Picking up the thread from the last article, the execution of the lease document between the trustee shell company (being represented by the delegate) and the originator of the Sukuk (the obligor, or the seller of the Sukuk asset) signals the commencement of lease rent for the benefit of Sukukholders.

I had explained in article 72 that the lease rent for a financial lease transaction entered into by an Islamic bank or financial institution is comprised of two parts viz. a fixed element, representing the recovery of the cost of the leased asset, and a variable element being the profit for the lessor institution.

However, all asset-based Sukuk Ijarah issued so far have only had one part, ie the variable element.

This sounds analogous to an operating lease, such as rent-a-car where the registered ownership of the cars being rented remains with the business entity which only charges for the use of the cars.

Nevertheless, a Sukuk Ijarah facility cannot be compared to such an operating lease since, as explained in the last article, the registered title to the leased asset continues to remain with the seller, albeit a title declaration or title agency is obtained in favor of the trustee shell company (representing the Sukukholders).

Usually, I have seen that a majority of lease rent is due for payment on a quarterly basis but there is no Shariah bar to keep it at shorter (monthly) or longer (biannually/annually) intervals.

Each time the rent is due, the lessee transfers the required amount to the account with a paying bank which arranges to electronically transfer the pro-rata amount to the investors holding the Sukuk certificates at that point in time, ie at the date of distribution.

This is due to the fact that the Sukuk Ijarah certificates, being tradable as per Shariah rulings, may have changed hands frequently, either through the bourse or ‘over the counter’.

I have always had my reservations on using the word ‘coupon’ to describe such a periodic payment on the plea that this term is associated with bonds and signifies the periodic interest payment whereas Sukukholders have not lent any money to the obligor and that they are getting paid the profit which emanates from the Sukuk assets.

‘Coupon’ is generally defined in the financial world as the annual interest rate paid on a bond that is expressed as a percentage of its face value. This is also referred to as a bond’s coupon rate, coupon percentage rate or nominal yield.

My argument with my colleagues in the legal fraternity while conducting the Shariah review of the Sukuk prospectus and documentation had been on the ground that it may be tantamount to misrepresentation of the facts since the underlying transaction is neither a bond issue nor generating any interest income.

It is purely the rent income that is rooted in the properly executed lease agreement which is drafted by the same law firm.

I failed to win the argument at times on the basis that the majority of potential Sukuk investors identified in the bookbuilding process by the arranger banks were the conventional institutional investors who are familiar with the term ‘coupon’ and they should not be confused by using another term, lest they change their mind to buy the Sukuk.

I recall that this matter was also discussed with the concerned Shariah scholars from time to time as and when a new transaction arose, but they did not insist on changing the name from coupon to rent or profit, realizing this may hamper the flow of the transaction.

I knew, and appreciated, that they were trying to avoid being subjective and wanted the increasing number of Islamic financial transactions, particularly the high-profile capital market ones, to come into the market. The reason was simple: the scholars were being pro-business and willing to let go of minor issues so long as the major Shariah parameters are adhered to.

Also, they desired the conventional institutional investors to ‘taste’ Shariah-based transactions besides knowing that a single large ticket capital market transaction helps to lift the overall size of the global Islamic finance assets in comparison with scores of smaller retail-based transactions.

One of the scholars wittingly quoted the old proverb that the rose and its adoring smell will be the same even if it is called by any other name. Similarly, by calling it ‘coupon’, the lease rent does not get transformed into interest. I thought the scholar’s argument was convincing. What do you think?

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]