sukuk al-musharaka

International

sukuk al musharaka, Also known as musharaka sukuk.

Islamic finance instruments (sukuk) based on an underlying Sharia-compliant partnership or joint venture providing finance for a specified project (musharaka). Certificates are issued by a special purpose vehicle that entitle the holders to an ownership interest and a right to a return in proportion to their investment in the underlying musharaka.

See also

Sharia

sukuk

sukuk al ijara

sukuk al mudaraba

sukuk al murabaha

sukuk al salam

sukuk al wakala

+ sukuk al-musharaka/sukuk al musharaka

International, USA

A form of sukuk derived from the musharaka joint venture/partnership structure. In a sukuk al-musharaka transaction:

• The two partners in the joint venture/partnership are:

o the entity seeking financing (the originator) that contributes the assets or cash; and

o a special purpose vehicle (SPV) that contributes cash (the proceeds of a sukuk issuance).

• The originator and the SPV enter into a management agreement pursuant to which the originator operates the assets and invests the cash in accordance with the musharaka agreement and Sharia. For example, the originator cannot invest the funds in prohibited (haram) products and services such as alcohol, gambling or pork products. If the musharaka is a separate legal entity, the management agreement is entered into by the musharaka.

• The profits from the musharaka are shared between the SPV and the originator in accordance with pre-agreed percentages. Losses, however, are shared in accordance with the partners' initial investments.

• The SPV uses its portion of the profits to make payments to the sukuk holders.

For a diagram showing the structure of a typical sukuk al-musharaka transaction, see Checklist, Islamic Finance Deal Structure: Sukuk al-musharaka (www.practicallaw.com/8-501-0071).

+sukuk al-salam/sukuk al salam

International, USA

A form of sukuk derived from the bai al-salam financing structure. In a sukuk al-salam:

• The entity seeking capital (the originator) enters into a sale and purchase agreement with a special purpose vehicle (SPV).

• Under the terms of the agreement, the originator agrees to sell assets to the SPV for deferred delivery but the SPV pays the purchase price in advance.

• The SPV finances the purchase of these assets with the proceeds of a sukuk issuance.

• The SPV holds the assets in trust for the sukuk holders who each own a proportionate interest in the assets in accordance with the value of their investment.

• The SPV then either leases or sells the purchased assets to the originator or an affiliate of the originator.

• The SPV uses the lease payments or purchase price to make payments to the sukuk holders.

A sukuk al-salam transaction must also satisfy all the requirements of a salam transaction.

For a diagram showing the structure of a typical sukuk al-salam transaction, see Checklist, Islamic Finance Deal Structure: Sukuk al-salam (www.practicallaw.com/5-501-1067).