The Jordanian Legislation and Opinion Bureau published the first draft of the Sukuk Islamic Financing Law of 2011 (draft law) on 14th April. In order to come into force, the draft law requires the approval of both the cabinet and parliament, and it is still too early to anticipate whether or not the draft law shall be passed.
The draft law, if passed, shall regulate for the first time the issuance of sukuk in all its forms and types; thereby removing much of the uncertainty surrounding the proper mechanisms for making use of Shariah compliant financing instruments in Jordan.
Under the draft law, sukuk is defined as (rough translation): ‘Documents of equal value representing common shares in the ownership of the project, registered as a book entry and issued in the names of its owners in consideration of monies which they provided for the execution and utilisation of the project, in order to achieve returns for the period specified in the prospectus.’
The draft law makes it clear that the definition of sukuk is wide enough to include all types and forms of Islamic financing, including ijarah, mudarabah, muqaradah, murabahah, musharakah, al-sillam, istisnah, the sale of benefit/use, and/or any other sukuk permitted by the High Central Shariah Commission.
The draft law further provides that the sukuk shall be capable of being traded in the Amman Stock Exchange, or in any other exchange, in accordance with applicable laws, and provided that the same is Shariah compliant.
In order to properly regulate the issuance of sukuk, the draft law provides for the establishment of two new bodies for this purpose: the High Central Shariah Commission (Commission) and the Islamic Financing Committee (Committee). The former is tasked with the following:
To opine, from a Shariah prospective, on the sukuk to be issued, including its prospectus; and to revert the same to the Committee.
To decide on the continued compliance of the sukuk with Shariah, from the date of its issuance and until expiration of the same, on the basis of the reports it requests from related entities.
The main tasks/competences granted to the Committee are as follows:
Draw public policy for issuance of sukuk in accordance with a regulation issued for this purpose.
Prepare main requirements which must be included in each prospectus, and in accordance with the form/type of sukuk to be utilised. (It is important to note that the draft law provides, in general terms, minimum information which must be included in each prospectus.)
Approve the prospectus.
Ensure compliance with decisions issued by Commission, in accordance with the above.
Ensure that the prospectus includes any opinions or comments made by the Commission, in accordance with the above.
Work on evaluating, following up and developing the sukuk market.
Issue the instructions necessary to implement the provisions of this draft law, including preparing the forms containing the main requirements which must be included in each prospectus for each of the types and forms of sukuk.
Recommend regulations, necessary to implement the provisions of this draft law, to the Council of Ministers.
As regards the mechanism for issuing sukuk, the draft law entitles the issuing company to establish an SPV, to be registered with the Companies Registrar, for the sole purpose of owning the assets underlying the Sukuk.
It is important to note the SPV shall be exempted from a number of taxes, fees and other charges in accordance with Article 8 of the draft law.
Furthermore, the draft law provides that each issuing company should designate a judicial person as a trustee to protect the interests of the sukuk owners, as well as a paying agent who shall be a bank or financial institution.
It is possible, under the draft law, for the trustee and the paying agent to be the same person.
The draft law further provides a number of conditions regarding both the assets underlying the sukuk and the projects themselves as follows: ‘Assets’ are defined as (rough translation): ‘Those fixed tangible assets which generate profits and for which it is possible to issue sukuk in consideration thereof, and include modes of transport and projects.’
‘Projects’ are defined as (rough translation): ‘any producing project in an economic activity, not prohibited by Shariah, whether it be a company, sole project, investment or any other project, and includes fixed and moveable assets, benefits, services or any mix of assets capable of being traded, as well as benefits and liabilities owed and which generate profits or which are considered a base for generating profits, in accordance with conditions of Shariah as issued for different forms of Islamic financing.’
Further, the draft law provides the following conditions on the projects:
To generate profits.
To be independent of other projects of issuing entity.
To be run as a separate financial unit, with its own financials in accordance with accounting standards, and the conditions imposed on Islamic finance entities. (Please note that the issuing company is obliged to appoint auditor(s) for the project).
It is important to note that income generated by investment in sukuk is not subject to income tax. Finally, the draft law allows for the issuance of sukuk by a number of governmental and semi-official bodies, and provides the rules regulating the same; thereby providing the Jordanian government with recourse to a hitherto untapped mode of public financing.
The effects of the financial crisis have been felt, to varying degrees, in all parts of the globe; and Jordan is no exception. For countries recovering from the global downturn, the need for financing resources cannot be ignored. In particular, our appetite for Islamic financing has never been greater.
The introduction of the draft law marks a welcome change in the financing industry, allowing investors, particularly Shariah compliant companies and entities, the opportunity to make better use of the array of Islamic finance instruments available to them; and thereby, hopefully, encouraging greater investment into the country.
Further, by granting government recourse to such Islamic financing instruments, the draft law is hoped to help finance a growing deficit and a fall in foreign aid that traditionally covers budget shortfalls.
Khaled Saqqaf is partner and the head of the Jordan and Iraq office of Al Tamimi & Company.
This article first appeared in Islamic Finance News (13 July 2011, Vol 8, Issue 27, Page 18 – 19). For more information, please visit www.islamicfinancenews.com.