94 Islamic Finance in Practice
and orphans trust. This is done so that the issuer is not a subsidiary of the
originator in order, primarily, to ensure total independence from the
originator. The funds made available by the investors will be paid to the
originator in return for the purchase of the pool of assets. A trustee will
usually hold title to the assets on behalf of the investors (and other persons
who are entitled,forexample,to bepaidfeesandotheramountsinconnection
with the issue). Those trust arrangements will usually be under English
law.
In practice while there has been a sale of assets, the investors have really
been looking to the credit risk associated with the originator. This is because,
in most of thesukukstructures to date, the originator has given a purchase
undertaking to the trustee for the benefit of the investors that if there were
an event of default or the term of thesukukended, the originator would be
obliged to re-purchase the assets for a price that would equal the initial
amount of the investment (less any principal payments made before the
exercise of the purchaseundertaking) and any other outstanding amounts.
This approach has, therefore, meant that mostsukukhave been asset
backed and not asset based.Sukukshould arguably be structured so that
they are in effect the same as a conventional securitization in that the
investors (who own the assets under thesukuk) should only be looking to
those assets to obtain the returns that they seek and the recovery of their
initial investments. To date, very fewsukukhave followed this structure.
An Islamic investment bank can structuresukukin a variety of ways and
the types of structures are likely to continue to expand and evolve. Current
examples includesukukstructured asijara(lease),mudaraba(investment
trust),musharaka(joint venture or co-ownership) and salam (forward sale).
What this means is that investors’ funds are utilized in a manner which
adopts a Shari’a-compliant structure in their deployment and the Islamic
investment banker will need to consider the circumstances of the client, the
requirements of the investors, the views of the Shari’a scholar and applicable
legal, regulatory and tax issues. Examples of structures used forsukuk al-
ijara,sukuk al-mudarabaandsukuk al-musharakaare to be found in the
exhibits to this chapter. The key aspects that are found in different types of
sukukare as follows.Sukuk al-ijara
The originator has various assets that it is able to sell to the investors. It
sells them for an amount which represents the investment funds being made
available by the investors. The investors then lease the assets to the
originator. Underthe Shari’a,a lessormustremainresponsibleforstructural
andmajormaintenance,propertyinsuranceandownershiptaxes.Itappoints
the lessee as its service agent to perform these functions and to pay such
amounts on its behalf. The lessor is obliged to reimburse amounts expended
by an agent. However, in order to pass the economic cost of these functions