Asset-Backed vs Asset Based Sukuk

Asset-Backed Sukuk

It involves granting the investor (sukuk holder) a share of a tangible asset or business venture along with a corresponding share of the total risk (that is, a share commensurate with this ownership).

In this structure, there is a true sale transaction, where the originator sells the underlying assets to a Special Purpose Vehicle (SPV) that holds these assets and issues the sukuk backed by them.

The buyers of sukuk don't have recourse to the originator if payments are less than usual. A true sale implies that the assets of the issuer will not be added to the assets of the originator in the event of default and liquidation.

The sukuk holders must assume any losses in case of impairment of sukuk assets.

Asset-backed sukuk are, thus, closer to equity than debt, and for that reason are not so popular in the market of sukuk offerings.

Asset-Based Sukuk

It involves the issuer purchasing the underlying assets and then investing, trading or leasing them on behalf the investors (sukuk holders), using the funds raised through the issued certificates (sukuk).

This structure, most often, takes the guise of a sale-lease to the originator and is embedded with a binding promise (wa'ad mulzeem) from the originator to repurchase the underlying assets at maturity. In this structure, the sukuk holders can only require the originator to purchase the underlying assets.

As such, the sukuk holders have an unsecured debt claim against the originator embodied in the payment of the purchase price following an execution of the binding purchase promise. This implies that sukuk holders don't have full recourse to the underlying assets and the underlying assets are not used as collateral.

 Asset-based sukuk grant only beneficial ownership to the sukuk holders, so that in case of default, the investor would be left without any claim on these assets. In this structure, the originator typically transfers to the investors only the beneficial ownership of the SPV issuer.

But shari'a stipulates a transfer of assets to sukuk holders. However, since investors have no recourse to the assets, the structure doesn't pay any attention to the asset risk, but rather concentrates on the creditworthiness of the sponsors of the sukuk

Sukuk	Asset-Backed	Asset-Based
Issuer	SPV	Company
Process	Securitization of tangible assets	Securitization of receivables
Characterization	Equity-like	Debt-like
Sources of payment	The revenues generated by the underlying asset	The originator/obligor's cash flows
Sukuk holder's ownership	Legal ownership with right to dispose of underlying assets	Beneficial ownership with no right to dispose of underlying assets
Recourse	Sukuk holders cannot recourse to the originator (recourse only to underlying assets)	Sukuk holders can recourse to obligor (originator) if there is a shortfall in payments
Shari'ah nomination	Because of its equity-like nature, this structure is considered Shari'ah compliant	This structure involves both Tawarruq and ba'i al-inah. Hence, it is not compatible with Shari'ah

Istisna' vs Salam Contract

Istisna’ vs. Salam

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Istisna’                  (manufacturing contract)	Salam                  (sale by deferred payment)
An Istina’ Contract is a Contract of Service / Manufacturing  / Development as per agreed terms	A Salam Contract is a Sale of product / asset / commodity by deferred delivery as per agreed terms
In an Istisna’ Contract the required service / manufacturing / development is the subject matter of the contract	In a Salaam  Contract the underlying asset / commodity / product is the subject matter of the contract
The subject of Istisna is always a thing which needs manufacturing,	The subject of Salam can be effected on anything, no matter whether it needs manufacturing or not
It is not necessary in Istisna’ that the price is paid in full in advance	It is necessary for Salam that the price is paid in full in advance
The contract of Istisna can be cancelled / revoked before the manufacturer starts the work.	The contract of salam, once effected, cannot be cancelled / revoked unilaterally
The time of delivery is not essential part to be fixed In Istisna’ contract	The time of delivery is an essential part of the sale in Salam