Islamic Banking and
Financial Markets
Sukuk Conversion Analysis
Scenario 4: Conversion from
Sukuk Mudarabah to Sukuk
Ijarah
Fall 2024
Team members:
Bashar Shakir M Al-Mishhadani
Jihad Nafidzulhaq
Yerzhan Kenes
TABLE OF CONTENT
Defining the Concepts
Imaginary Case
Steps involved in initial Sukuk Mudarabah Structure
Steps involved in the Converted Sukuk Ijarah Structure
Conversion Process
Rationale of the Conversion
Benefits of the Conversion
Challenges of the Conversion
Valuation Implication
Defining the Concepts
Sukuk comes from the word “Sak” which means certificate
Mudarabah Sukuk is a based upon profit and loss sharing concept
The issuer is the project owner, while the subscribers are the investors
Mudaraba Sukuk must represent a common ownership
Entitle their holder to shares in a specific project
Sukuk al-Ijara are securities representing the ownership of well-defined existing
and well-known assets,
Tied up to a lease contract
Can be traded in the secondary market at a price determined by market forces.
Imaginary Case
1) Company A plans an
01
agricultural venture
02
3) Raising Capital: to
purchase agricultural 03
2) Issuance of Sukuk al
land, equipment, and Mudarabah
cover operational costs
04
05
4) Transition Period 5) Conversion to Sukuk Ijarah
(after 3 years)
Steps involved in initial
Sukuk al Mudarabah
Structure
Steps involved in
the Converted Sukuk
al Ijarah Structure
Conversion Process
1 2 3 4 5 6
COST-BENEFIT INVESTORS REINTRODUCTION
ASSET EVALUATION NEW CONTRACT SHARIAH BOARD
ANALYSIS
New contract since
Cost-Benefit Asset Shariah board Investors signature Reintroduction
the nature of both
analysis to see if evaluation to sukuk differ, approval for for the new into the new
the conversion ensure that no Mudarabah is based the conversion contract, in this market
will be asset injection on PLS while Ijara is structure new SPV
worthwhile is needed based on lease is not needed
payments.
Pre-determined ratio to fixed
Predictable rental payment, will give each
Cash Flow party a different benefit.
Investors might find sukuk al Ijara
Risk appetite
less risky
Rationale of Sukuk Ijarah has higher demand,
the Conversion
Liquidity
in the secondary market.
from Sukuk Mudarabah to Sukuk Ijarah
The entrepreneur will have the
ability to manage and utilize the
Asset Control
assets effectively after converting to
sukuk al ijarah.
Sukuk al Ijara could be more
Tax efficiency
tax efficient
Benefits of the
Conversion
01 02
Fixed predictable cash flow as Sukuk al Ijarah is more demanded
Sukuk Ijarah provides a fixed in the secondary market.
income.
03 04
Allows the Mudarib to take all the More control over underlying assets.
profits.
05 06
The Sukuk Ijarah structure reduces For the issuer, Sukuk Mudarabah income is
direct exposure the sukuk holders recorded in the income statement, while the
face to the business risks. lease is recorded as expense, which can
provide a tax-shield.
Asset Valuation
The underlying assest must be
valued at the fair market price,
to find the fair lease payments
Investor Relations
Shariah Board Challenges of Since there is a large number
Approval the Conversion
of sukuk holders, getting 100%
approval rate by investors adds
a layer of complexity
Legal and Regulatory
compliance
Valuation Implication
Asset Revaluation
01 Fairly assessing the value of the assets at the market value is crucial,
that both sukuk holders and entrepreneurs be treated justly.
Potential Increase of Sukuk valuation
Predictable rental payments with reduced cash flow variability would
increase the value of the Sukuk Ijarah
02
Enhanced the Credit Score
03 Rating agencies might also increase the rating of the sukuk after
revaluation, as a lower perceived risk results in a higher market
valuation and stronger rating.
More Accurate Valuation
Predictable and steady cash flows from sukuk al ijarah would
enable to increase in the accuracy of the valuation
04
Thank You for
Your Attention
