1. Background to the ZamZam well
ZamZam is the name of the well that provides the water that billions of people, have thirstily drunk from throughout history, especially during the Hajj pilgrimage.
The well is linked to some of the most important personalities in Islamic history: the Prophets Ibrahim and Ismail and Muhammad, as well as Ismail’s mother Hagar.
The ZamZam well is located in Makkah, which is the heart of the Hajj pilgrimage. Standing only a few meters east of the Kaaba, the well is 35 meters deep and topped by an elegant dome.
During Hajj and Umrah, pilgrims are recommended to drink ZamZam water, to their fill, to quench their thirst. They also continue the tradition of taking the water back for family and friends.
2. Background to the ZamZam Sukuk
Owners of a time-share will own the lease of an apartment, ranging from royal suite to studio for a period of one or two weeks for the next 24 years.
A studio apartment, in off peak season, for one week will cost US$5,000 for the 24-year period, whereas the price for the same apartment increases to US$22,000 if it is during the first three weeks of Ramadan; or to US$80,000 if it is during the last 10 days of Ramadan. The same formula applies for all the other categories.
The technical characteristics of the Sukuk are detailed below.
1. The deedholders
The company used the amount contributed by the investors in the project by selling the beneficiary Sukuk (Deeds) to provide the money necessary to complete the project. The revenues from selling these deeds provided the necessary money for development and achieving a profit for the shareholders in the investment that correspond to the investment proposal offered to the participants.The project is marketed as being a distinguished investment by all standards of the great real estate investments. It has many added values represented in building a wonderful architecture in a place that is considered the most purgatory spot on earth and contributing to developing an endowment specified to serving the two Holy Mosques and supplying residential units at the highest standards of hotel management for the largest portion of Muslims at a reasonable price. The price is characterized by being fixed for years.
2. Beneficiary Sukuk
Munshaat developed a form of ‘beneficiary Sukuk’ as a creative solution that allows an ensured deedholder to a specially described unit of the tower for a fixed time each year and for 24 years, that being the term of the project.Those wishing to have residency rights in ZamZam hotel wings have the possibility of acquiring the same through buying beneficiary deeds of one of the tower units. Each deed represent a document or bond proving that its owner has the right to benefit from one of the hotel wings in the ZamZam Tower for a fixed period of the year and for several known years in return for the price of the deed which is paid in advance and for one period.
This right is completely owned by the deedholder and allows them the authority to use it or sell it or gift it or invest it or transfer it to their heirs.
Munshaat offered the beneficiary deed as an Islamic commercial tool to satisfy the desire of some consumers to make use of the product offered for fixed periods without bearing the cost of buying it in accordance with the Islamic Shariah.
The company developed the Sukuk from its conventional form to a developed form suitable for investment. The company put the product into a contractual mould suitable to the rules of the Shariah and conform at the same time with the related Saudi laws and regulations.
Munshaat tried to develop and audit the beneficiary deeds until it obtained, in January 2005, the certificate of ISO 9001 – 2000 for the beneficiary deeds. The beneficiary deeds then became no longer a mere idea but they became a system having its legal framework, its own infrastructure and its standards that are internationally agreed upon. Munshaat was able to achieve great financial results during the last years as its profits soared from 1, 5 million dinar in 2004 at 31 fils per share to 11, 8 million dinar in 2005 at 142 filsper share.
Demand for hotel rooms in Mecca varies through the season. Whilst there is a year around demand some months are more popular than others. The pattern of demand is reflected in the prices of the Sukuk
Figure 2 gives a feel for the demand for the Sukuk both now and in the future
It is this environment in which the ZamZam Sukuk was issued.
Before analyzing this further we first need to turn to the AAOIFI rulings regarding Sukuk which are relevant to the ZamZam Sukuk.
4. AAOIFI rulings regarding investment Sukuk
The AAOIFI rulings for investment Sukuk can be found in Financial Accounting Standard No. 17 and Shariah Standard No. 17. The appropriate sections are reproduced below.
Statement of the standard
1. This standard is applied to investment Sukuk. These Sukuk include Sukuk of ownership of leased assets, ownership of usufructs, ownership of services, Murabahah, Salam, Istisnah, Mudarabah, Musharakah, investment agency and sharecropping, irrigation and agricultural partnerships. The standard does not apply to shares of joint stock companies, certificates of funds and investment portfolios.
2.
Definition of investment Sukuk
Investment Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity. However, this is true after receipt of the value of the Sukuk, the closing of subscription and the employment of funds received for the purpose for which the Sukuk were issued.In this standard, Sukuk have been designated as Investment Sukuk in order to distinguish them from shares and bonds.3/1 Certificates of ownership in leased assets
These are certificates of equal value issued either by the owner of a leased asset or a tangible asset to be leased by promise, or they are issued by a financial intermediary acting on behalf of the owner with the aim of selling the asset and recovering its value through subscription so that the holders of the certificates become owners of the assets.3/2 Certificates of ownership of Usufructs3/2/1 Certificates of ownership of Usufructs of existing assets
These are two types:3/2/1/1 Certificates of equal value issued by the owner of an existing asset either on his own or through a financial intermediary, with the aim of leasing the asset and receiving the rental from the revenue of subscription so that the usufruct of the assets passes into the ownership of the holders of the certificates.
3/2/1/2 Certificates of equal value issued by the owner of the usufruct of an existing asset (lessee), either on his own or through a financial intermediary, with the aim of subleasing the usufruct and receiving the rental from the revenue of the subscription so that the holders of the certificates become owners of the usufruct of the asset.
3/2/2 Certificates of ownership of Usufructs of described future assets
These are certificates of equal value issued for the purpose of leasing out tangible future assets and for collecting the rental from the subscription revenue so that the usufruct of the described future asset passes into the ownership of the holders of the certificates.ZamZam Sukuk fall into this category. It is commonly called Sukuk Al-Intifaa
3/2/3 Certificates of ownership of services of a specified party
These are certificates of equal value issued for the purpose of providing services through a specified provider (such as educational benefits in a nominated university) and obtaining the service charges in the form of subscription income so that the holders of the certificates become owners of these services.3/2/4 Certificates of ownership of described future services
These are certificates of equal value issued for the purpose of providing future services through described provider (such as educational benefits from a university without naming the educational institution) and obtaining the fee in the form of subscription income so that the holders of the certificates become owners of the services.4. Characteristics of investment Sukuk4/1 Investment Sukuk are certificates of equal value issued in the name of the owner or bearer in order to establish the claim of the certificate owner over the financial rights and obligations represented by the certificate.4/2 Investment Sukuk represent a common share in the ownership of the assets made available for investment, whether these are non-monetary assets, usufructs, services or a mixture of all these plus intangible rights, debts and monetary assets. These Sukuk do not represent a debt owed to the issuer by the certificate holder.
4/3 Investment Sukuk are issued on the basis of a Shariah-nominated contract in accordance with the rules of Shariah that govern their issuance and trading.
4/4 The trading of investment Sukuk is subject to the terms that govern trading of the rights they represent.
4/5 The owners of these certificates share the return as stated in the subscription prospectus and bear the losses in proportion to the certificates owned (held) by them.
Source: AAOIFI
Brian Kettell was, until recently, an advisor to the CEO at Islamic Corporation for the Development of the Private Sector (ICD), part of the Islamic Development Bank (IDB) Group based in Jeddah, Saudi Arabia. He had many Shariah-related responsibilities and was actively involved in the ICD Sukuk structuring team.
Brian is the most published book author on the subject in the world. He is the author of 11 books on Islamic banking and finance.
Contact details
www.gulfSukuktraingcourses.com
[email protected]
mobile : +971 (0) 566399300
Sukuk Case Studies Vol 1
Author: Brian Kettell
ISBN 9780955835179
Price US$125 including post and package