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Glossary

Murabaha Sukuk

Category — Islamic Finance
A Murabaha Sukuk is based on Murabaha contracts, they are instruments issued to finance the purchase of a Murabaha commodity, this Murabaha commodity becomes owned by the Sukuk holders.

Characteristics of Murabaha Sukuk:

1. Sharia-compliant financial instrument.
2.A Istisna Sukuk is not tradable. The issuance of Murabaha Sukuk is possible only on the primary market, while trading them in the secondary market is considered contrary to Sharia.
3. The issuer of Murabaha Sukuk is the seller of the Murabaha commodity.
4. Sukuk holders are the buyers of the Murabaha commodity, they own the Murabaha commodity and deserve the price upon the resale of the commodity.
5. The Murabaha commodity is in the ownership and possession of the issuance manager (the financial institution) as an agent for the Sukuk holders, Sukuk at this stage represents a share in this commodity.
6. Sukuk holders bear the property risk (risk of damage to the property) until the Murabaha commodity is sold.
7. In a Murabaha Sukuk contract, the SPV can use the Sukuk holders’ capital to buy an asset and sell it on the basis of cost-plus profit margin (the obligor pays on a deferred payment basis).

Advantages:

1. It has limited risks for investors.
2. It has high flexibility in determining the repayment period.
3. It is fully possible to know the profit and when it will be realized.

Disadvantages:

Since Murabaha is a debt-creating transaction, the Murabaha Sukuk is not tradable except at par (because debt cannot be traded from the perspective of the Islamic Sharia).
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