Assignment

Solution to Omega Airlines Case study

(Sukuk-Al-Ijarah)

Instructor:
Sir Ahmad Ali Siddiqui

Student:
Hafiz Sami Ullah Daud
MS-IBF

ERP: 13679

Semester-III

Centre for excellence in Islamic Finance (CEIF)-IBA

Structure of Sukuk-al-Ijarah

There are three parties to the structure: the originator or (beneficiary) of ijarah-sukuk; the
Special Purpose Vehicle (SPV) the issuer of ijarah-sukuk; and the investors (sukuk holders). A
single or a group of assets that are admissible for ijarah contract are selected. The beneficiary
(initiator) creates a Special Purpose Vehicle (SPV) with separate independent legal personality
to whom it sells the asset(s) with the understanding that the beneficiary will lease back the
asset from the SPV3. Rent is negotiated and a term specific lease contract is signed.4 The SPV
then securitizes its assets by issuing ijarahsukuk for sale to investors. These are certificates of
equal value representing undivided shares in ownership of tangible assets. The sukuksale
proceeds provide funds to SPV to pay for the asset(s) purchased from the beneficiary
(originator). A rent-pass-through structure is adopted by the SPV to pass on the rents collected
from the originator-cum-lessee to the sukuk holders. These returns along with low risk and exit
possibility through secondary market (liquidity) constitute the incentives for investors to buy
the sukuk.
At the expiry (or termination) of the lease deed the flow of rents would stop and ownership of
the asset pool would be with the sukuk-holders as a group. If the underlying asset has a market
value the sukuk-holders can realize capital gain (or loss). However, if the underlying asset is a
public good or if it has no ready market then the sukuk-holders is certain to incur capital loss.
This would either discourage investment in sukuk or raise the cost of finance for the originator.
Term sheet:
Amount: PKR 1200Mn

Rental Payment: 60Mn

Payment: Semi Annual equal payments

Tenure: 10 Years

Profit Rate: 11%

Expected Earnings per year: PKR 200Mn

No of periods Cashflows
0 1200
1 60
2 60
3 60
4 60
5 60
6 60
7 60
8 60
9 60
10 60
11 60
12 60
13 60
14 60
15 60
16 60
17 60
18 60
19 60
20 60
 Why Selected this structure:

It has low risk as compared to mudarabah .Its structure is very simple. Its tenure can easily be
changed.Best structure compatible with the sukuk.Periodic payments can be fixed or kept
variable. In order to generate returns for investors, all sukuk structures rely upon either the
performance of an underlying asset or a contractual arrangement with respect to that asset.
The ijara is particularly useful in this respect as it can be used in a manner that provides for
regular payments throughout the life of a financing arrangement, together with the flexibility to
tailor the payment profile - and method of calculation - in order to generate a profit. In
addition, the use of a purchase undertaking is widely accepted in the context of sukuk al-ijara
without Shari’a objections. These characteristics make ijara relatively straightforward to adapt
for use in the underlying structure for a sukuk issuance.