Sukuk has been playing a significant role in developing Islamic finance, more specifically, Islamic capital market. Islamic financial institutions did not have any liquid investments other than hard cash to held as conventional short-term bonds, commercial papers and notes are interest based and prohibited in Shari’ah. The rapid growth in Sukuk market not only in Malaysia but also internationally indicates huge potential of this innovative financial instrument. However, exist many controversies regarding Sukuk. Many people ask questions like how Sukuk is different from conventional bond. As various Sukuk structure have emerged very recently, a comprehensive research is required to answer all the unanswered questions. In this paper, we have studied Sunway Treasury Sukuk. It is based on Mudarabah contract. Even though the initial focus of our study is to find accounting issues connected with this sukuk and we discussed in details financial performance of Sunway group, accounting disclosure needed for Sukuk issuance, model accounting treatment of Mudarabah sukuk in general and Sunway Treasury Sukuk in specific, in depth analysis of Shari’ah issues related with the Sukuk, various risks associated with it.
Our analysis shows that Sunway Group is a one of the leading construction and development in company in Malaysia and it has presence in other south-east Asian country also in India. The slowing down in real-estate industry has put a lot of pressure on Sunway and it has been evident in the financial statements of the company. All most half of its financing are coming from debt and it has been growing but the company has solid fixed assets namely it has already acquired more than 3000 acres of land for development. Accounting of Sukuk is not necessarily different from conventional bond, even though, we consider Sukuk to be closer to equity but in reality it is closer to debt. Analysis shows that IFRS and AAOIFI accounting have different objectives and perspectives. Subsequently, IFRS is more concerned with the substance, while AAOIFI focuses on legal form while considering accounting transactions, however, Sukuk in both cases are shown as a liability in the balance sheet. Some authors argue that in addition to preparing its own accounts as SPV, accounts should be prepared for the investment fund represented by the sukuk in accordance with Financial Accounting Standard 14 "Investment Funds". Capital guarantee, fixed rate Mudarabah, later payment charge, promise to buy back are found to be critical Shari’ah issues in Sunway Treasury Sukuk. Default risk in Treasury sukuk is very low considering company reputation and its huge fixed asset back of more than 3000 acres of land.
The sukuk has some sort of market risk, namely interest rate/profit rate risk in rising interest rate environment. Shari’ah risk found to be the main problem of this Sukuk. Therefore, we proposed
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and justified an alternative model, Ijarah Sukuk for Sunway Group by considering the financing needs of the company and also to be complaint with Shari’ah.
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References:
Global Sukuk Report 1Q 2015 Annual Global Sukuk Report 2013
The size of Islamic finance market(27th December 2014). Islamicfinance.com. Retrieved on 09/11/2015 https://www.islamicfinance.com/2014/12/size-islamic-finance-market-vs-conventional-finance/#_ftn3
Islamic Finance and Role of Islamic Finance (March 2015). The IMF and Islamic Finance.
Retrieved on 09/11/2015 http://www.imf.org/external/themes/islamicfinance/
Kamil et al.(2010). The subprime mortgages crisis and Islamic securitization. International Journal of Islamic and Middle Eastern Finance and Management, Vol. 3 No. 4.
Al-Bashir, M. (2001), The Islamic bonds market: possibilities and challenges. International Journal of Islamic Financial Services, Vol. 3 No. 1.
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an islamic analysis, International Journal of Islamic Financial Services, Vol. 1 No. 2, 1-16.
Thomas, A. S., Cox, S., & Kraty, B. (2005). Structuring Islamic finance transactions. Linnius.
Kamil, W.A.R. (2008), Introduction to sukuk”, Malaysian Sukuk Market Handbook. RAM Rating Services Berhad, Kuala Lumpur, pp. 21-49
Kamil, K.M., Abdullah, M., Shahimi, S., & Ghafar Ismail, A. (2010). The subprime mortgages crisis and Islamic securitization. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 386-401.
Tahmoures et al (2013). Compare and Contrast Sukuk (Islamic Bonds) with Conventional Bonds, Are they Compatible? The Journal of Global Business Management Vol. 9 No. 1
Mohammad, S. Z. Tanazul and Shari’ah Issues Arising from Ranking of Rights in Sukuk and Preference Shares.
ʻ ʻm n , M. (2002). An introduction to Islamic finance (Vol. 20).
Brill.
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mortgages crisis and Islamic securitization. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 386-401.
Dusuki, A. W., & Mokhtar, S. (2010). Critical appraisal of Shari’ah issues on ownership in asset-based sukuk as implemented in the Islamic debt market. International Shari’ah Research Academy for Islamic Finance (ISRA).
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Lahsasna, A., Lin, L. S., & Ahmed, R. (2013). Shar ʻah Issues in Islamic Capital Markets:
Suk k. ISRA International Journal of Islamic Finance, 5(2), 99-123.
Afshar, T. (2013). Compare and contrast Sukuk (Islamic Bonds) with conventional bonds, are they compatible?. Journal of Global Business Management, 9(1), 44-52.
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Kahf, M. (1997). The Use of Assets Ijara Bonds for Bridging the Budget Gap.Islamic Economic Studies, 4(2), 82.
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Ahmed, K. (2011). Sukuk: Definition, Structure and Accounting Issue, MPRA paper 33675.
36 Appendix 1 AAIOFI standards on Sukuk
To ensure the sharia compliance of newly issued Sukuk, the AAIOFI issued a six standards resolution in February 2008 as follows:
1. Sukuk to be tradable, must be owned by sukuk holders with all the rights and obligations of ownership in real assets, whether tangible, usufruct or services. The transfer of ownership should not be shown as the assets of seller or manager.
2. Sukuk to be tradable must not represent receivables or debts.
3. It is not permissible for the manager of Sukuk to offer loans to Sukuk holders when actual earnings are smaller than expected ones. It is permissible to establish reserve account for the purpose of covering such shortfalls, provided the same is mentioned in prospectus.
4. It is not permissible for the investment manager to repurchase the assets from Sukuk holders for its nominal value when Sukuk is terminated. It is permissible to purchase on the basis of net value of assets, its market value, fair value or price to be agreed at the time of their actual price.
5. It is permissible for a lessee in Sukuk al-ijara to undertake to purchase the leased assets when the Sukuk are extinguished for its nominal value, provided lessee is not a partner, investment manager or investment agent.
6. Sharia supervisory boards should not limit their role to the issuance of fatwa on the structure of Sukuk,
but should also oversee its implementation and compliance at every stage of the operation.
Bond vs Sukuk
Source: Obiyathulla I. Bacha(201
37 Appendix 2
015). Islamic Capital Market Slide, INCEIF. Slidlide No. 43
38
Source: Obiyathulla I. Bacha(201
39 Appendix 3
015). Islamic Capital Market Slide, INCEIF. Slidlide No. 18
Source: Obiyathulla I. Bacha(201
40 Appendix 4
015). Islamic Capital Market Slides, INCEIF. Slidlide No. 20
41 Appendix 5 Sukuk Type, Underlying Contracts and Cash Flow characteristics
Underlying contract Originator
Ijarah (lease) Leasee of asset. Pays lease payments
Lessor Periodic Lease Payments At maturity from sale of asset Wakalah
Dependent on type of invested asset and/or economic life of project. No fixed return. simply be the last periodic payment given tenor of Mudharabah occurs. Cash flow is from sale proceeds
Profit from sale of completed asset Murabaha Purchaser of asset Financier of asset Periodic payments
received from Mudharib representing price of asset plus mark up
Unlikely. Final payment could simply be the last periodic payment of contract
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Source: Obiyathulla I. Bacha(2015). Islamic Capital Market Slide, INCEIF. Slide No. 21
Appendix 6
Summary of Risk Characteristics of Sukuk Structures
43 Appendix 7 Sukuk – Players
Originator/Mudharib (could be govt-sovereign or corporate) Regulator (SC in Malaysia)
Credit Enhancer (Govt for GLCs, third party for others) Trustee – (to manage and administer the SPV)
Vendor/Manufacturer (of asset/machinery that is the object of financing) Rating Agency (to rate and monitor the Sukuk)
Investment Bank – (structures, Sukuks, compliance, prospectus and bring to market) Shari’ah Advisors (at the investment bank level and at the regulators)
Sukuk Investor
• Source: Obiyathulla I. Bacha(2015). Islamic Capital Market Slide, INCEIF. Slide No. 31
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Appendix 8 Balance Sheet Sunway
Currency in
Millions of Malaysian Ringgits
As of:
Dec 31 2013 Restated MYR
Dec 31 2014 MYR
Assets
Cash And Equivalents 961.4 1,647.5
Short-Term Investments 557.4 353.9
TOTAL CASH AND SHORT TERM
INVESTMENTS 1,518.8 2,001.4
Accounts Receivable 1,114.1 1,184.7
Other Receivables 396.6 478.4
TOTAL RECEIVABLES 1,510.7 1,663.1
Inventory 1,790.8 2,098.3
Prepaid Expenses -- 47.8
Other Current Assets 28.0 171.7
TOTAL CURRENT ASSETS 4,848.3 5,982.3
Gross Property Plant And Equipment 1,731.3 1,927.0
Accumulated Depreciation -902.8 -948.7
NET PROPERTY PLANT AND
EQUIPMENT 828.5 978.3
Goodwill 319.4 319.4
Long-Term Investments 2,306.7 2,524.1
Accounts Receivable, Long Term 2.3 6.7
Deferred Tax Assets, Long Term 37.7 42.7
Other Intangibles 8.2 8.1
Other Long-Term Assets 2,750.3 2,995.5
TOTAL ASSETS 11,101.6 12,857.1
45 LIABILITIES & EQUITY
Accounts Payable 1,150.2 1,202.9
Accrued Expenses -- 333.9
Short-Term Borrowings 731.1 885.5
Current Portion Of Long-Term Debt/Capital
Lease 1,269.6 1,247.4
Current Portion Of Capital Lease Obligations 10.6 2.7
Current Income Taxes Payable 21.4 24.9
Other Current Liabilities, Total 966.6 393.2
Unearned Revenue, Current -- 188.1
TOTAL CURRENT LIABILITIES 4,138.9 4,275.8
Long-Term Debt 927.0 1,795.9
Capital Leases 4.2 1.8
Minority Interest 316.9 387.5
Unearned Revenue, Non-Current 17.7 15.7
Deferred Tax Liability Non-Current 74.0 82.9
Other Non-Current Liabilities 294.6 361.2
TOTAL LIABILITIES 5,456.4 6,533.3
Common Stock 1,723.5 1,730.6
Additional Paid In Capital 2,628.4 2,642.2
Retained Earnings 1,886.5 2,451.0
Treasury Stock -- -29.3
Comprehensive Income And Other -910.2 -858.1
TOTAL COMMON EQUITY 5,328.3 5,936.4
TOTAL EQUITY 5,645.2 6,323.8
TOTAL LIABILITIES AND EQUITY 11,101.6 12,857.1
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TOTAL REVENUES 4,721.4 4,558.1
Cost Of Goods Sold 3,220.6 3,108.0
GROSS PROFIT 1,500.8 1,450.1
Selling General & Admin Expenses, Total 719.2 764.4
Other Operating Expenses 166.0 165.7
OTHER OPERATING EXPENSES, TOTAL 885.2 930.1
OPERATING INCOME 615.6 520.0
Interest Expense -124.6 -67.1
Interest And Investment Income 32.4 38.8
NET INTEREST EXPENSE -92.3 -28.3
Income (Loss) On Equity Investments 190.6 233.4
Currency Exchange Gains (Loss) 13.2 14.0
Other Non-Operating Income (Expenses) -8.1 -2.1
EBT, EXCLUDING UNUSUAL ITEMS 719.0 737.0
Gain (Loss) On Sale Of Investments 769.6 --
Gain (Loss) On Sale Of Assets 47.8 16.7
Other Unusual Items, Total 363.9 206.6
Legal Settlements -- 4.3
Other Unusual Items 2.0 1.4
EBT, INCLUDING UNUSUAL ITEMS 1,900.4 960.2
Income Tax Expense 137.0 148.6
Minority Interest In Earnings -273.0 -77.6
Earnings From Continuing Operations 1,763.3 811.6
NET INCOME 1,490.4 734.0
NET INCOME TO COMMON INCLUDING EXTRA ITEMS 1,490.4 734.0 NET INCOME TO COMMON EXCLUDING EXTRA
ITEMS 1,490.4 734.0
47 Appendix 10
Cash Flow Statement
Currency in
Millions of Malaysian Ringgits As of:
Dec 31 2013 Restated MYR
Dec 31 2014 MYR
NET INCOME 1,490.4 734.0
Depreciation & Amortization 133.4 114.5
DEPRECIATION & AMORTIZATION,
TOTAL 133.4 114.5
Amortization Of Deferred Charges 6.4 3.3
(Gain) Loss From Sale Of Asset -47.8 -15.4
(Gain) Loss On Sale Of Investment -768.5 12.3
Asset Writer own & Restructuring Costs -356.6 -197.8
Other Operating Activities 477.6 333.1
(Income) Loss On Equity Investments -190.6 -233.3
Provision & Write-Off Of Bad Debts 54.2 12.0
Change In account Receivable -2.1 -85.1
Change In Inventories -56.7 -86.5
Change In account Payable -2.9 190.0
Change In Other Working Capital 316.8 -101.5
CASH FROM OPERATIONS 1,093.4 708.0
Capital Expenditure -154.6 -206.1
Sale Of Property, Plant, And Equipment 18.4 29.1
Cash Acquisitions -71.4 --
Divestitures -38.7 8.6
Sale (Purchase) Of Real Estate Properties -513.2 -518.4
Sale (Purchase) Of Intangible Assets -3.1 -3.2
Investments In Marketable & Equity Securities -722.3 -196.2
48
CASH FROM INVESTING -1,377.4 -886.0
Short-Term Debt Issued 608.7 560.5
Long-Term Debt Issued 2,014.9 2,740.8
TOTAL DEBT ISSUED 2,623.5 3,301.3
Short Term Debt Repaid -980.3 -470.9
Long Term Debt Repaid -1,858.7 -1,957.0
TOTAL DEBT REPAID -2,838.9 -2,427.9
Issuance Of Common Stock 732.9 18.6
Repurchase Of Common Stock -- -29.3
Common Dividends Paid -163.7 -172.3
TOTAL DIVIDEND PAID -163.7 -172.3
Other Financing Activities -311.4 -89.0
CASH FROM FINANCING 42.4 601.4
Foreign Exchange Rate Adjustments 11.0 -2.2
NET CHANGE IN CASH -230.6 421.2
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