THIRD-PARTY GUARANTEE IN EQUITY-BASED SUKUK (ISRA-TR REPORT 2017)

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Protecting the capital of investors through the provision of a third-party guarantee has been practiced in sukuk structuring, including equity-based sukuk (EBS), i.e. musharakah and mudarabah sukuk. The guarantee has been used since the late 1970s, when the modern sukuk market first emerged with the issuance of muqaradah bonds by the Ministry of Awqaf, Islamic Affairs and Holy Places in Jordan. This issuance financed the renovation of waqf properties. Since these properties could not be subjected to sale, unlike other assets, the risk that investors could lose their capital was enhanced in the event of losses when payment was either stopped or deferred. In an attempt to increase the attractiveness of such instruments to investors, the government of Jordan provided a guarantee as a third-party for the principal invested in the sukuk. At the time of redemption, therefore, investors were guaranteed the return of their capital.

Other examples of EBS deals having this feature are Bin Ladin mudarabah sukuk 2008 (SR 1 billion sukuk issued by the Purple Island Corporation and guaranteed by Saudi Binladin Group Limited to fund a specific construction project in Makkah) and TSH musharakah sukuk 2011 (RM 100 million sukuk issued by TSH Musyarakah Sukuk Sdn. Bhd. and guaranteed by Danajamin to fund the business of TSH Resources Berhad). In the context of Malaysia, Danajamin Nasional Berhad (Financial Guarantee Insurer) acts as the national guarantor for bonds and sukuk issued by credit-worthy Malaysian companies to facilitate their access to private debt securities market. 

 

Source:

 

ISRA THOMSON REUTERS ISLAMIC COMMERCIAL LAW REPORT 2017 (Pg 62 - 65)


 

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