SUKUK REPORT IN 7 HOURS NEEDED

SAUDI TELECOM COMPANY ISSUES DEBUT $533M SUKUK

Saudi telecom is a well-known for the role it plays in the field of technology because it is the leading company in the provision of technological services. It offers services that range from the use of landlines, mobile phones, services that are related to internet as well as computer networks. It accounts for about 81% of all the telecom subscribers found in Saudi Arabia. The number of its subscribers has expanded to around 17.3 million due to its popularity in the region. Sukuk Company is the most popular company that is known for depth coverage in the financial markets. It was developed to provide securities in the financial market of which they were structured in a way that they could be in line with the sharia laws in Saudi Arabia. SUKUK is considered to be so beneficial to the Saudi Arabia because it was established to replace the conventional bonds because the Muslims in Saudi Arabia did not like the conventional bonds. This is the reason as to why sukuk company is very popular.

Recently the Saudi telecom company issued a debit of $533M SUKUK. This SUKUK is a 10-year bond according to the Islamic laws in the financial markets and it carries along with it a floating financial profit at a rate of 70 basis points. The $533 million can be equated to two billion Saudi riyals. The reason as to why the telecom company was given the bond is because it had a very new establishment of 5 billion Saudi riyals placement that was private. This debut was oversubscribed to times more that the rate at which it is supposed to be oversubscribed with. The number of investors who came on board ranged from banks, investors from the government, managers who deal with assets as well as very many insurance companies

It is very easy to adapt the regulatory and legal framework by the Luxembourg stock exchange because all the Islamic products have already built up some experience in the process of supervision and the authorization of all the Islamic financial structures that have been put in place. The relevant authorities have made sure that they have clarified very keenly about the issue on both indirect and indirect taxes and how they are going to affect the stock exchange market and it also emphasis on the importance of paying taxes since it is a legal requirement. The banking institute offers training that relates to the banking profusion and it does this by offering a foundation by giving certificate degrees. It also offers advanced diploma courses that relate to Islamic finance.

Currently, Luxemburg is the super power in the stock exchange market in the European continent. This is because of the good services that it provides to its clients and are also reasonable in the cost that they charge their clients. They also ensure a cross border distribution of their products that making it dominate the whole region therefore in case there is any service provider that is willing to enter the market, he may find it difficult to control the market because of the monopoly that Luxembourg enjoys in the entire continent. Other financial providers that came from countries like Malaysia could have found it very difficult to survive in the market because they would have been forced to first study the Islamic products and come uo with more financial products that would out do those of Luxemburg although this would take a lot of time or at times it would be even rendered as a mission impossible.

However, to support other upcoming markets in the financial sector, Luxemburg has signed various pacts with other agencies such as the Dubai financial services authority, Malaysia commission that deals with securities, the financial regulatory sector that deals with securities and very many other institutions that making it easy for them to actually participate in the exchange and the selling of securities to the Arabian continent. There are very many Luxemburg companies that have been listed as active institutions in the Islamic directory that records all the financial service providers (Grassa, 2018). The companies that are associated with Luxemburg include banks, auditing firms, asset managers, and legal and consultation firms. Luxemburg also provides other services apart from the provision of sukuk. The services include private bank services, investment on vehicles, investment on fin tech, the issuance of climate and sustainable finances. This means that people don’t have do go to other banks to seek for private services. All the services they need are offered by Luxemburg and since it is the most popular company in the European continent, people will prefer Luxemburg to other companies that deal with financial services.

Since sukuk has already matured, different structures have been put in place. There structures can be different depending on the mode of financial market that has been applied by the Islam. Therefore, the Islam is free to choose the structure that they feel can suit them. There are various structures that have been emerging over a period of time. The structures include the mudarabah structure, the mushakara structure, the murabana structure and the ijarah structure.

Mudarabah sukuk are sukuk investments that represent one ownership of the units that are of equal value. In short, they represent equity. The shareholders in this structure are the ones who are responsible for the supply of capital and they own various share or returns in the market according to the percentage of the number of shares that one has in the market. In this sukuk structure, the owners of the share have the powers to transfer all their shares to another person or even the right to owner ship through the transfer of title deeds. However, it is not a requirement that a sukuk holder should have a guarantee from an issuer or even the manager in charge of that fund. The profits realized are also based on the amount of capital that has been invested in the market.

Musharakah sukuk is the investment sukuk that has the mandate of representing the ownership of a musharakah equity. Even though it is somehow similar to the mudarabah sukuk expect in the way in which both structures are developed. If one wants to venture into a commercial venture that requires a lot of finances, then it would be advisable that he or she uses the musharakah sukuk mode of getting finances. A good example of a venture that may include a large deal of finances is the construction of big projects or the expansion of a company. A special purpose company that deals with vehicles has the capability of buying, commissioning or even constructing musharakah assets that are owned or even assets that have already been bought by the issuing entity. The vehicle company transacts business by purchasing the musharakah sukuk and then it later lends it to the issuing entity for a period that is equal to the sukuk maturity period thus the vehicle company will end up making very huge profits. Musharakah sukuk also provides room for negotiations such that an instrument can be sold for the second time in a financial market. It is also negotiable in that incase an issuing entity defaults the payment agreement, they can negotiate and allows the issuing entity to make another promise of when the loan shall be settled

Murabahah Sukuk is also another structure in that the certificate issuer appears to be the main seller of the commodity that is under Murabaha. The buyers of the commodity are known as subscribers and they have an entitlement in the final sale of the product even after the product has been sold for the second time (Ahmad, 2016). Contrary to the previous structure, it is illegal to trade a murabaha sukuk in the secondary market. Therefore, the telecommunication market cannot sell the sukuk bond through the secondary market if it is applying this structure. This is because the certificates that are issued in this structure depict a debt that is owed from the previous buyer of the commodity. In this structure, investors are supposed to share any loses that might arise from any of the sukuk assets and the losses are shared equally among everyone. However, in the year 2008, a statement that had an aim of criticizing the application of fixed prices in the purchase of instruments or in the sharing of returns was issued and therefore these seemed to criticize the whole structure. Therefore, if the telecommunication had decided to borrow its security using this structure, then they would be forced to share all the losses among the shareholders.

Ijarah sukuk is the best and the most preferred structure to use. Ijarah sukuk originates from a capital lease and an operational lease hybrid. It involves various ownership risks which include the mandate to make sure that there is maintenance of the assets that have been leased and the mandate to ensure that the assets are insured against any occurrence of a risk. In this structure an agent is preferred and most likely the agent is usually the lessee. Therefore, Saudi telecommunication could have been forced to choose an agent that could represents them or to perform any duties on his behalf provided they have an agreement on how they are going to do the work. For example, in this structure the STC will be forced to finance the whole acquisition procession a cash basis depending on the issues that have been raised by the sukuk certificates. The STC can again lend the asset to another party most probably the originator. The lease payments that are for rental purposes will reflect any coupon payment that is due and it is within the sukuk certificates. Any holder of the Ijarah sukuk has a right to own a real estate. Therefore, this is the best structure to consider when one wants a sukuk.

Recommendations

STC should apply the Ijarh sukuk structure.

STC should make sure that it approaches the Luxembourg service provider.

Conclusion

The best structure to apply so as to ensure the effective use of any securities is the Ijarah sukuk structure because it accommodates a series of advantages which include the right to own real estate. Other structures do not accommodate such rights. Intact it is worse in that in case of an eventuality, loses are shared among all the shareholders. Luxemburg is the best service provider since it accommodates the Islamic culture and it is well known because it is the most popular security market in the European continent. This is because it provides a wide variety of services that are beneficial to the Islam.

References

Nagano, M. (2016). Who issues Sukuk and when?: An analysis of the determinants of Islamic bond issuance. Review of Financial Economics, 31(1), 45-55.

Grassa, R., & Miniaoui, H. (2018). Corporate choice between conventional bond and Sukuk issuance evidence from GCC countries. Research in International Business and Finance, 45, 454-466.

Ahmad, W. (2016). Sukuk and Conventional Bond Issuance.

Regional Conference on Science, Technology and Social Sciences (RCSTSS 2014) (pp. 301-307). Springer, Singapore.

Graphical format of the SUKUK structure

Purchaser

Servicer

Seller

Issuer

Investors