Islamic Capital Markets

Islamic Capital Markets: TRW’s Expertise and Detailed Processes

TRW’s Comprehensive Approach to Islamic Capital Markets
TRW’s Islamic Capital Markets practice represents the epitome of combining Shari’a-compliant financial principles with advanced international capital market expertise. By blending traditional Islamic finance structures with modern financial practices, TRW ensures that clients achieve their goals within a framework that adheres strictly to Islamic jurisprudence.

Below, we explore the processes and methodologies that underscore TRW’s successes in Islamic capital markets.

Key Processes in Developing Islamic Capital Market Instruments

1. Structuring Sukuk (Islamic Bonds)

Sukuk Development Phases:

1. Initial Assessment and Feasibility:

• Conduct detailed discussions with the client to understand financing needs, the purpose of the sukuk, and the type of investors being targeted.
• Identify the assets or projects to be utilized as the underlying asset, ensuring their compliance with Shari’a principles.
• Evaluate market conditions, potential investor appetite, and regulatory requirements in target jurisdictions.

1. Shari’a Structuring and Compliance:

• Engage with a recognized Shari’a supervisory board to ensure the proposed sukuk complies with Islamic jurisprudence.
• Determine the appropriate structure for the sukuk, such as:
  • Ijarah (Leasing): Based on rental income from leased assets.
  • Murabaha (Cost-Plus Financing): Using asset-based sales agreements.
  • Wakala (Agency): With the issuer acting as an investment manager.
• Draft Shari’a-compliant documentation, including the prospectus, trust deed, and certificates.

1. Legal Documentation and Issuance:

• Prepare legal and financial documentation tailored to the sukuk’s structure.
• Align the documentation with international standards such as those of the International Islamic Financial Market (IIFM).
• Secure regulatory approval in relevant jurisdictions to issue the sukuk.

1. Marketing and Distribution:

• Market the sukuk through book-building processes to attract institutional and retail investors.
• Ensure transparency in terms of risks and returns while complying with Shari’a investment ethics.

1. Post-Issuance Management:

• Monitor compliance with sukuk terms throughout its lifecycle.
• Facilitate regular payments (e.g., rental income in ijarah) and eventual redemption of the sukuk.

2. Shari’a-Compliant Securitizations

Process of Structuring Islamic Securitizations:

1. Asset Identification:

• Select eligible assets (e.g., leases, receivables) that align with Shari’a principles and have predictable cash flows.
• Avoid assets or contracts involving haram (forbidden) activities, such as alcohol, gambling, or interest-based lending.

1. Shari’a Structuring:

• Develop a structure where the transfer of ownership or beneficial interest in the asset complies with Islamic rules.
• Utilize structures like ijarah securitization, where investors acquire rights to rental income.

1. Special Purpose Vehicle (SPV) Formation:

• Establish an SPV to issue sukuk or certificates backed by the asset pool.
• Ensure the SPV operates within Shari’a-compliant frameworks and does not engage in non-permissible activities.

1. Issuance and Sale:

• Issue certificates representing ownership stakes or rights in the underlying assets.
• Sell these certificates to investors through Shari’a-compliant processes, ensuring full disclosure of risks and rewards.

1. Monitoring and Reporting:

• Manage periodic distributions to investors from the securitized asset pool.
• Provide ongoing reporting to stakeholders in a transparent manner.

3. Designing Islamic Structured Products

Process Highlights:

1. Client Needs Analysis:

• Understand the client’s objectives, whether for risk management, yield enhancement, or investment diversification.
• Assess the financial instruments available within Shari’a guidelines.

1. Shari’a-Compliant Derivative Structuring:

• Develop permissible risk management tools such as Profit Rate Swaps and Currency Hedging Solutions under the ISDA-IIFM Ta’hawwut Master Agreement.
• Ensure no speculative elements are involved.

1. Customizing Structured Products:

• Design products that replicate the economic outcomes of conventional instruments without violating Islamic principles.
• Examples include structured ijara, where periodic returns mimic bond coupons but derive from leasing arrangements.

1. Compliance and Documentation:

• Prepare all agreements, ensuring full Shari’a approval.
• Collaborate with Shari’a boards to finalize the documentation.

Notable Sukuk Transactions

1. Sovereign Sukuk:

• Government of Indonesia Sukuk Program:
  • Structured with ijarah assets and commodity murabaha.
  • Integrated new ICMA sovereign collective action clauses tailored for sukuk.
• Government of Malaysia Sukuk:
  • First to incorporate transportation rights in the underlying asset pool.
  • Established an innovative framework for sovereign sukuk.

1. Corporate Sukuk:

• Saudi Telecom Sukuk Program:
  • Used a groundbreaking dual mudaraba and murabaha structure.
  • Designed for profitability while covering Shari’a compliance for profit and principal components.
• EQUATE Petrochemical Sukuk:
  • Established a $2 billion trust certificate program.
  • Facilitated large-scale infrastructure funding.

1. Institutional Sukuk:

• Kuveyt Turk Tier 2 Sukuk:
  • A $350 million issuance integrating a fixed-rate resettable structure.
• APICORP Sukuk Program:
  • A $3 billion sukuk framework for ongoing funding needs.

Collaboration with Shari’a Scholars and Regulators

TRW’s approach includes active collaboration with:

• Shari’a Supervisory Boards: Ensuring transactions meet the highest ethical standards.
• Regulatory Bodies: Advising on legislative frameworks to support Islamic finance growth.
• Industry Leaders: Participating in the development of international standards, such as the IIFM and AAOIFI guidelines.

Conclusion

TRW’s Islamic capital markets expertise is defined by its ability to deliver innovative, Shari’a-compliant solutions tailored to complex financial needs. From pioneering sukuk structures to designing bespoke securitizations and structured products, TRW has established itself as a trusted partner for clients seeking to navigate the dynamic world of Islamic finance. Through its meticulous processes, regulatory insight, and commitment to Shari’a compliance, TRW continues to set benchmarks in the global Islamic capital markets arena.