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Islamic Finance | Q&A

What Is the Difference Between Asset-Backed Sukuk and Asset-Based Sukuk?

Asset backed-sukuk involve 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, on the other hand, involve 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 mulzim) 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.

Asset-Backed Sukuk Asset-Based Sukuk
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'a nomination Because of its equity-like nature, this structure is considered shari'a-compliant This structure involves both ba'i al-dayn and ba'i al-inah. Hence, it is not compatible with shari'a

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