​Islamic Finance – Islamic Capital Market - Sukuk that is tradable and interchangeable
More value-added elements are needed in the Sukuk structure as investors become more sophisticated. One feature is the exchangeability or convertibility of the Sukuk into shares of certain businesses. They now have the chance to change their Sukuk into shares as a result. A straight bond or security issuance that also grants the investor the option to convert or exchange the bond or security into a predetermined number of shares of a company at a predetermined exchange price is known as an exchangeable security. This choice is available for both convertible and exchangeable securities, but the shares that can be converted into or exchanged for them vary. 

While holders of exchangeable securities can convert their securities into ordinary shares of other businesses, holders of convertible securities have the right to convert their securities into ordinary shares of the issuer company. The conversion price, which is set at the time the securities are issued and is dependent on the par value of the bond, is crucial in this Sukuk structure. The conversion ratio, which determines whether the security will be converted or exchanged into common shares of the relevant businesses, is calculated by dividing the par value of the securities by the share price.

Let's say a convertible or exchangeable asset has a $1,000 par value. A share's exchange cost has been set at $250. It is possible to calculate the conversion ratio by using two fixed variables: 1,000/250 = (4:1). This formula shows how each security with a $1,000 par value can be changed or traded for four common shares. It should be emphasised that regardless of the market value of the securities at the moment of conversion or exchange, the conversion ratio must be based on the par value of the securities. The holders of securities will undoubtedly profit from this development.

If the Sukuk holder chooses to convert or exchange their Sukuk, they will become shareholders of a company with all the corresponding rights and liabilities. Additionally, they will be qualified to receive dividends and/or financial gains, as applicable. Since the market will ultimately decide on the dividend or capital gain, there is no cap on either because it will be determined by the market. Holders will continue to receive the fixed income or the anticipated periodic profit distribution if they do not convert or trade their Sukuk. Additionally, they have the right to the principal redemption during the maturity time. They also have precedence over regular shareholders of the issuing company in the event of liquidation because they are Sukuk investors. 

​Islamic Finance – Islamic Capital Market - Arguments against the Sukuk's Capital Guarantee Clause
This has been equated by opponents of a capital guarantee provision with a capital guarantee, which they believe should be avoided. They contend that even in cases where the issuer has failed to produce sufficient income, a purchase undertaking based on Wa'd will secure or guarantee the capital or investment principal. In actuality, this will absolve Sukuk investors of the danger of capital loss. 

They contend that the capital has been guaranteed under all conditions by the formula for the exercise price of the purchase commitment in these Sukuks. It has been hotly debated among Middle Eastern academics whether the manager (of Mudarabah), the partner (in Musharakah), or an agent should be the one to issue a purchase undertaking promising to buy the Sukuk assets for a price equal to the Sukuk's face value. Many Shari'ah principles, including the pertinent Shari'ah standards of AAOIFI, have been cited by scholars who oppose this practise. These principles essentially forbid or disallow any kind of capital assurance. While supporting the ban on capital guarantees, academics who have endorsed this practise have argued that this purchase endeavour won't necessarily result in a capital guarantee like in the case of a conventional bond. 

A point that makes an Islamic Sukuk different from the conventional bond, though it includes a purchase undertaking provision, is that the undertaking is to purchase the assets of the business venture. The capital redemption is not an endeavour. Therefore, the Sukuk owners would be responsible for paying any losses if the venture's assets were damaged or completely lost.

 This characteristic sets it apart from a typical bond and represents the loss sharing idea. In a traditional structure, the investment's capital is always required to be repaid. It is therefore feasible to have a redemption clause or put option price that protects the investment's principal thanks to the Ijtihad and the supporting scholars' viewpoints.

​Islamic Finance – Islamic Capital Market - Justification for a capital guarantee provision in Sukuk.
The purchase undertaking, according to proponents of a capital guarantee provision, applies to the venture's assets rather than its capital. They contend that since the method complies with Shari'ah from a fundamental contractual standpoint, it is irrelevant that this practise will have the same economic impact as a capital guarantee. Additionally, they contend that rather than a partnership (Shirkah al-'Aqd), there is a co-ownership (Shirkah al-Milk) among participants in sukuk. Co-ownership, which is less structured, would permit the partners to purchase the venture's assets from one another at a mutually acceptable price.

​Islamic Finance – Islamic Capital Market - Musharakah and Mudarabah Sukuk 
Some Shari'ah compliance issues arise from the fact that Sukuks are anticipated to provide a fixed income and to ensure capital. In actuality, an agreement contains a clause of buy commitment by either the issuer/SPV or partner/company to establish a default in the event that the issuer/SPV fails to make the anticipated periodic profit distribution. If this occurs, the holders of Sukuk or investors will have the authority to order the SPV/issuer to buy the Sukuk asset(s) at a price equal to its nominal value. The investment's money will be safeguarded by this clause.

Equity-based Sukuk, like Mudarabah and Musharakah Sukuk, are primarily designed to give investors in Sukuk access to the cash flow of the enterprise into which the proceeds of the Sukuk are invested. The proceeds of the Sukuk are used to finance a specific venture done by the issuer, which they would otherwise not be able to commence. Neither Sukuk Mudarabah nor Sukuk Musharakah are built on a fixed-income structure, in contrast to Sukuk Ijarah. Only the venture's financial flows will result in revenue. Therefore, rather than having a set rate of return, the coupon is typically structured as an estimated or expected profit. It is typical for a clause to be included that creates a purchase commitment by the issuer to safeguard investors' money.

In the event that the issuer fails to pay the anticipated periodic profit distribution, the investors have the authority to compel the issuer to buy the Sukuk at a specific price, known as an exercise price. The so-called "partnership" must be ended by the issuer buying the venture's underlying assets for a price that is typically equal to the outstanding principal balance plus the anticipated profit owing at that time. Regarding the issuer's buy commitment in both Sukuk Mudarabah and Sukuk Musharakah, there is significant disagreement.

The fundamental question is whether or not the purchase commitment would result in a capital guarantee, as this is prohibited by equity-based contracts. The purchase commitment lets investors know that the initiative is likely to succeed. While returns are still attached to the asset, such as in the case of musharakah, the endeavour may be argued to cover fiduciary risks. Even among Middle Eastern academics, there is still no agreement on whether it is permissible.

​Islamic Finance – Islamic Capital Market - Ijarah Sukuk
Sukuk Ijarah offers a fixed revenue through the lessee's or originator's rental payments. Two mechanisms, namely the establishment of a trust over the leased asset in favour of the Sukuk holders and the incorporation of a put option or purchase undertaking by the lessee to purchase the leased asset, especially in the case of default, safeguard the financial interests of the investors. The put option's cost is frequently predetermined in advance using the principal's face value. This sum consists of the principal certificate of Sukuk, the amount of rental owing prior to the default date, and any other scheduled or agreed-upon costs that the lessee is responsible for covering. The investors' capital is effectively protected as a consequence of this. The price should be based on market value to represent the meaning of Sukuk investment, which is essentially an investment certificate, which may be why some academics find this put option objectionable. These researchers contend that any investment certificate must be devoid of any capital security. A guarantee on the principal's investment would be given if the leased asset were to be bought by the lessee in the event of default at a cost equivalent to the outstanding principal. 

The conditions of this type of transaction restrict the owner/purchaser of the asset from selling the asset in the open market because the owner/purchaser has been compelled to sell to the obligor at a predetermined price. This is acceptable provided that the put option's price is determined by the leased asset's market value at the moment of default. Scholars who accept this aspect of the Sukuk Ijarah, however, have contended that the put option is actually exercised on the leased asset rather than the capital invested. The put option is essentially the lessee's unilateral pledge (Wa'd) to buy the leased asset from the lessor at a predetermined price. The lessee may promise to buy the leased asset at any agreed-upon price.

​Islamic Finance – Islamic Capital Market -  Sukuks
In a single issuance, hybrid Sukuks securitize both receivables and tangible assets. As previously stated, securities created through complete receivables-based or financial-asset securitization can only be traded at par value because they are regarded as monetary assets. This prevents the majority of Islamic receivables from being securitized, with the exception of Malaysia, where receivables have been securitized and sold as bonds. As such, accounts receivable cannot be converted into liquid assets and the financier must retain the receivables until maturity. The Islamic Development Bank (IDB) released the first and second Sukuk Istithmar in response to this issue by combining financial assets, Islamic receivables, and tangible assets in a ratio deemed appropriate by the bank's Shari'ah board. The Shari'ah court permitted the financial asset's composition in these two cases to be up to 70% as opposed to the tangible asset, which cannot be less than 30%. Prior to this Fatwa, many Shari'ah Boards, including the Dow Jones Islamic Market Index, agreed that 45/55 or 49/51 was an appropriate ratio of receivables to assets (DJIM). This Fatwa fits the need to securitize this financial asset because a large portion of the bank's assets are in the form of account receivables. Given the nature of financing undertaken by the IDB, which consists primarily of project financing in the form of Istisna' and asset financing in the form of Murabahah. 

This Sukuk is distinct and tradeable because it combines Ijarah assets (not less than 30%) and debts (not more than 70%). In this arrangement, the IDB bundles certain Ijarah assets (minimum 30%), as well as Istisna' and Murabahah receivables that it possesses (assets) and sells to the SPV for the SPV to issue Sukuk Istithmar. These assets will be subject to claims from the investors, and the IDB will use the money earned from their sale as operating capital. Later, the Accounting and Auditing Organization for Islamic Financial Institutions' (AAOIFI) Shari'ah Standard on Financial Papers supported this line of reasoning (No.21). This has opened the door for the hybrid method to be used in the future structuring of Islamic

​Islamic Finance – Islamic Capital Market – Sukuk Musharakah 
Since both Sukuk Musharakah and Sukuk Mudarabah are equity-based arrangements, they are comparable. However, a Musharakah contract only has certain characteristics. These include I the requirement that both parties to a Musharakah contract contribute capital to the venture; (ii) the requirement that, while a PSR may be negotiated, loss sharing must be proportionate to capital contribution; and (iii) the right of both parties to participate in the management of the venture.

An identified business venture, such as improving the amenities at an airport, is funded by both the firm and investors. The capital may be provided in kind, such as forklift vehicles, or in cash. The business and investors will split the profit, if any, in accordance with the PSR that was reached. According to the Tanazul concept of waiver, it is also acceptable to waive some profit in the company's favour. Given that Sukuks are thought to act like fixed-income instruments, investors would expect to receive the expected periodic profit distribution, say biannually. Both the Mudarabah and the Musharakah do not involve debt-based funding. No party is required to make a set payment in the form of income or profit, and the invested capital is not guaranteed.

​Islamic Finance – Islamic Capital Market – Sukuk Mudarabah 
Mudarabah is a partnership contract whereby one party provides the money and the other provides the management and entrepreneurship skills. The investors, the issuer (which is the company), and the manager (Mudarib), who will oversee the business venture, are all required for a Sukuk structure to collect the required capital. The manager (Mudarib) will not be liable for the loss, unless it was brought on by his negligence or misconduct. These are two additional characteristics of a Mudarabah contract. Neither the capital nor the profit are assured. (iii) the Profit Sharing Ratio (PSR) can be revised with the agreement of both parties. The decision of the investors to forego their right to the profit is based on the principle of Tanazul, a Shari'ah principle that permits one party to a contract to give away his right or entitlement to another party for no consideration. (iv) The capital providers may agree to limit the rate of return, with the remaining amount being given to the manager as an incentive or performance fee.

In reality, the business may issue the Sukuk directly or set up a Special Purpose Vehicle (SPV), being a remote entity, to issue Sukuk Mudarabah to facilitate the partnership between the investors and the manager. An SPV is a company that has been specifically established to retain Sukuk assets, keeping them apart from the issuer's other assets. The assets that an SPV typically holds are held in trust for the advantage of the Sukuk investors. This entity cannot be served with a liquidation order by the issuer's debtors. The SPV was established to safeguard the interests of Sukuk investors. The money received from a Sukuk Mudarabah subscription will be used to pay for the venture's company operations. The business could be in the building, manufacturing, trading, service, mining, or oil extraction industries. The investors will receive the earnings, if any, based on a predetermined PSR. As previously stated, investors may agree to limit their profit to, for instance, 10% of the capital even though the profit is based on a ratio or percentage, such as 1/3:2/3 or 30%:70%. The manager will receive the balance as a performance fee after waiving the rest.

​Islamic Finance – Islamic Capital Market - Sukuk Ijarah is accepted everywhere
Due to the Sukuk Ijarah's representation of ownership rights in non-financial assets, the trading of Sukuk Ijarah has gained widespread recognition. However, this structure does not deserve to be called an asset-backed securitisation. When the originator has a "put option," the asset transfer to the SPV/issuer is not a "true sale," according to the law.

​Islamic Finance – Islamic Capital Market - The dangers of a Sukuk Ijarah
Investors in Sukuk Ijarah assume two types of risk: the market risk associated with the leased asset as well as the originator's capacity to pay the rental. Most Sukuk Ijarah structures have a clause where the originator agrees, under the principle of Wa'd (a unilateral binding promise), to purchase back the leased asset if the lessee defaults on the rental payments in order to address the market risk problem. The price to be paid is equal to the quantity of the outstanding principal (less the future rental payments, which are payable by the lessee). Future rental payments are waived in any case of default because it is against the law to make the lessee pay the rental without providing a matching usufruct or benefit. This provision, known as a "put option," allows investors to "put to the originator" the chance to buy the rented asset at a predetermined formula.