Designing an Appropriate Model for Issuing General Murabaha Sukuk with Floating Rates

Introduction and Objectives: Murabaha sukuk (Sukuk al-murabaha) is a type of Islamic financial instrument used by the government of the Islamic Republic of Iran for various financial purposes. According to the definition provided in the guideline of issuance on Murabaha, these sukuk serve as securities that represent ownership of debt acquired through a Murabaha contract. A key difference between general Murabaha and standard Murabaha is that, in general, Murabaha, the goods or services intended for purchase are not acquired in advance and are not facilitated by the  financial institution.
The consistency of profit presents a significant challenge in evaluating general Murabaha, which reduces its appeal. In recent years, high inflation rates and fluctuations in interest rates have increased the demand for capital, making it unsuitable for available resources. Paying interest based on a market index (such as the interbank rate or inflation) can
lead to inflated purchasing rates. In contrast, governments in other countries have adopted fixed-rate purchases to improve their performance and implement monetary policies.
Research Method: The goal of this article is to identify a suitable model for determining the yield rate in Murabaha transactions. To achieve the paper's objective, the study first identified parameters for evaluating suitable models through expert opinions and an analysis of international practices. The indicators identified included applicability for services, consumer goods, and capital goods; the potential for utilizing all funds generated from sukuk issuance; Shariah acceptability; and the ability to link returns with various indices. Based on these indicators, we evaluated our models.
This study utilizes library research to explore different flotation models for Murabaha sukuk, analyzing them from both Shariah and operational perspectives, and aligning them with established criteria. Two focus groups were formed to assess these models: the first concentrated on operational aspects, while the second focused on Shariah onsiderations.
Results: The proposed models for floating returns in Murabaha sukuk were categorized into four groups: models based on debt adjustment, models based on gradual transactions, excess interest payments in the form of gifts, and utilization of investment funds.
Considering the adjustment models, three specific approaches were designed and analyzed: adjustment within the contract, application of a discount method, and inflation compensation conditions. In these models, Investors' debt is adjusted based on the index.
Adjustment within the contract refers to modifying the price ratio in the Murabaha contract. While this method is operationally efficient, it has not received favorable evaluations from scholars. The discount solution is applicable in the Sharī'ah perspective; however, significant increases in the index may hinder the ability to pay interest according to the capital reference index.
Scholars have noted that the inflation compensation condition has not been widely endorsed and has faced numerous challenges. Investigations indicated that our view supports pre-due compensation based on the principle of action and the necessity of post-due compensation. Furthermore, this approach allows for transactions only when the return exceeds inflation.
In the gradual transaction models, three distinct frameworks were identified: gradual Murabahah, Salaf and Murabaha, and Murabaha with guaranteed loans.
In the final profit model, the originator procures the necessary raw materials on behalf of the investors and sells them on credit, incorporating a predetermined profit margin. This model allows for bulk purchasing of materials, with pricing determined by prevailing inflation rates and daily interest rates in the secondary bond market, facilitating profit negotiations.
The Salaf and Murabaha model involves the originator acquiring all assets as a proxy from the original owners over multiple independent sukuk, subsequently selling the goods at specified intervals. The sale price in the second transaction is determined by a reference rate.
In the Murabaha with guaranteed loans model, the originator initially purchases all goods as a proxy from investors. These goods remain on loan with the buyer, who, at payment intervals, acquires a specified quantity at an agreed price through a Murabaha sale, with the remainder provided as a secured loan. Ultimately, the buyer gains full ownership of the product by the end of the contract.
Although these models are Shariah-compliant, their practical implementation is fraught with complexities that hinder effective execution and monitoring.
The third model involves paying excess interest in the form of a gift. In this scenario, the originator collects funds, purchases desired goods and services and subsequently sells them on credit to themselves in a mutually beneficial transaction. The Murabaha rate for these goods is set at the base rate, with the originator committing to compensate investors for the difference between the Murabaha rate and the target index, in addition to regular Murabaha installments. Previously, the Shariah Committee of the Securities and Exchange Organization recognized the adjustment of contractors' debts to the government based on a specific index as a matter of good faith and legal obligation. Consequently, in inflation-proof Murabaha sukuk, excess interest may be disbursed to investors by legal obligations tied to the designated index. This model has been evaluated and found to pose no Shariah issues, meeting all efficiency criteria.
In the last model, after gathering funds from investors, the originator purchases goods and services on their behalf, selling them at a higher price. Part of the resources are utilized for Murabaha operations, while the remaining funds are invested in a managed fund. The Murabaha rate mirrors the base rate in floating sukuk, with the originator required to cover the difference between the Murabaha rate and the reference index during each payment period. Although this model does not present legal challenges, it suffers from the limitation of not securing all funds for the government upfront, alongside complications in its execution.
Discussion and Conclusion: Two focus groups were convened to identify the optimal model for interest rate flotation in government sukuk. The first group, which focused on implementation aspects, recognized the models of excess interest payments in the form of gifts and contract adjustments as suitable. However, the second group, which evaluated Shariah aspects, did not endorse the contract adjustment model. Ultimately, the method of paying excess interest as a gift was affirmed as an appropriate mechanism for floating interest rates.