SMEs/SMIs Financing via Shari'ah Compliant Instrument CASABLANCA STOCK EXCHANGE MOROCCO M A Y 2 0 T H , 2 0 1 4 BY DR. NIDAL ALSAYYED, CEO WWW.INAYAH.ORG A M M A N , J O R D A N Prepared by iNayah CEO: NIDAL ALSAYYED ( Email: nidal@inayah.org ) www.inayah.org
Introduction 2 About INAYAH.org &Dr. Nidal Alsayyed Background Contribution to Islamic Finance Strengths and Focus areas Industry recognition
Brief Introduction on the Topic 3 May, 2014 INAYAH RESEARCH & CONSULTING| www.inayah.org
Socio-Economic ventures ةريغصلا تاكرشلا ليومتل ةمعادلا رواحملا MICRO WAQF FINANCE SME
يعرش روظنم نم رغصلؤاو ريغصلا ليومتلا ثحابم تيتاسسؤًنا ةرظُناو وىهفًنا ( . براجتو ثايجهُيو مداريو ةأشَ ) اهيهع سايمنا ٍكًي براجتو برغًنا يف ريغصنا ميىًتنا علاو . لىذتنا تيجهُيو ريداغلؤ قوذُص حرتمي . تسارذنا خيتافيو ثابهطتي : دارفلؤا مخد يىتسي ثاجايتدلبا ذيذذت . تفهتخًنا ٌاذهبنا يف ةذذتًنا ىيلؤن تيئاًَلئا جياربنا . ICARDA ثاذبلؤن تينوذنا كيداُصناو زكارًنا .. مثي : WWW.INAYAH.ORG
Why SME’s? Policymakers and bankers worldwide are increasingly focusing on micro-, small and medium-sized enterprises. (IDB) is making important efforts to nurture the micro- enterprise and SME sector and its export activities. Three important subsidiaries serving the sector: the International Islamic Trade Finance Corporation (ITFC), Islamic Corporation for the Development of the Private Sector (ICD) and the Islamic Corporation for Insurance of Investments and Export Credit (ICIEC). Each of the IDB WWW.INAYAH.ORG
برغملا يف ريغصلا ليومتلا تايدحت ( ةماعلا ةروصلا ) The brief survey of possible funding gaps affecting smaller enterprises suggested that SMEs in the developed world could generally expect to receive funding if they have a commercially viable proposition. The banks are the principal source of funding and a lack of collateral might result in credit rationing in some cases. ييلبسلئا ميىًتنا لود يتأي اُه
Islamic Banking for SME ةريغصلا تاكرشلا يف ةيملبسلئا ةفريصلا Wide range of Islamic financial instruments, each with a specific purpose: ensure that the instrument used is suitable for the economic purpose that a company seeks to achieve. There are two main categories of transaction types: ❑ Profit- and loss-sharing partnership equity investments; and ❑ Transactions with a predictable or fixed return structure.
SME’s in Morocco SMEs is a natural niche for Islamic banking as it deals directly with the real economy, creates employment, involves the productive use of resources, especially capital and finance, and contributes to the alleviation of poverty. Ethical and moral values. Islamic banking also advocates entrepreneurship and risk sharing. In the profit-sharing concept of a financed project, the financier and the beneficiary share the actual or net profit/loss, rather than leaving the risk burden to the entrepreneur. The principle of fairness and justice requires that the actual output of such a project be fairly distributed between the two parties. For micro-enterprises and SMEs looking for financing, Islamic banking can help promote entrepreneurial development WWW.INAYAH.ORG
What are Sukuk 10 AAOIFI: “Investment Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity , however, this is true after the receipt of the value of Sukuk, the closing of subscription and the employment of funds received for the purpose of which the Sukuk were issued” (standard no. 17, clause 2) Further reading: AAOIFI Sharia Standard No. 17 DAY ONE : SESSION I – BRIEF INTRODUCTION ON THE TOPIC
Sukuk return/pricing and payment 11 Fixed Return Vs. Variable return : Choosing the right underlying structure; Mapping cash flows to the transaction , Sukuk is not an interest paying instruments, therefore a clear link must be established between the return and the underlying transaction; Documentation perspective – Commercial consideration – matching requirement with limitations Assessing the role of security / Collaterals DAY ONE : SESSION IV – EXAMINING RETURN OR PRICING IN SUKUK AND SECURITIZATION TRANSACTIONS
Structuring an SME Sukuk Transaction 12 Jurisdiction and Investor Regulations considerations • Availability of • Tenure Asset • Fixed Vs Variable • Selecting a right • Nature of the Asset • Maturity terms jurisdiction for tax • Risk assessment efficiency and other purposes Asset Type Return DAY ONE : SESSION III – SUKUK STRUCTURING AND DOCUMENTATION: A STEP BY STEP GUIDE
Asset Backed vs. Asset Based Sukuk Asset Backed Sukuk ( ABS ) = Securitization + Certificates Backed by Assets + SPV (independent) (So the recourse to the Assets due to True Sale) Asset Based Sukuk ( AbS ) = Securitization + Certificates Backed by Collaterals+ SPV (credit interlinked) (So the recourse to the Originator)
Comparative Table www.inayah.org
Typical Sukuk Structure 15 Investment Return on Investment (Sharia Investment compliant transaction) Proceeds [ ● ] Distribution Distribution Issuer/Trustee (As SPV Obligor/Undertaking) Securitization Shari'ah compliant Contract Proceeds Declaration Of Underlying Transaction: Any Trust Sharia compliant contractual Distribution relationship between the Issuer Sukuk Holders representing Sukuk Holders and the Obligor
Sukuk Vs. Other Investments ىرخلؤا رامثتسلبا تاودأو كوكصلا 16 Securitizat Covered Characteristics Sukuk Equity Bonds ion Bonds X/ √ X/ √ Ownership of √ √ X Assets √ Performance √ √ X X linked return X/ √ Underlying √ √ X √ transaction √ X/ √ √ √ X Equity Risk √ X √ √ √ Fixed Returns √ X √ √ √ Risk Mitigation
Shari'ah Compliant for SMEs/SMIs 17 Based on approved Shari'ah compliant structures/contracts/instruments Mimic the commercial aspects of the conventional instruments, however structurally and documentation wise significantly different Meet the short & long term liquidity and investment needs of the SME project Fund generation for various stakeholders in a Shari'ah compliant way Essential component for Society overall Economics growth DAY ONE : SESSION I – BRIEF INTRODUCTION ON THE TOPIC
Fundamental Shariah requirements for SMEs Sukuk issuances 18
Outline 19 A. Structuring a Sukuk? B. Various parties and their role. C. What corporate structure is required? D. What assets are required? A distinction between asset based and asset backed Sukuk E. Securitization vs. Sukuk – differences and similarities F. Innovation and the factors driving innovation DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
How Sukuk transaction is structured? 20 Basic requirement to decide the structure of the Sukuk include the following: Asset: Availability/non availability, nature and type, Return: Fixed, floating, …. Risk Appetite: Jurisdiction / Regulatory framework: Nature of Obligor/Issuer : Utilization of proceeds: Convertibility, multiple issuances, and other special features: Redemption: Enforcement: Other considerations for Morocco? DAY ONE : SESSION II – FUNDAMENTAL SHARIAH REQUIREMENTS FOR THE ISSUANCE OF SUKUK
Sukuk parties 21 Discuss Role of each of the parties: Investors Obligor / Issuer Lead Manager (Investment Bank) Regulators / Relevant Authorities Sharia Board / Sharia Consultants Legal Counsel (for each party/transaction) Service Providers (as required) Auditors/clearing stream Others specific for any particular Sukuk issue DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
What assets are required? Asset based Vs Asset backed 22 What is meant by Asset Based / Asset Backed Based on availability of Asset Sale of Asset? Lease of Asset? Other Investments (Musharakah, Mudarabah, Wakalah) Regulatory requirement Issues with fees and taxes for Asset transfer Based on the underlying transaction type Discuss the requirement based on transaction type: Ijara, Mudarabah, Wakalah, Salam etc (more details and discussions will follow when we deal with the transaction type) DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
Islamic Securitization vs. Sukuk: Differences & Similarities 23 Sukuk is in essence securitization of the underlying transaction; However there exists a very important difference between a simple Islamic Securitization and Sukuk; Recourse to the Asset: In securitization the recourse of the investors is only to the asset securitized Whereas in a Sukuk the recourse for the investors is both to the Obligor and the underlying assets/receivables DAY ONE : SESSION II – FUNDAMENTAL SHARIA REQUIREMENTS FOR THE ISSUANCE OF SUKUK
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