ABSTRACT
The prohibition of interest in Islamic finance necessitated the development of an Islamic banking model, in which Islamic principles are being implemented. While the traditional investment tools are not capable of fulfilling the needs of those requesting interest-free banking, sukuk comes to the picture as an important interest-free investment tool with its different variations that can be adjusted to different conditions. Sukuk, with its continuously increasing utilization in various countries around the world has also gained recognition in our country, and some of the pioneering companies of Turkey such as Turkish Airlines and Turk Telecom have started the issuance of sukuk already. In this study, the historical background and daily implementations of sukuk are analyzed within the scope of its variations which are practiced frequently encountered at the present time.
I. INTRODUCTION
The prohibition of interest in Islamic law and principles as well as transactions based on profit sharing only without risk and loss sharing being in contravention of the Islamic principles resulted in the emergence and the development of the-interest free banking model besides the traditional banking model. As the interest free banking system has expanded, alternative investment tools also started to emerge in order to answer the demand for interest-free banking1. Sukuk is one of these alternative investment tools which is also known as ‘interest-free bond application”2.
In Islamic banking, activities with a high rate of uncertainty are not allowed3. Furthermore, the creditor institution has to be informed regarding where and for what purpose its sources are being used. Sukuk is indeed based on an actual commercial or investment related liaisons that do not involve uncertainty. In that sense, sukuk, which was first issued in Malaysia, is progressively on its way to becoming an even more substantial source of income in terms of an interest-free banking model4.
In this study, the development stages of interest-free banking system both in Turkey and the rest of the world will be analyzed as well as the concept of sukuk including the most commonly used variations of it which may or may not be subjected to purchase and sale such as sukuk al-ijarah, sukuk al-mudaraba, sukuk al-musharaka, sukuk al-salam, sukuk al-murabaha and sukuk al-istisna’a.
II. INTEREST FREE BANKING SYSTEM IN TURKEY AND THE WORLD
An interest-free banking system based on sharing both the profit and the loss is a concept which can be seen even in the Code of Hammurabi5. Following the upsurge of the oil prices in the 1970’s amongst the Islamic nations, the interest-free banking system commenced to play an active role in the sector. The increase in the demand towards interest-free banking enabled the prevalence of participation banks. Today, along with the banks in the Islamic nations, we can observe that some of the internationally recognized banks like Citibank, Barclays Bank and Commerzbank are issuing sukuk as well.
Since 1970’s, Turkey’s foreign affairs policies have become more foreign relations oriented and this facilitated the inflow of the financial novelties emerging in other countries to the Turkish market. Tukey is among the founding members of the Islamic Development Bank established in 1975 and has been one of the key members ever since raising its shares in 1984. In 2005, Turkey officially recognized the term of “Participation Banking” with the implementation of the Banking Code no 54116.
The participation banks in Turkey that operate in compliance with the interest-free banking system used to consist of private financial establishments until 2015. With the establishment of Ziraat Katılım in 2015, the public banks also started to operate in the interest-free banking field.
III. SUKUK
A. Historical Background of Sukuk
In the classical Islamic period, Sakk (sukuk in plural form) meant the documents representing a contractual relation or a conveyance of rights, obligations or goods in conformity with the Islamic Law. In this regard, throughout the regions where Islam is not widely embraced, sukuk is in tune with the legal instrument called “cheque”, given in return for the service or goods instead of money7.
The first sukuk was issued in 7th century AD by the Great Mosque of Damascus, also known as the Umayyad Mosque in Damascus.
According to 2002 Islamic Financial Markets Report, Shell Oil Malaysia issued sukuk al-ijaraha in 1990 which was worth 125,000,000 Malaysian Ringgit. Today, sukuk has established a market presence in different jurisdictions regardless of whether Islam is embraced or not.
As a result of the considerable attention the field attracted, the first book exclusively on sukuk investments is published in 20014 with the title of “Islamic Bonds: Your Issuing, Structuring and Investing in Sukuk” with the contributions of Euromoney and banker Nathif Jama Adam.
In the United States of America, two (2) prominent sukuk issuances can be discussed. The first was issued based on oil and petrol shares for the East Cameron Gas Company in 2006. This sukuk issuance has importance as it holds. the qualification of being the first sukuk al-musharaka issued within the borders of the United States of America8. The other prominent sukuk issuance is the issuance of sukuk al-ijarah based on aircraft in General Electric Company in 20149.
After it was announced by the Organization of Islamic Cooperation in 1983 that the usage of bonds with fixed interest rates will not be allowed due to the necessitations of Sharia, sukuk, by disregarding the sole payment of the interest but cooperating in loss, became a frequently referenced procedure especially in applying the Islamic Law.
B. The Definition of Sukuk
Sukuk is the securitized form of commercial assets or a pool of assets in a project and based on its area of usage it may be project-oriented, assets-oriented or statement-oriented10. Sukuk, which is a type of investment certificate according to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), is defined as “equally valued certificates representing undivided shares regarding the ownership of tangible assets, usufruct and services, assets of particular projects or special investment activity”. Sukuk is the financial certificate system, developed to guarantee that the revenue derived from a commercial activity, partnership or ownership, is used by the investor or sukuk holder to subsidize a new or an existent project. The source of the income earned by the investor or the sukuk holder is from the actual commercial or economical transactions but not from the interest.
Sukuk has variations in accordance with the fields of activity in which the ownership right of the property is subject to11. Today, there are fourteen types of sukuk, which are defined and approved by the AAOIFI. They are identified as “sukuk al-ijarah, sukuk ijarahmowsufabitihima, sukuk manfaaijarah, sukuk manfaaijarahmowsufabithima, sukuk milkiyat al-khadamat, sukuk al-salam, sukuk al-istisna’a, sukuk al-murabaha, sukuk al-musharaka, sukuk al-mudaraba, sukuk al-wakala, sukuk al-muzra’a, sukuk al-musaqa, sukuk al-muqarasa”. The most commonly issued of those types can be listed as sukuk al-ijarah, sukuk al-salam, sukuk alistisna’a, sukuk al-murabaha, sukuk al-musharaka ve sukuk al-mudaraba. Among these six commonly used types of sukuk, sukuk al-ijara, sukuk al-mudaraba and sukuk al-musharaka are subject to trade and can be issued in secondary markets, while non-negotiable sukuk al-salam, sukuk al-murabah and sukuk al-istisna, cannot be issued at secondary markets.
C. The Difference Between Sukuk and the Traditional Bond
Sukuk, which has been attributed as an interest-free commercial paper or an Islamic bill of exchange, unlike traditional bonds and bills of exchange, provides the sukuk holder/investor the right to possess and benefit from the assets subject to the sukuk. While the institutions that issue sukuk have to be conducting commercial activities in accordance with the Islamic principles, the ones issuing traditional bonds are not limited with such restrictions. On the other hand, the sukuk holder at sukuk obtains direct proprietorship on the assets which are subject to sukuk. However traditional bond is a commercial paper which solely represents the obligation of the issuer.
IV. TYPES OF SUKUK
A. Tradable Types of Sukuk
1. Sukuk Al-Ijarah
Sukuk al-ijarah, also known as leasing oriented sukuk is the most commonly used type of sukuk within the tradable sukuk models in the secondary market.
Sukuk al-ijarah is similar to “leasing” which is also known as financial renting12. In this model, there is an asset that is the subject of sukuk, which is being rented and is usually a real estate. The lessor can either be a bank (“the Bank”) or a special purpose vehicle (“SPV”). A legal relation enters into force between the lessor and the lessee for a specific time period13. The assets subject to sukuk are being rented to the client for a specific period of time for a specific amount. Differently from typical credit relations, the credit obtained by a Bank or SPV is not paid in cash to the lessee; the asset to be used requested by the lessee is obtained with credit allotted by a Bank or SPV and then leased to the lessee14. The Bank or SPV issues sukuk by the securitization of the purchased assets. The issued sukuk certificates can be sold to the investors. Thus, the assets are financed by selling the sukuk certificates and the investors hold the ownership rights separately. The lease incomes are shared between the sukuk holding investors proportionately with their shares. At the end of the leasing relation, sukuk al-ijarah provides the right of redemption to the lessee15.
2. Sukuk Al-Mudaraba
Sukuk al-mudaraba is the project oriented sukuk certificate that is about the activities and the projects based on mudaraba standards, representing the propriety right of the holder16. In the investment projects and venture capital oriented projects, contributions are made to the investments by issuing sukuk al-mudaraba. In mudaraba model, capital, labor, knowledge and experience come together to realize the project17. The investors who are the sukuk holders finance the project and obtain rights based on their shares of the projects18. In this case, the sukuk holders who have become the project owners and the entrepreneurs who put effort (“Mudarip”) enter into a prospective profit sharing agreement. Mudarip receives income from the regular returns of the project activities and delivers the project to its owner once it is completed.
3. Sukuk Al-Musharaka
Sukuk al-musharaka, a model similar to sukuk al-mudaraba, is a sukuk model where there is a labor-capital partnership. The sukuk holders join the shares of the current investment project proportionately with their shares and become partners to the firm capital. Parties usually get into partnerships in the form of ordinary share without legal entity and share the profit and the loss proportionately with their shares in the capital19. Sukuk al-musharaka is issued with the purpose of providing new investment projects and renewing or improving the current ones.
B. Non-Tradable Types of Sukuk
1. Sukuk Al-Murabaha
Sukuk al-murabaha, the most common type of sukuk, is the sale of an asset at a cost plus an agreed profit markup by the parties. Sukuk al-murabaha is a financial transaction in which the goods are bought in cash but are sold with a deferred payment.
The sukuk al-murabaha process begins with a person, who wishes to have assets but is not in the position of being able to pay for it, entering into an agreement with an SPV and thus incurring a debt. The projected price, the deed and the agreed profit margin are stipulated in the precontractual agreement. The details of the agreement consist of the mode of payment and the amount to be paid. The holder may pay the price at once or by instalments in accordance with the instruments of the deferred payment periods.
2. Sukuk Al-Salam
Sukuk al-salam, also known as forward contract is a financial certificate which is designed with the purpose of fund raising for prospective acquisitions. In this type of sukuk, the price for the goods or services that will be delivered at a future date will be paid in full in advance by a Bank or SPV. Thus, the Bank or SPV would have bought the goods and/or the services which will be obtained at a future date20. However, the Bank has to wait for the maturity date of the goods and services as the mentioned goods and services are prospective. The obligator undertakes to provide the specific goods and services within a specific time period if the holder completes the necessary payment. Thus, the holder who is able to foresee the total price of the goods may be subjected to the determined discounts in accordance with the prepayment as well.
3. Sukuk Al-Istısna’a
Sukuk al-istisna’a is a sukuk certificate about the production of particular goods within a specified date. Manufacturer undertakes the delivery of the completed goods within the specified time period.
The word “istisna” is derived from the Arabic “sina’a” which means the production of particular goods and is used to finance the production of particular goods, especially the projects that are in construction phase.
According to this, the entrepreneur, who wants to produce the goods but lacks sufficient funds, contacts the investor and makes an offer. If the investor accepts the offer to finance the entrepreneur’s project, then the investor finds a manufacturer suitable for the project. The manufacturer undertakes to manufacture and deliver the goods for a certain fee within the scope of the istisna’a agreement set between the investor and the manufacturer. In accordance with the istisna’a agreement between the investor and the manufacturer, another istisna’a agreement is also set between the entrepreneur and the investor. The amount the investor agrees to pay is less than the amount received by the entrepreneur. The difference between the amounts is the revenue of the investor from the relation of this agreement. Meanwhile the investor pays the predetermined amount to the manufacturer. The investor delivers the goods to the entrepreneur. The entrepreneur pays the price previously determined in the agreement to the investor21.
V. CONCLUSION
Sukuk, providing medium to long term interest-free and fixed or variable returns, has become an important financial instrument in a world where interest-free banking system is getting increasingly popular. As distinct from traditional bonds, sukuk allows its holder ownership rights on assets or asset pools subject to sukuk. Nowadays, the most commonly used sukuk types are sukuk al-ijarah, sukuk al-mudaraba, sukuk al-musharaka, sukuk al-murabaha, sukuk al-salam, sukuk alistisna’a, however, considering the increasing demand for sukuk, it is possible to experience different types of sukuk in the near future.
BIBLIOGRAPHY
Ahmet Tok, “İslami Finans Sistemi Çerçevesinde Sukuk (İslami Tahvil) Uygulamaları, Katılım Bankaları Ve Türkiye Açısından Değerlendirmeler”, Sermaye Piyasası Kurulu Hukuk İşleri Dairesi, http://dergipark.ulakbim.gov.tr/marufacd/ article/download/5000004958/5000005470, Last Access: 15.07.2016.
Ali İhsan Özeroğlu, “Sukuk Ve Türkiye’de Sukukun Uygulanabilirliğinin Değerlendirilmesi”, Tarih Okulu Dergisi, Y.7, V. XIX, September 2014.
CGS Center, “Faizsiz Menkul Kıymet Kullanımı.”, http://www.cgscenter.org/doc/SUKUK%20NEDIR.pdf , Last Access: 14.07.2016.
Erdem Yılmaz, “Yeni Bir Finansal Araç Olarak Sukuk: Çeşitleri, Türkiye Uygulaması ve Vergilendirilmesi,” Muhasebe ve Finansman Dergisi, January 2014.
Figen Büyükakın/Onur Önyılmaz, “Faizsiz Finansman Bonosu Sukuk ve Türkiye Uygulamaları”, Finansal Araştırmalar ve Çalışmalar Dergisi, V. 4, 2012, http://spk.gov.tr/yayingoster.aspx?yid=992&ct=f&action=displayfile, Last Access: 13.07.2016.
“General Electric Weighs Return To Sukuk Market”, http://www.globalcapital.com/article/r2m2g4n4pvpj/general-electric-weighsreturn-to-Sukuk-market, Last Access: 22.07.2016.
İlhami Söyler, “Kira Sertifikalarına Yönelik Vergisel Teşvikler”, http://www.maliyeokulu.org.tr/index.php/ouractivities/articles/tax/466-kirasertifikalarna-yoenelik-vergisel-tevikler.html , Last Access: 25.07.2016.
“Islamic Banker”, https://www.islamicbanker.com/education/east-cameronpartners%E2%80%99-SukukSukuk, Last Access: 22.07.2016 “Istisna Contract”, https://www.islamicfinance.com/2015/01/istisna/, Last Access: 23.07.2016.
Muaz Güngören, “Bir Finansal Enstrüman Olarak Sukuk Katılım Bankalarına Katılım Modellemesi”, http://www.ito.org.tr/itoyayin/0000401.pdf, Last Access: 15.07.2016.
Online Etymology Dictionary, http://www.etymonline.com, Last Access: 23.07.2016.
Sibel Doğan, “Katılım Bankaları ve Ekonomiye Etkileri: Türkiye’de Örneği”, Kahramanmaraş Sütçü İmam University Social Sciences Institute, Master Thesis, Kahramanmaraş 2008, http://kutuphane.ksu.edu.tr/e-tez/sbe/T00842/ Sibel_Dogan_tez.pdf, Last Access: 15.07.2016.
FOOTNOTE
1 Figen Büyükakın/Onur Önyılmaz, “Faizsiz Finansman Bonosu Sukuk Ve Türkiye Uygulamaları”, Finansal Araştırmalar ve Çalışmalar Dergisi, V. 4, 2012, p. 4., http://spk.gov.tr/yayingoster.aspx?yid=992&ct=f &action=displayfile, Last Access: 13.07.2016.
2 For the article “Faizsiz Menkul Kıymet Kullanımı” which is available on the web page of CSG Center see http://www.cgscenter.org/doc/SUKUK%20NEDIR.pdf, Last Access: 14.07.2016.
3 Ahmet Tok, “İslami Finans Sistemi Çerçevesinde Sukuk (İslami Tahvil) Uygulamaları, Katılım Bankaları Ve Türkiye Açısından Değerlendirmeler”, Sermaye Piyasası Kurulu Hukuk İşleri Dairesi, p.5, http://dergipark.ulakbim.gov.tr/marufacd/article/ download/5000004958/5000005470, Last Access: 15.07.2016.
4 Ali İhsan Özeroğlu, “Sukuk Ve Türkiye’de Sukukun Uygulanabilirliğinin Değerlendirilmesi”, Tarih Okulu Dergisi, Y. 7, V. XIX, September 2014, p. 756.
5 Sibel Doğan, “Katılım Bankaları ve Ekonomiye Etkileri: Türkiye’de Örneği”, Kahramanmaraş Sütçü İmam University Social Sciences Institute, Master’s Thesis, Kahramanmaraş 2008, p.1, http://kutuphane.ksu.edu.tr/e-tez/sbe/T00842/ Sibel_Dogan_tez.pdf, Last Access: 15.07.2016.
6 Doğan, p. 48.
7 For the definition of “cheque” see Online Etymology Dictionary, http://etymonline.com/index. php?allowed_in_frame=0&search=cheque, Last Access: 23.07.2016.
8 For the article “Islamic Banker” please check https://www.islamicbanker.com/education/eastcameron-partners%E2%80%99-SukukSukuk, Last Access: 22.07.2016.
9 For the article “General Electric Weighs Return To Sukuk Market” see http://www.globalcapital.com/ article/r2m2g4n4pvpj/general-electric-weighsreturn-to-Sukuk-market, Last Access: 22.07.2016.
10 İlhami Söyler, “Kira Sertifikalarına Yönelik Vergisel Teşvikler”, p.29, http://www.maliyeokulu. org.tr/index.php/ouractivities/articles/tax/466-kirasertifikalarna-yoenelik-vergisel-tevikler.html, Last Access: 25.07.2016.
11 Büyükakın/Önyılmaz, p. 3.
12 Büyükakın/Önyılmaz, p. 4.
13 Özeroğlu, p. 759.
14 Tok, p. 9.
15 Büyükakın/Önyılmaz, p. 9.
16 Özeroğlu, p. 761.
17 Tok, p. 6.
18 Muaz Güngören, “Bir Finansal Enstrüman Olarak Sukuk Katılım Bankalarına Katılım Modellemesi”, p.103, http://www.ito.org.tr/itoyayin/0000401.pdf, Last Access: 15.07.2016.
19 Tok, p. 9.
20 Erdem Yılmaz, “Yeni Bir Finansal Araç Olarak Sukuk: Çeşitleri, Türkiye Uygulaması Ve Vergilendirilmesi”, Muhasebe ve Finansman Dergisi, January 2014, p. 87.
21 For the article “Istisna Contract” please check, https://www.islamicfinance.com/2015/01/istisna/, Last Access: 23.06.2016.
