IFB Hosting First Capital Market Manfa’ah Sukuk Underwriting

Wednesday, 7 March 2018

According to IFB Product Development Department, Government has raised IRR 30 trillion by issuing the first in kind Manfa’ah sukuk in Iran, to finance principal & interest repayment of previously issued Sovereign Sukuk back in 2017 which are going to be matured soon.

The expected yield for this instrument is 20 percent with semi-annual coupon payment and it will mature in 3.5 years. Moreover, the actual yield is capped at 20.1% while floored at 20%.

To be further familiarized with Manfa’ah sukuk refer to following explanation.

What is Manfa’ah Sukuk?

Manfa’ah sukuk is a type of Islamic financial instrument which involves the sale of future revenue stream of a company to investors. Using this instrument, operating companies which have reliable revenue to be derived in the future, can issue debt securities backed by those expected cash flows to manage their current liquidity needs or to expand their business. Such future receivables are expected to be generated in years to come and through normal course of operations or investments.

While this instrument is Shariah-Compliant according to SEO’s Sharia Board, its concept is very similar to that of securitization in western finance.

Securitization is the process of pooling illiquid financial assets such as mortgages and loans as contractual debt assets or operating and non-operating revenues as non-debt assets and selling their related cash flows which will be produced in future to third party investors as securities.

Although owners of Manfa’ah sukuk can be construed as owners of future receivables of the originator, they can also be future owners of predetermined services or benefits of some durable assets which belong to the originator. This second form of Manfa’ah sukuk is suitable for investors looking for that service in future, but at a lower price with a coherent investment opportunity.

The yield for this sukuk can be initially estimated in the contract. Coupons, if any, will be paid based on this estimated rate. At maturity, the company who originated the sukuk will precisely determine the realized cash flows and subsequently specify the final yield. If that is higher than what it was estimated at the contract, the difference will be paid to investors by the company. Meanwhile, the nominal price of the Manfa’ah sukuk will as well be redeemed to investors at maturity.