholars, financial experts, environmentalists, economists to monitor its implementation. The differences between Sukuk structures and conventional bonds may confuse potential investors in Bangladeshi Sukuk market. To avoid this, investors should be duly informed through a minimum disclosure. Finally, in addition to general auditing, Beximco Sukuk needs an independent shari'ah audit committee to conduct regular Shariah audits so that investors can rely on Sukuk's shariah compliance.

Dr. Foyasal Khan is an economist and independent researcher, he can be reached at [email protected] 

Sirazoom Munira is working at the Global Center on Adaptation Regional Officer and is currently supporting the ongoing Climate Vulnerable Forum Presidency of the Bangladesh Government. She can be reached at [email protected].

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.