Capital Markets 189
and insurance expenditures. However, given that risk is protected through
insurance and fi nancial risk may be protected through guarantees, the return
to the investors is fairly stable.
In the case where an asset that can be sold and leased back does not
exist, another type of contract, istisna’ can be utilized. An istisna’ contract
is suitable for situations where a new asset is created through construction
or manufacturing activity to a specifi ed description and at a predetermined
price. For such cases, darrat sukuk have been suggested, which are sukuk
against assets which do not exist at the time of securitization. A combina-
tion of istisna’ and ijarah is used in the structure of the contract to fi rst
create the asset and then to rent it back to the originator. In addition to the
originator of the asset, a new party becomes involved — the contractor, who
is responsible for the construction of the asset before it can be handed over
to the SPM for leasing.
Figure 9.4 shows how sukuk based on an ijarah contract are structured. A
special purpose vehicle (SPV) is used to securitize the ijarah - based assets. At the
inception of the sukuk, the asset owner (obligor) transfers the asset to the SPV
(issuer) which, in turn, exchanges ownership rights with the sukuk proceeds
from sukuk investors. Over the life of the sukuk, periodic lease rental payments
are made to the SPV, which passes it on to the investors. At maturity, the princi-
pal amount is returned to the investors in exchange for the leased asset.
Salam Sukuk Salam - based sukuk have proved to be a useful investment vehi-
cle for short - term maturity, since the underlying commodity fi nancing tends
to be for short - term tenor, ranging from three months to one year. They
can be based on either spot sale (salam) and/or deferred - payment sale (Bay’
al - Muajjil) or deferred - delivery sale (Bay’ al - Salam) contracts, whereby the
investor undertakes to supply specifi c goods or commodities, incorporating
a mutually agreed contract for resale to the client and a mutually negotiated
profi t margin. The Bahrain Monetary Agency (BMA) was one of the innova-
tors and originators of early salam - based sukuk.
According to the structure promoted by BMA, an SPM is set up, which
buys a commodity such as crude oil or aluminum on a salam basis, whereby
the purchase price is paid entirely up - front with the proceeds from the sukuk
certifi cates. The delivery of the purchased commodity is set at a specifi ed
future date and, subsequent to the salam contract, there is a promise by the
benefi ciary of the commodity to buy the commodity from the SPM on the
due delivery date. The return on sukuk is determined by the pre - agreed cost
of fi nancing the purchase.
In addition to being short term, the salam sukuk has another special
characteristic. Because it results in a pure fi nancial claim and is somewhat
de - linked from the risk/return of the underlying asset, the Shari’ah treats it
as a pure debt security, which cannot be traded in the secondary market. To
do otherwise would introduce an element of riba into the transaction. This
feature adversely affects the transferability and negotiability of these certifi -
cates in the secondary market. As a result, investors have no option but to
hold salam sukuk up to the maturity of the certifi cates.