An Introduction to Islamic Finance: Theory and Practice

254 AN INTRODUCTION TO ISLAMIC FINANCE

STRUCTURING TAMWEEL SUKUK (CONTINUED)

passed to the investors, with no recourse back to the originator (other

than in limited circumstances, such as misrepresentation).

In this respect, the Tamweel structure was considered more compli-

ant with the requirements of both the customer and the rating agencies,

and also fell within Shari’ah parameters.

Multi tranches

Structuring multiple tranches of securitization to cater to investors of

different levels of creditworthiness is common practice in conventional

securitization. However, replicating the same in a sukuk structure is

a real challenge because of Shari’ah requirements that all investors

are treated equally. In the case of Tamweel, Shari’ah scholars were

convinced that such tranching was possible without violating Shari’ah

principles. This was done by arguing that it was possible for the inves-

tors to agree to subordinate their interests so that different classes of

investors obtained differing returns and at different times.

Liquidity facility

Another interesting feature of the Tamweel sukuk was the introduc-

tion of a liquidity facility to cover any delay in the collection of rentals

from the underlying leasing agreements such that the fl ow to investors

was not disturbed. This was achieved by applying a qard - ul - hassan

mode of fi nancing.

Currency - exchange mechanism

The cashfl ows from the rental payments were denominated in UAE

dirhams (AED), whereas the sukuk was denominated in US dollars,

which give rise to classic exchange - rate mismatch risk. This risk was

mitigated by ensuring that in the event of the current fi xed/pegged rate

between the two currencies being broken, a fi nancial institution would

agree to exchange dirhams in the future for US dollars at the pegged

rate. This hedging facility was provided by Morgan Stanley & Co.

International plc and steps were taken to ensure that the facility met

all the Shari’ah requirements.

Source: de Belder (2009). The authors are grateful to SNR Denton, formerly Denton

Wilde Sapte, for sharing the case study. See: http://www.snrdenton.com/pdf/Syndicated_

and_Structured_IF_Chapter_3.pdf