Sukuk Securities: New Ways of Debt Contracting

CHAPTER 4 Contract Design and the Structure of Common Sukuk Securities Issued to Date

This chapter and the next two are connected. This chapter reviews the financial and legal structures of the six major types of existing sukuk securities: mudarabah (partnership), musharakah (profit sharing), murabahah (markup), ijarah (leasing), salam (futures), and istisna (working capital). The next chapter describes the structures of the contracts that are widely available in different markets.

The cash-flow pattern of each type of structure and its variations are discussed in this chapter. There are a variety of sukuk types, based on their funding purposes, contractual specifications, payback schemes, and issues such as conversion. The details, characteristics, and specifications of them are elaborated in the following sections. Chapter 6 describes those that have not yet been issued.

MUDARABAH (PARTNERSHIP)

A mudarabah sukuk is based on mudarabah contract terms. Mudarabah, or partnership in profit, is one of the premier financing methods, with roots going back to the pre-Islamic era. The Prophet Muhammad (570–632 CE) used mudarabah with Khadijah bint Khuwaylid (555–619), a rich woman from Mecca who became his first wife, about 15 years before he began his prophetic mission.

Mudarabah is defined in jurisprudence as a mode of financing through which a financier provides capital for the venture of an entrepreneur. The financier is known as the rab-al-mal, and the entrepreneur is called ...