I have been asked as to why I am not enumerating the do’s and don’ts while writing on the subject of Sukuk as I have done all along during the explanation of various Shariah nominate contracts. The reply to that question is to kindly refer to my article 147 where I have tried to provide the reason for not attempting to write on Sukuk earlier.
The gist of what I had said in that article is that I had planned to write on Sukuk pursuant to the completion of the full cycle of narrating all Shariah nominate contracts and Sukuk is not one of the contracts but a means to execute them.
The nature of Shariah contracts revolves around the sequence of events, ethics and rulings which requires drawing the boundaries and hence the explanation on the do’s and don’ts. As for Sukuk, it must have one of the Shariah nominate contracts, hence by default the do’s and don’ts come into play in Sukuk by adopting that contract.
Also, the Sukuk is a modern-day instrument and allows a set of investors from around the world to reap the benefits from the fairness of Islamic financing and investment contracts. Moreover, Sukuk is an excellent example of the relevance of Islamic finance for every age and era.
Returning to our subject, pursuant to signing the sale and purchase agreement, the ownership of the asset gets transferred to the trustee shell company (the SPV) representing the Sukukholders. From a Shariah standpoint, it means that the Sukukholders have assumed the proprietorship of the asset.
Here, it will be pertinent to mention that the sale and purchase of an immovable asset in a Sukuk Ijarah facility is usually not formalized through the land registry, and the registered title continues to remain with the seller (Sukuk originator) during the entire tenure of the transaction. This helps to keep the overall transaction costs under control.
However, in order to safeguard the investors’ interest, a declaration in the form of a trust deed is obtained from the seller to the effect that it is holding the registered title as a trustee for and on behalf of the SPV, which represents the Sukukholders.
In jurisdictions where the trust laws are not available, the seller is required to sign the title agency document (unilateral or bilateral) in which it asserts the same thing as mentioned above. The agency laws are prevalent in almost all common law and civil law jurisdictions.
Some jurisdictions have formally recognized such a sale and purchase of an asset and its lease to the seller as a means of bank finance and not liable for levying the land registry fee. This position is taken on the back of the purchase undertaking provided by the Sukuk originator to the SPV.
However, clarity is needed in many domains where such transactions are routinely carried out to provide liquidity to entities without paying any land registry fee but also without a formal exemption from the relevant authority.
The Shariah position on the transfer of ownership from the seller to the buyer is fairly clear in such transactions from the perspective that the sale and purchase of properties have gone on from time immemorial when there was no existence of the land registry function anywhere in the world and that the Shariah ownership is not impacted in any manner by not registering the transaction. For more of my comments on this point, you may refer to article 63.
Pursuant to acquiring the ownership to the asset, the next immediate step shall be for the trustee shell company to sign the lease agreement with the originator of the Sukuk, ie the seller of the asset. This is done in the same document-signing session but keeping with the Shariah sequence of first obtaining the ownership of the asset through a purchase agreement before entering into the lease agreement.
An interesting point to explore here is the possession of the asset by the purchaser SPV. In the normal course of property financing to a retail customer, the financing bank takes utmost care of this important aspect and requires the customer to fully satisfy himself or herself from all angles that the property is in good working condition and provide formal confirmation to the financing bank before the bank purchases it from the third party and commences the financial lease with the customer.
In the purchase and lease type of transaction where the seller and the lessee are one and the same entity, a standard confirmation provision is added in the purchase and lease agreements as to the suitability of the asset for the purpose of both transactions.
Another aspect is the fact that the asset has remained in the possession of the entity before the sale and shall continue to remain with it in the new capacity as the lessee and that the entity’s position simply gets altered from the owner to the lessee in the space of a few minutes; as such, the Shariah position on possessing the asset by the lessor prior to commencing the lease and delivering the asset to the lessee to commence the lease continues to be respected.
One last thing before I move on to the next point. I have observed that the practitioners in the industry usually call such a transaction as ‘purchase and lease back’ which is incorrect. This should be simply termed as a ‘purchase and lease’ transaction.
The ‘purchase and lease back’ transaction is the one where the asset is obtained on a head lease and leased back to the lessor of the head lease. At the outset, it may look a bit strange but there could be a purpose behind it. We shall discuss it at some other time.
The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.
Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at [email protected]
Next week: Discussion on the Sukuk procedures shall continue.