188 AN INTRODUCTION TO ISLAMIC FINANCE
is imposed to avoid dealing with riba while trading debt securities in the
secondary markets. Shari’ah is of the view that since salam and muraba-
hah contracts create debt as the result of salam - and murabahah - based sale,
sukuk based on these contracts cannot be traded in the secondary market.
Following is a discussion on selected types of sukuk.
Ijarah Sukuk For ijarah sukuk to qualify for securitization, the underlying
leasing contract must fi rst conform to Shari’ah principles. Secondly, the
leased assets must have some benefi cial usage for which the users are will-
ing to pay a rent. Third, the leased assets must be of such a nature that
their use is fully compliant with the Shari’ah. For example, the leasing of a
casino building would not be acceptable. Finally, the maintenance expendi-
ture related to the underlying asset is the responsibility of the owner — in this
case, the holders of the sukuk.
The ijarah contract offers several advantages, which make it a natural
candidate for securitization. These include:
Flexibility: The ijarah is one of the instruments that is most similar to
the conventional lease contract and offers the fl exibility of both fi xed - and
fl oating - rate payoffs. The cash fl ows of the lease, including rental payments
and principal repayment, are passed through to the investors in the form of
coupon and principal payments. This makes them attractive to conventional
investors as well. There is fl exibility in the timing of infl ows and outfl ows
since it is not necessary that the cash fl ows to the certifi cate holders should
coincide with the timing of the rental payments. Another element of this
fl exibility is that the Shari’ah does not require that the underlying asset to be
securitized in this way be in existence at the time of the contract.
Extended maturity: The ijarah contract can be of any length as long as
the asset that is the subject of the contract remains in existence and the user
can draw benefi t from it. The possibility of an extended term means that
the sukuk can be structured to provide an effi cient mode of fi nancing with a
medium - to - long - term maturity.
Transferability: Since Shari’ah rules do not restrict the right of the lessor
to sell the leased asset, persons who share the ownership of a leased asset
through sukuk can dispose of their property by selling it to new owners,
individually or collectively, as they may desire. This feature is critical in
developing a secondary market for ijarah - based sukuk.
Negotiability: The Shari’ah requires that a bond or note such as sukuk
can be sold at a market price provided that the majority of its underlying
assets are physical assets. This makes ijarah sukuk completely negotiable
and capable of being traded in the secondary markets. This feature makes
them attractive to investors as it enhances their liquidity in the market.
The ijarah sukuk is also subject to risks other than the market risk.
These are related to the ability and willingness of the lessee to pay the rental
payments over the life of the sukuk. In addition, the return to investors is not
always predetermined, as the lease is subject to maintenance and insurance
costs. Therefore, the amount of rent given in the contractual relationship
indicates a maximum possible return subject to a deduction for maintenance