LIFE-CYCLE HYPOTHESIS OF HYBRID SUKUK

Abstract

The development of financial system recently has been contributing to the economic growth of the nation. Its vital role helps many financial institutions to advance their financial services, particularly in investment systems such as Sukuk. As seen in recent years, the involvement of Sukuk in many industries ranging from sovereigns to corporates for both Muslim and non-Muslim world companies. Although its popularity increases, it seems to be widely accepted that the insufficient structures of Sukuk become a big challenge to serve the public needs to be in compliance with Shari’ah principles. In an attempt to fulfil many financial companies in issuing Sukuk and the needs of the Muslim world, this study aims to provide the new structure of Sukuk. The study proposes a design of securitization by combining two contracts of Sukuk into one Sukuk structure. The constructed idea will use a model of life cycle hypothesis to support the Sukuk issuing companies in maintaining their incomes. It also explains the cycle cash flow and asset movement as well as the calculation of Net Present Value (NPV) of the project.

Full text

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Jurisdictie: Jurnal Hukum dan Syariah Vol. 10 No.2 Tahun 2019
LIFE-CYCLE HYPOTHESIS OF HYBRID SUKUK
Lutvia Monda
Durham University Business School
Email: moondavie@gmail.com
Abstract
e development of nancial system recently has been contributing to Indonesian
economic growth. Its main role is to help many nancial institutions advancing their
nancial services, particularly in inestment systems e.g. Sukuk. As seen in recent
years, Sukuk inolement in many industries ranges om soereigns to corporates
for both Muslim and non-Muslim world companies. Despite the increasing fame, the
insucient structures of Sukuk become a signicant challenge to serve public needs
complying with Sharia principles. Attempting to full many nancial companies in
issuing Sukuk and the needs of Muslim world, this study aims at proiding the new
structure of Sukuk. e study proposes a design of securitization by combining two
contracts of Sukuk into one structure. e constructed idea will use ‘life cycle hypothesis’
model to support the Sukuk issuing companies in maintaining their incomes. It also
explains the cycle cash ow and asset moement as well as the calculation of Net
Present Value (NPV) of the project.
Perkembangan sistem keuangan baru-baru ini telah berkontribusi pada pertumbuhan
ekonomi bangsa. Peran vitalnya membantu banyak lembaga keuangan untuk memajukan
layanan keuangan mereka, khususnya dalam sistem inestasi seperti Sukuk. Seperti
yang terlihat dalam beberapa tahun terakhir, keterlibatan Sukuk dalam banyak
industri bervariasi mulai dari yang berdaulat hingga korporasi untuk perusahaan
dunia Muslim dan non-Muslim. Meskipun popularitasnya meningkat, tampaknya
diterima secara luas bahwa struktur Sukuk yang tidak memadai menjadi tantangan
yang signikan untuk melayani kebutuhan publik untuk mematuhi prinsip-prinsip
Syariah. Dalam upaya untuk memenuhi banyak perusahaan keuangan dalam
menerbitkan Sukuk dan kebutuhan dunia Muslim, penelitian ini bertujuan untuk
menyediakan struktur Sukuk yang baru. Studi ini mengusulkan desain sekuritisasi
dengan menggabungkan dua kontrak Sukuk ke dalam satu struktur Sukuk. Gagasan
yang dibangun akan menggunakan model ‘Life-Cycle Hypothesis’ untuk mendukung
perusahaan penerbit Sukuk dalam mempertahankan pendapatan mereka. Ini juga
Doi 10.18860/j.v%vi%i.6922

138 Life-Cycle Hypothesis of Hybrid Sukuk
Jurisdictie: Jurnal Hukum dan Syariah Vol. 10 No.2 Tahun 2019
menjelaskan siklus arus kas dan pergerakan aset serta perhitungan Net Present Value
(NPV) dari proyek tersebut.
Keywords: ijarah sukuk, istishna’ sukuk, hybrid sukuk, Islamic securitization,
life cycle hypothesis
Introduction
e consistency of economic malaise in the Muslim world have a tendency
to be more unquestionably apprehensive.1 e evidence of this retrogression
can be found in some literature demonstrating its veracity. For some, it seems to
be broadly realized that Islam is less supportive of the economic improvement
contrasted with the Westerners. Early Islamic world and its Arab propagators
were malicious to science and philosophy.2 While the mass education in the West
was more than achievable, the Muslims, interestingly, were overwhelmed with the
low ratio of illiteracy.3
In the current economic and nancial world, the Islamic nance has
attempted to revive the intellectual desire of Muslim to redevelop their sciences
by embedding the Islamic value in every transaction in their daily economic
activities. However, Islam still necessitates more eorts to reach that goal. at
because Islam still stand in its unchangeability and scarcely any Muslim increased
in value, and even less were trying to capitalize on the disclosures and innovations
that, in the West, were transguring creation forms, introducing new products,
and boosting expectation for everyday comforts.4
In the Islamic contractual system, the essential prohibition is the sale of the
non-existent object and deferred payment. However, Islam has dependably been
responsive to people’s needs and will never burden them in terms of economic and
contractual freedom, whether it is in the past, current or future era. Conversely,
Islam will permit and legitimate all transactions based on the justice and fair
compensation in their commutative transactions. erefore, in some cases, Islam
allows a few contracts to ease individuals in their nancial contracts.5
1 Thomas, A. S., Interest in Islamic Economics: Understanding Riba (London: New York Routledge,
2006), p. 124.
2 Renan, E., 1883. Islam and Science (Sorbonne: A Lecture presented at La Sorbonne, 1883),
p. 2-11.
3 Kuran, T., “Islam and Underdevelopment: An Old Puzzle Revisited.” Journal of Institutional
and Theoritical, (1997): 41-50.
4 Kuran, T., “Islam and Underdevelopment: An Old Puzzle Revisited.” Journal of Institutional
and Theoritical, (1997): 41-50.
5 Thomas, A. S., Interest in Islamic Economics......, p.126.

139
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Innovation in capital market is one of the essential element to increase
the development of Muslim world which will provide better fund mobilization
as well as oer better portfolio proposition to the investors. e xed income
instrument has longed become a genuine need for particular investors, especially
for the risk neutral investors who expecting for value investment. Sukuk, which
is categorized as Islamic xed income securities, has emerged as an innovation in
the Islamic nance realm to accommodate this need as its growth become more
signicant in these days (see gure-1). However, most of study related to Sukuk,
focus on the debate on the asset-backed and asset-based Sukuk. Only few studies
pertaining to hybrid Sukuk.
e phenomenon of Sukuk growth in recent years can be seen in the picture
below:
Figure 1. International and Total Sukuk Issuance 2010-2016
*As of June 30.
Source: Eikon and S&P Global Ratings
Started from 2010, the total Sukuk issuance increased more than 20$ Billion
dollars every year until 2012, as well as the development in the international
Sukuk issuance. And it was even seen a boom in Sukuk issuance in 2012 for the
total Sukuk issuance. Although that trend was not continuously occurred from
2013, neither total nor international Sukuk issuance, but the percentage of the
total issuance surged signicantly until the last period.
Based on the above explanation, this study attempts to improve the nancial
architecture in the Muslims world by combining two classical Sukuk structures into
one combination of hybrid Sukuk. e combination is specialized on the Istishna’
(manufacturing contract) and salam (forward sale) contracts in the initiation
time, whilst they will be combined with other contracts such as mudarabah (silent
partnership), murabahah (cost-plus nancing), musharakah (partnership), and
Ijarah (leasing) structures until the maturity time.
However, this study will specialize the research into one combination of
Sukuk Istishna’ and Sukuk Ijarah. e structure is built from the classical Istishna’

140 Life-Cycle Hypothesis of Hybrid Sukuk
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Sukuk structure and Ijarahmawsufah  dzimmah (forward leasing) contract.
e structure will set up a genuine design within a classical Islamic structure
that emphasizes on the modern design of economic development that complies
with Shari’ah principles and avoids ‘hilah6’ in structuring the Islamic nancial
architecture.
Research Method
is study utilises model development as methodology. is model
development method provides a logical guideline as an evaluation process that can
be more tractable to the reader. To describe the model, the research started with
explaining the underdevelopment of Muslim economic world and the need for
nancial architecture, followed with the understanding the key legal and shariah
issues in sukuk structuring. en, the model description is explained along with
the sukuk and its hybrid.
e Underdevelopment of Muslim Economic World and the Need for
Financial Architecture
Dealing with many questions of law in term of solving the contractual
problem of the Muslim world in these recent days, it is unsatisfactory to merely
rely on the opinions and interpretations of past generations. is is due to the fact
that it will bring the Muslim economy into an inertia that Islamic Shari’ah is not
appropriate for all ages and places for Muslim and non-Muslim alike.
Likewise, Lewis (1955) perceived that some religious codes have a heavy
correlation with economic growth compared to others. If religion emphasises
more on material values rather than concerns to work value, thri and dynamic
investment, trustworthiness in commercial relations, experimentation and risk
bearing, as well as on equality of opportunities, although it plays a signicant role
in their growth, it is in fact becomes inimical to their development.7
Ebrahim et al. (2014) outlined the factors which seem likely have contributed
to the issue of economic underdevelopment of the Arab or Muslim world in the
evolvement over the years8 as follows:
6 A trick that in commercial or nancial transactions that is used to avoid the fundamental
prohibitions of Shari’ah principles
7 Lewis, Shari’ah. A. The Theory of Economic Growth (London: Allen & Unwin, 1955), p.96-
102.
8 Kuran, T., “Islam and Underdevelopment: An Old Puzzle Revisited.” Journal of Institutional
and Theoritical, (1997): 41-50..

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First, the development of commercial transaction by using the juristic
interpretation (ijtihad) has failed to advance Islamic law. e current ijtihad
remains static while in contrast, the progression of the We s te r n world has le
Islam far behind.
Second, the evolvement of nancial intermediation in the twenty-rst
century, although not perfect, has surpassed pre-modern forms involving nancial
economics from various management sciences.
In the even that in managing inquiries of law, Islamic nancial institutions
restrict their perspectives by relying only on the opinions and interpretation of past
eras. Consequently, people will face the defenceless and inactive notwithstanding
life which knows neither dormancy nor ceasing and would not have the capacity to
announce that the Islamic Shari’ah is suitable for all ages and for long periods.
As a consequence, the increasingly important role of bond markets as a source
of funds coincides with the more general paradigm shi from bank-intermediated
nance to disintermediated market nance.
Innovation in capital market is one of the essential element to increase the
development of Muslim world which will provide better fund mobilization as well
as oer better portfolio proposition to the investors. e xed income instrument
has longed become a genuine need for particular investors, especially for the risk
neutral investors who expecting for value investment. Sukuk has emerged as one
of innovation in the Islamic nance realm to accommodate this need as its growth
become more signicant in these days (see gure-1). However, most of study related
to Sukuk focus on the debate on asset-backed and asset-based Sukuk. Only few
studies pertaining to hybrid Sukuk.
Figure 2. Global Bond Market Size
Source: Bonds – BIS total debt securities (2015); FTSE All-World Index (2016).
e discussion on Sukuk is strongly relevant while sizing up the global bond
market valued more than twice compare to equities in 2016. is due to consideration
of bond that it is (1) a high liquid asset than traditional bank loans, and (2) very

142 Life-Cycle Hypothesis of Hybrid Sukuk
Jurisdictie: Jurnal Hukum dan Syariah Vol. 10 No.2 Tahun 2019
‘mobile’ form of capital9 which implies for its role as a mode of nancing. Given
the large global demand of the bond as a xed income instrument, innovation of
Sukuk will attract investor in the Islamic capital instrument.
Understanding the Key Legal and Shari’ah Issues in Sukuk Structuring
e legalization of Sukuk is not clearly stated neither in Quran nor Sunnah,
but it was derived from ijtihad10 from Shari’ah scholars due to the emergence
needs of Islamic nance instruments to ta ke part in nancing the large enterprises
of the Muslim world. An obvious soaring demand for infrastructure to increase
the quality of standard living has become evidence for the emergence of Sukuk
instruments.11 However, the theoretical and legal aspects of Sukuk still become an
ongoing debate among Islamic scholars until the recent period.12 Although this
new economic system brings dispute among Islamic jurists, this disagreement is
naturally accepted in Islam because of the legal texts in the Quran and sunnah.13
In November 2008, Syeikh Muhammad Taqi Usmani, the chairman of
the AAOIFI Shari’ah council, gave a shockwave statement to the global Islamic
capital markets. He stated that most of sukuk structures were breaching the
Shari’ah principle because of their similarities with a conventional system and
its agreement. Moreover, they provide an agreement to buy back the underlying
assets from investors at face value, regardless of its true market value at the time
of maturity.14
e statement from Taqi Usmani is a crucial thing that needs to be
seriously considered in Islamic nance. It can be reected as a root source of the
current Sukuk default, such as Dana Gas Sukuk, which has been announced as
a non-Shari’ah compliant Sukuk. us, in February 2008, AAOIFI published
the Shari’ah standards for investment Sukuk and issued six recommendations on
proper Sukuk to respond the issue of mudarabah and musharakah structures that
were not Shari’ah compliant.
9 Watson, M., The Political Economy of International Capital Mobility, Basingstoke: Palgrave
Macmillan, 2007, p.63-90.
10 Ijtihad means an effort and endeavour of something to achieve presumption (dzan) in regards
to Shariah Law.
11 Al-Amine, M. a.-B. M., Gloabal Sukuk and Islamic Securitization Market. (Leide, Boston: Brill,
2011), p.57-100.
12 Zulkhibri, M., “A Synthesis of Theoritical and Empirical research on Sukuk.” Borsa Istanbul
Review, (2015): 237-248.
13 Saeed, A. & Salah, O., Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk
Structures. Journal of International Banking Law and Regulation, Volume 1: 2014, p.41-52.
14 Usmani, T., Sukuk and eir Contemporary Applications, (2008), p.2-14.

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e purpose of AAOIFI in publishing the regulation of Sukuk investment
was to ensure the ownership legality in the sale of the assets to the Sukuk holders.15
AAOIFI highlighted the dierences between ‘substance’ and ‘form’, where most of
the Islamic instruments were issued merely concern about the form to be ‘Islamic’
but still far from its real substance.
Types of Sukuk
Dierent kinds of literature classify the types of Sukuk in various ways. For
instance, Ari16 in his book divides Sukuk into 6 classes based on cash ow payo
patterns of Sukuk securities. However, based on the Sharia standards published
by AAOIFI in the standard of Sukuk investments No. 17, it has 14 eligible asset
classes but only several structures that have commonly been used in the capital
markets.
Figure 3. Types of Sukuk
Source: Securities Commission Malaysia (2009)
Sukuk Challenges: Harmonization of Asset-Backed vs Asset-Based
In the course of the most recent decade, Sukuk has turned into an undeniably
prominent debt instrument in the worldwide capital markets. Issuers ranging from
sovereigns, quasi-sovereign substances and corporates as well as supranational
associations in the Muslim and non-Muslim world have interested in Sukuk, and
15 Ahmed, SHARI’AH., Islamic Finance at a Crossroad: The Dominance of the Asset-Based
Sukuk. Butterworth’s Journal of International Banking and Financial Law, 25, 6: 2010, p. 366-
367.
16 Ariff, M. Sukuk Securities, New Ways of Debt Contracting (Singapore: John Wiley & Sons
Singapore Pte. Ltd.), 145-150.

144 Life-Cycle Hypothesis of Hybrid Sukuk
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some have already issued this certicate.17
Regardless of that development and improvement of the Sukuk showcase, a
few obstacles emerged, for instance, the absence of cross-border standards for Sukuk.
Such as, while some Sukuk structures might be worthy in one nation, they may
not be satisfactory in another ward from a lawful and Shari’ah viewpoint. Others
have blamed Sukuk for mimicking on ordinary bonds and neglecting the spirit of
the Shari’ah principles of Riba, Gharar, and Maysar.18 us, many investors put a
big concern in the challenges over the matter of underlying assets of Sukuk.
e overwhelming domination of asset-based Sukuk structures in the global
market also becomes a source of dispute in Islamic nance. is is due to the fact
that asset-backed Sukuk cures gharar because of its sanctity, whilst asset-based
Sukuk aggravates it. Many kinds of literature have discussed the problem of assed
based Sukuk structures, for instance, Dusuki19 deliberates the issue of asset-based
Sukuk from the Shari’ah perspectives:
Legal documentation on 1. Sukuk contradicts the requirements of Shari’ah
principles.
e certicate holders have no right in selling the underlying asset of 2.
Sukuk as it represents undivided assets.
e involvement of purchase undertaking agreement in the asset-based 3.
contracts replicates the substance of debt based instrument.
e independence of the SPV (Special Purpose Vehicle).4.
Although there is a raising issue in asset-based Sukuk, Hidayat20 stated that
the Sukuk legal framework based on common law is more suitable to be applicated
in the asset based rather than in asset backed structure. As a result, it aects the
market preferences in using the asset-based structure than another one. However,
the wide spreading utilisation of this structure depicts the indication of the unwell-
17 Jivraj, “Sukuk Structures, Faith in Finance - An Introduction to Sukuk Structures”, Debtwire
Magazine, January 2017, p.1-6.
18 Jivraj, “Sukuk Structures, Faith in Finance - An Introduction to Sukuk Structures”, Debtwire
Magazine, January 2017, p.1-6.
19 Dusuki, A. P. D. A. SHARI’AH. & Mokhtar, S., Critical Appraisal of Shari’ah Issues on
Ownership in Asset-based Sukuk as Implemented in the Islamic Debt Market. Research Paper
ISRA No. 8: 2010, p.1-32.
20 Hidayat, S. E., “A Comparative Analysis between Asset Based and Asset Backed Sukuk:
Which One is More Shari’ah Compliant?”. International SAMANM Journal of Finance and
Accounting, Vo. 1, Issue 2, (2013): 24-31.

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performing of Shari’ah Supervisory Boards to oversee the growth of industry21 as
many issues in Sukuk default using asset-based arose in these recent days.
In addition, the Sukuk trend in the global market is overwhelmed by the asset-
based structure, which triggered some Sukuk into defaults. ose defaults are derived
from the unreliable classical Sukuk structures which cannot guarantee the investors
in investing their money. Moreover, the insucient Sukuk structures in providing
the Muslim needs related to investment becomes another factors in developing
the new Sukuk structure, where in this case by combining two Sukuk structures
into one contract.
e Application of Hybrid Contracts in Sukuk
Hybrid Sukuk is a combination of two elements of debt and equity using
two contracts or more to be put into one structure. is type of Sukuk is also
called mixed-asset Sukuk, which, naturally, can comprise various Sukuk structures
including Istishna’, murabahah, mudarabah, musharakah and Ijarahat the same
time.e hybrid structure oers the company or originator to take into account
the diversity of investors’ demands,22 allowing the portfolio of assets in involving
dierent assets which benecially brings a better fund mobilization as the previous
murabaha and Istishna’ are not able to approach.23 In other words, the issuing
company can utilize hybrid Sukuk when the possibility range of investors become
wider, and the hopes of raising money are higher.
Since the Sukuk issuance grows signicantly in the nancial market, it
becomes the vital means in the investment area. is growth is even expected to
have a probable domination of the Sukuk structures in the future24 considering that
its practice has been widely accepted by almost all Islamic jurists. ere are so many
companies and originators who have practiced which hybrid structure in issuing
their Sukuk, such as Saudi Aramco, Tabreed Sukuk. Nevertheless, the insucient of
Sukuk structures such as Ijarah Sukuk to provide its services limits the originator to
issue Sukuk without holding enough tangible assets. Consequently, the emergence
21 Ahmed, SHARI’AH., 2010. Islamic Finance at a Crossroad: The Dominance of the Asset-
Based Sukuk. Butterworth’s Journal of International Banking and Financial Law, 25(6): 2010, p.
366-367.
22 Maierbrugger, A., Innovative Approach in Islamic Finance: Hybrid Sukuk Issuance, Gulf Times
28 March (2017).
23 Tariq, A., “Managing Financial Risks of Sukuk Structures”, (Msc diss., Loughborough
University, 2004).
24 Adilla, F., “‘Hybrid Sukuk’ Set to Dominate Future Sukuk Issuances.”, New StraitsTimes,
May 29, 2017.

146 Life-Cycle Hypothesis of Hybrid Sukuk
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of hybrid Sukuk is heavily needed to full the demands of investors.
Accordingly, by providing the equity features and benecial ownership, it
allows the investors to obtain the periodic distribution amount of income as well
as receiving the right to convert or exchange their Sukuk certicates into equity
in the future date under certain predetermined conditions. In the gure-3, it is
depicted that hybrid Sukuk has two types as stated in the Securities Commission
Malaysia (2009). As the time went by, there are three main types of hybrid Sukuk
that currently exist in the Islamic nancial institutions:
1. Convertible Sukuk:
is type of Sukuk gives the certicate holders the right to exchange their
Sukuk into new equity share in the issuing entity with the provision of certain
conditional date in the future.
2. Exchangeable Sukuk:
Similar to the former type of Sukuk, it also gives the same right to the Sukuk
holders but only allowing to convert their Sukuk in the company rather than
the issuing entity. e Sukuk can be exchanged to share of a third party at a
specic ration conversion and under certain conditions.
3. Perpetual Sukuk
Acting dierently from the other types, this Sukuk has the equity features
and bestows their investors a return in perpetuity (regular, perpetual return).
Moreover, this Sukuk does not clearly specify the prexed maturity date but
allowing the Issuer to exercise the price by call option.
e conceptual framework of the life cycle of Sukuk is based on the Modigliani’s
theory of life cycle hypothesis. Although there are many possibilities of hybrid
Sukuk that can be invented, this paper will focus only on Istishna’’ and Ijarahhybrid
Sukuk, where both contractsare combined into one hybrid contract.
Figure 4. Diagram Model of Life cycle of Sukuk
Source: Modied version of Modigliani (1986)

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In constructing the model, the following assumptions are preserved:
At t = 0, the investors pay the issue price in respect the certicates to the
issuer or trustee and give some amount to the contractor to build the particular
manufactured asset under Istishna’’ agreement. At the same time, the issuer makes
another agreement with the lessee under forward leasing (Ijarah mawsufah 
dzimmah).
t = 1 is the period where the contractor starts to construct the asset.
t = x is the periodic payment by the issuer or periodic distribution amounts
to the certicate holders. While the contractor is building the manufactured asset,
the lessee will pay the issuer a rental amount for the asset leased to it by the issuer
and pay the received amount to the seller for the second and subsequent phase of
purchasing commodities, as long as it has obligations to perform under Istishna’’
agreement. Along with this, the issueruses these amounts to fund the periodic
distribution amounts to the certicate holders.
When the construction of an asset is complete at t = Shari’ah, the contractor
hand over the asset to the issuer and the issuer will sell the commodities to the
counterparty and the issuer will use the exercise price to fund the dissolution
payment to the certicate holders on the scheduled dissolution date.
e basic proposition of my model is to preserve the investment expenditures
at a smooth curve in line with the theory of life cycle hypothesis purposed to
maintain the life consumption even aer retirement ages. To do this, the structure
of Istishna’ and Ijarah contracts are combined under one Sukuk contract. is
contract is segregated into three components: (i) the periodic payments by the
certicate holders and the issuer, (ii) the periodic payments by the originator, and
(iii) the dissolution payments.
Description of the Model
In this model, Istishna’ and Ijarah Sukuk contract are combined into one
hybrid Sukuk, where Istishna’ is used to facilitate the manufacturing product when
the originator needs capital for their production. Meanwhile, the Ijarah Sukuk is
more focused on using the Ijarah mawsufah  dzimmah rather than using Ijarah
muhaddadah mu’ayyanah due to the non-existent of an asset in the event of the
contract. e forward leasing (Ijarah mawsufah di dzimmah) has a role in binding
the promise between the lessor and lessee to lease the asset in the future. e
application of Istishna’ is compatible when it is combined with forward leasing due
to the fact that both contractshave no an existent asset in the event of contract.

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Initially, the originator or the company will act as four parties in the
contract, as lessee, contractor, seller, and sometimes as counterparty to undertake
the purchase commodities and will be helped by the issuer or SPV (Special
Purpose Vehicle).
Figure 5. Hybrid Istisna Ijarah Sukuk Structure
Cash Flow Analysis of the Project
e cash ow of the project will be analysed from the phase where the SPV
issued Sukuk certicates in regard of the paid price by the investor on the issuance
date until the last distribution of the dissolution asset at the maturity time.
First, the Issuer or SPV, on behalf of the originator, will issue the Sukuk
certicates with respect to the paid price of Sukuk by the investors. Under the
Istishna’ and forward lease contracts, the Issuer (on behalf of the investors) will
enter into an agreement with the Originator for the pre-agreed terms to construct
and deliver the asset (Istishna’ contract) and to lease the asset (forward lease
contract) on the issuance date.
Aer all those invested money are collected from the investors, the Issuer
then will pay the Istishna’ amount to the Contractor (the Originator acts as a
contractor) by way of instalments on the Closing Date. en the contractor can
start to build the project. In some cases, the balance amount of the issue price will
be invested by the Issuer in authorised investments on the same date. Aer the
Contractor has completed the rst phase of the project, it will be delivered to the

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Issuer to obtain the second payment from the Issuer.
At the rst periodic Distribution date, upon completion and delivery of
the asset at each stage, the Lessee (the Originator as a Lessee) will pay the rental
amount for the leased asset to the Issuer for so long as it has an obligation to
perform under Istishna’ agreement. e rental amount, then, will be given to the
investors to fund the Periodic Distribution amounts under the certicates as per
pre-agreed ratio.
e rental amount payment, given by Lessee in each relevant Payment
Period, is calculated according to the following formula:
A : The issued ‘Trust Certicate’ price
L : LIBOR
M : Margin rates per annum
D : The actual number of days in each Payment Period
In each period, the distribution amount is equal to the margin percentages
per annum plus LIBOR calculated on the outstanding face amount of the Sukuk
certicates as at the commencement of pertinent return of the period accumulation
on an actual/360 basis. At the same time, the Issuer also pays the subsequent
instalment payment to the Contractor to continue the constructing project and
as the second and the next delivery assets.
On the scheduled maturity date, the Issuer will receive the paid amounts of
selling the asset to the Originator under the exercise price. ese amounts then will
be paid by the Issuer to the investors to fund the dissolution distribution amount
at the end agreement under the certicates.
In term of certicate tradability purposes, the company or originator will face
some restrictions to make the Sukuk certicates be tradable in secondary trading
since this agreement involved assets under construction. is is also related to
the probability of default during the construction (Istishna’) stage. To tackle this
issue, the originator is required to have one third for a minimum tangible asset
of the Sukuk, which will be explained further below.
Asset Ownership Movement Analysis
Ownership in Sukuk certicates refers to undivided shares in genuine
possession and sets up oers guarantee over the rights and commitments related
to the certicates. e matter of asset ownership could be a primary source of

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dispute in case of Sukuk default if the transfer of the asset is not enforced legally.
According to AAOIFI,25 the meaning of ownership is related to the true sale that
complies with Shari’ah principles by these following requirements:
A legitimate purchaser buys the specied asset from the seller who 1.
legally holed the ownership.
e purchased items are transferred from the seller’s balance sheet to 2.
that of the buyer.
e purchaser has his/her rights to exercise the asset, and there is no 3.
condition or statement that keeps them from practicing the rights to
sell the asset or discard it.
e returns of the 4. Sukuk certicate are derived from the actual performance
of the underlying asset of the Sukuk.
e buyer has direct authorities in recoursing the asset in term of 5.
default.
In the case of Istishna’ Ijarah Sukuk, the asset movement between parties is
very oen since it needs to conform with the Shari’ah standards. us, it needs
to be clearly specied regarding moving projected asset during the construction
until the maturity time in relation to the taxation in each movement of the items.
As stated by Cross, et al. (2012) that the Islamic securitization structures can
conceivably trigger multiple tax expenses (for instance, stamp duties) in selling
and transferring the assets. Although many Islamic jurisdictions have acquainted
particular enactment to avoid these tax burdens, every transaction ought to be
painstakingly surveyed by tax advisors. It might be conceivable to deal with these
issues using vehicles in tax neutral jurisdictions.
In this case, all payments regarding the transaction archives and any documents
in the contracts of Istishna’ Ijarah Sukuk will be made without deduction under any
circumstances, including tax withholdings, unless the tax deduction is obligated
by law. In other words, in the event of asset movement from one party to another
party in delivering projected asset, the taxation will become the Originator’s
responsibility, with the exception if the law requires the deduction of the taxes.
Accordingly, if the tax reduction is compulsory by law, then:
e Originator or the company will pay to the Issuer in term of deduction 1.
under the certicates,
e Issuer needs to pay under the certicates the additional amounts 2.
which will be applied in the certicate payment.
25 AAOIFI, Shari’s Standard No. (21), Financial Paper (Shares and Bonds), s.l.: Accounting and
Auditing Organization for Islamic Financial Institutions, (2007), p.18.

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Tradability Issue in Istishna’ Ijarah Sukuk
e tradable Sukuk refers to the certicate that can be sold and purchased by
either investors and/or other intrigued people. e Istishna’ Ijarahhybrid contract
can generate the Sukuk structure without the mobilization of asset existences.
However, this type of Sukuk certicate would not promptly be tradable due to
Shari’ah restrictions. e primary resource pools to be created would be by using
the justication of Istishna’ and instalment trading contracts that would generate
debt obligations. e essential resource pools to be produced would be of the
nature justied by Istishna’, and portion buy/deal gets that would make obligation
commitments. e declaration on these obligation courses of action can be named
as settled rate zero coupon Sukuk.26
Relating to the tradability issues of Sukuk certicates, AAOIFI stipulated
some requirements as follow27:
e 1. Sukuk holder must have the real ownership of the asset, which
comprises the rights and its obligations in the form of real assets whether
it is in tangible, usufructs or services. Moreover, those assets must be
capably owned and can be traded legally according to the Shari’ah
rules, as stated by AAOIFI in Shari’ah Standard on Investment Sukuk
(2007).
ere is no presence of debt or receivables in the 2. Sukuk certicates,
aside from one account of a trading or nancial entity.
erefore, in the case of the tradability issue in the hybrid 3. Istishna’ Ijarah
Sukuk, the Shari’ah board advised the issuing company to have at least
on third of the tangible asset in Sukuk. At the rst partial construction
payment to the Contractor, the payment must represents one third of
the Sukuk. if the rst instalment payment could not reach the required
benchmark, there must be an additional tangible asset in the asset pool
from the company as can be seen in the TabreedSukuk, whereas Tabreed
bought palladium worth US$26 million from a third party, then sold
it to the SPV in the same price.28
26 Tariq, A. A., Managing Financial Risks of Sukuk Structures, Loughborough, UK: Submitted
dissertation of Masters of Science, Loughborough University, (2004), p.21.
27 AAOIFI, Shari’s Standard No. (21), Financial Paper (Shares and Bonds), s.l.: Accounting and
Auditing Organization for Islamic Financial Institutions, (2007), p.21.
28 Tabreed, Tabreed 06 Financing Corporation (incorporated in the Cayman Islands with limited liability),
Abu Dhabi: Tabreed, (2006), p.4-5.

152 Life-Cycle Hypothesis of Hybrid Sukuk
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Net Present Value Calculation
e infrastructure rms need to calculate the net present value (NPV)
of each investment in order to make a precise of fund allocation. e following
topic illustrates the concept of NPV. e net present value of the project could
be found by determining the present value of net cash inows subtracted by the
initial investment on the project (Brealey, et al., 2011).
Net Present Value Calculation
-
+..……………………… + +
where:
e value of NPV could be either positive or negative. e positive NPV
tells that the investment is feasible and vice versa.
In addition, the rm needs to ensure to select the projects that generate the
highest prot of each one £ invested. It does so by determining the Protability
index (PI) ratio. The following formula of PI is written as follows:
To illustrate, the rm has to choose among the several projects, which
offer higher prot but with the budget constraint of ( Assume that the
of the rm is equal to £ 30 m. Thus, the PI ratio could be calculated using the
information provided in the following table as follows:
Projects Cash Flows (
£ millions)
R N P V
(t=1)
Total investment
(in £ million)
PI
Project 1 10 4% 1.61 15 10.73%

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Project 2 12 2.5% 1.70 12 14.1%
Project 3 11 2% -1.21 10 (12.1%)
erefore, the company could undertake the investment on project 2, which
oers 14.1% as well as the project 1, which oers 10.73%. It concluded that PI
ratio of Project 1 < Project 2.
Sukuk Pricing Illustration
Assume that at , we have only two potential investments in the
portfolio. Project A and Project B with the consecutive expected returns of E (
16% = and E ( The cash ows are forecasted in the following:
At period t = 1
£8 = m
5 £ = m
Thus, the PV of the portfolio at t =1 equal to:
+ =
£11.35
If the rms raise capital by issuing Istishna’Sukuk certicate of 100,000
units. Thus the value will be:
The value per unit will be: £113.5 = / unit.
At period t = 2
£10 = m
7 £ = m
+ =
£13.01
The value per unit will be: £130.01 = / unit.
At period t= 10
30 £ = m

154 Life-Cycle Hypothesis of Hybrid Sukuk
Jurisdictie: Jurnal Hukum dan Syariah Vol. 10 No.2 Tahun 2019
25 £ = m
+ =
14.84 £
The value per unit will be: £148.40 = / unit.
Conclusion
is study provides needs of Muslim and Islamic nancial institutions in
structuring their Islamic securities due to the lack of former and classical structures
which is insucient to full the Islamic economic requirements, as the development
of nancial system in the present era has developed even further and in some cases
has le Muslim world behind.
e hybrid structure of Sukuk provides the company or originator to take
into account the diversity of investor demands which benecially generates better
fund mobilization. is study constructed an innovation in the hybrid structure
combining the forward leasing/Ijarah and Istishna’ Sukuk by modifying the life
cycle hypothesis of Ando and Modigliani (1964). e life cycle Sukuk aim to
preserve the investment expenditures at a smooth curve by constructing the project
which implies to the realm of the economy while able to generate income in the
time through the lease payment of Ijarah. Hence, in the long run until maturity,
the hybrid structure will able to generate better fund mobilization. Generally, this
paper resulted in the structure of the contract and moderately simulate the case
ow generated by the project.
us, it can be concluded by with an advice of the model extension in other
structures of Sukuk such as Istishna’ with mudarabahor musharakahas well as the
salam with murabahah structures.
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