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The project of development of the market of Islamic securities of Kyrgyzstan for financing economic projects Pravitelstva Kyrgyzstan
Material posted: -Publication date: 03-09-2012

A distinctive feature of Islamic securities is that their production is based on the actual underlying bonds the underlying tangible asset or security. Most accurately identified the Islamic securities in the international organization's resolutions on accounting and audit in Islamic financial institutions.

She defines it as certificates of equal value and amount, which is after their issue and placement, a written document confirming the property right of their owners to a share in tangible property, the right of use of any property, services, or extract from it the fruits of any use - usufruct), or giving the right of ownership stake in the project or shares in any investment activity.

1. Islamic bonds and the difference between them

Sukuk – Arabic denotes a financial document (certificate) of equal significance and value, testifying to the ownership of the investor's share in the property (assets), or evidencing the right to benefit from property and cash received as income during the maturity period of securities (sukuk). A distinctive feature of Islamic securities is that their production is based on the actual underlying bonds the underlying tangible asset or security. Most accurately identified the Islamic securities in the international organization's resolutions on accounting and audit in Islamic financial institutions. She defines it as certificates of equal value and amount, which is after their issue and placement, a written document confirming the property right of their owners to a share in tangible property, the right of use of any property, services, or extract from it the fruits of any use - usufruct), or giving the right of ownership stake in the project or shares in any investment activity.

Unlike Skokov, conventional bonds are debt commitment without material support on the basis of the concluded contract where the Issuer is strictly obliged to pay to the holders of the bonds coupon payments in the specified period in percent, and at the end of the maturity principal, that radically distinguishes it from Skokov. Since sukuk gives the inalienable right of ownership in property asset. The sukuk holders are entitled to share the income (revenue) accruing to the property and to divide the proceeds from the sale of property and realization of the asset on the basis of which were released sukuki. That is, sukuki possess properties of two kinds of securities in one, that is properties, as the bonds and the opportunities for ordinary shares. Some similarities of Skokov bonds at first glance, is incorrect. Because the bonds sets forth the obligation to pay interest (coupon) and principal payments at the end of the repayment period. However, sukuk is a certificate that is based inherently on debt relations.

In Islamic law the permanent income or interest bearing bonds are not allowed, so the Sukuk is considered as securities, acting in accordance with the principles of Shariah and its investment principles prohibit the charging or paying interest. These bonds, corresponding to the canons of Islam, can also be divided according to their feasibility and serializenode on the secondary market.


2. Types of asset securitization

On the Western financial markets before it was invented two traditional securitisation, the first type include securitizations that are used for cash receipts under the terms of the contract as collateral when issuing debt financial obligations – bonds (securitization receivables). From the point of view of the Issuer, this process transforms illiquid assets such as loans, mortgages, into tradable (liquid) on the bond markets. This is done by grouping illiquid assets with similar parameters and issue securities backed only by a pool of assets, the owners of these assets for the purpose of obtaining additional funds or eliminate illiquid assets from its balance sheet.

To the second variety belong securitization backed by assets (asset backed) securities secured by a pool of assets not involving a direct loan from investors by issuing securities, and based on the actual sale of a specially created asset management company (SPV [1]), with limited period of existence. “Valid sale” (True Sale) of assets enables one party to transfer the costs of those assets owned by the other party if the issuance of securities, preventing from conflict of interests in case of bankruptcy (bankruptcy remoteness) and shrinks from the risk of loss for the company and investors. In a traditional securitization, asset-backed, there are certain conditions in the process of the actual sale of assets. The Issuer or SPV (special management company) later after the transfer of assets to issue securities, the proceeds from which are used to form the reserve for the purchase of these assets. Overall this is a very convenient mechanism for the issuance of the bonds, where the purchase of assets by formed from the emission of the Fund (pool) of cash and its transfer to a third party (SPV).

Periodic payments to investors in such a mechanism of issue of debt securities mainly are from direct or indirect cash flows (cash-flow) of the asset. For example, it can be as tangible assets such as buildings of hospitals, energy facilities, and intangible, in the form of a future cash receipt or right to use any intellectual property. But in any case, these assets must be able to generate cash – its cash-flow, as investors (holders of securities) for the purpose of obtaining the returns become the subscribers of these securities. Another characteristic feature of the securitization, asset-backed (asset-backed) to highlight the lack of mutual rights filing requirement from the SPV management company to the entity (originator) that combines debt obligations into a pool. The person (originator) is typically an investment Bank, working with the Issuer on the first stage of the preparation of the securities issue.

The aforementioned securitization, if she was provided with no tangible assets and only accounts receivable (i.e., the expected amounts of income to be received in the future), has some problems and contradictions from the point of view of Sharia. As in the procedure “valid sales” of assets SPV investment Bank-the management company/Issuer to sell debt that causes controversies and contradictions with certain principles of Shariah. However, as shown by the chain of crises in the financial markets of the West, these principles were not followed when the debt of U.S. banks from mortgage transactions easily sold as collateral for the issuance of such bonds, and that was the main reason for the collapse of markets for mortgage bonds.

That is why the Islamic financial market has introduced the world to the third type of securitization, which had never happened before. This kind of securitization is fundamentally different from securitization of the first type (securitization of receivables), and has similarities in some respects with the securitization, asset-backed. It is called the securitization-based asset (asset-based sukuk), or Islamic bonds. As sukuki (Islamic bonds) asset-based (asset-based) does not imply any financial (debt) obligations with the Issuer, e.g. to pay the coupon interest income, allowing the holders of sukuk become equal participants in a share of the asset. And the ability to generate revenue and receipts from tangible (physically present) of an asset, such as building hospitals and homes, makes her look like a securitization, asset-backed, invented out of Western financial markets.

The variety of sukuk, which reflects fully all the advantages of Islamic securitization, Sukuk called Ijara (lease ending with Sukuk), which is widely used in many countries of the world. Ijara means the same lease, that is, the contract that is used in the scheme of securitization for issuing this kind of sukuk. Tenant leasing in the issuance of these sukuk is becoming a company or the Government need additional funds to develop their projects and thus becomes the buyer of these tangible assets (buildings) in the maturity of Islamic bonds, which is recorded in advance in the contract. In the agreement on sukuk issuance is a condition that gives the right to buy the asset at a previously fixed in the contract price. But here we need to make this consistent with the market price, not nominal price of securities. Since in this case it will correspond to the traditional criteria (asset backed) securitization, where there is a sale of assets to a third party. This estimate of the asset at market value allows both sides as an investment company (originator) and SPV/Issuer to share market risks associated with the valuation of assets.

Consider the diagram given in the figure all the stages in the production of IP-Islamic bonds sukuk-Ijara carried out by for example Governments to PTO Russia:

Stage 1:stage assets sold to SPV buys the assets (land) (1) Assets purchased by the SPV are asset as collateral for sukuk issuance, provide also the right of ownership in the asset and the acquisition of benefits on leasing (2) - the Government receives funds from the placement of sukuk (4)

Stage 2:leasing leasing (Ijara) - SPV company leases leasing to the Government for a certain limited period (5) - SPV company collects the rent (6)

Stage 3:the stage before the end of maturity sukuk certificates - SPV company reports rental income to the sukuk holders as periodic (coupon) payments (7)

Stage 4:At the end of the maturity of sukuk - the SPV sells the asset (built property) at an agreed price (8) - Government pays cash to SPV company (9) the company SPV simultaneously pays investors cash in redemption of the sukuk certificates (10)

Thus, the scheme of issuing sukuk-Ijara shows the advantages and flexibility of the financial structure unlike conventional securitization, where as often there is no tangible asset that is taken to ensure the bond issue. Since debt does not provided many of the traditional issues of bonds in the event of failure of projects have the danger of education the effect of “financial bubbles”. As well as the Islamic principles of financing rely in its activities only on the guarantee of the Almighty, there is no guarantee that the proceeds from the bond issue in the form of a fixed coupon yield. This allows us today to consider the market for Islamic bonds among the most secure and liquid instruments to invest with medium and long circulation period.


3. Sukuk as a reliable way of financing Government projects in Kyrgyzstan

Contrary to all expectations Kyrgyzstan is a willful defaulter and a debtor in its international financial obyazatelstva, not knowing how advisable to use these financial resources which supplied the country for 20 years. The reasons are very trivial. Not for the state to provide competent management of the projects which are supposed to generate revenues after their implementation. The lack of a competent professional managerial approach in implementation of gold mining projects, and hydroelectric projects prevent from the beginning to the end of the final stage of commissioning of the major projects in the country, which are a tidbit for foreign investors and that could bring income to the budget of Kyrgyzstan directly. Take gold mining, having considered a failed agreement with Tsenteroi, you receive a lot of questions about how to spend the revenues from Kumtor to develop this Deposit. Not only that, the agreement was signed at the expense of economic interests of the state, it put the country on a gold needle. The country's leaders do not have courage to part with Tsenteroi even if the agreement was signed at the expense of its budget, at the same time does not understand the Government what it will do if you nationalize Kumtor, so many turning a blind eye to economic harm from the export of the precious metal, which is a flagrant example of the export of capital from poor countries into economically developed country of the West, so the country's leaders allow further operating Centerra in Kyrgyzstan.

The proposal of the Government of the KYRGYZ Republic in response to this situation, investment policy:
1. First, you must break up with the Soviet mentality that Kyrgyzstan is a poor country in need of financial resources of the sea and investment from abroad, which in the country. For 20 years there-the guy in the Kyrgyz Republic the export of capital abroad has reached unprecedented levels, the situation saved only by the remittances of labor migrants, who annually remit the amount of component of about 1 billion dollars, that allows to stabilize the financial condition of citizens and the financial institution of Kyrgyzstan.

2. You must understand that investors are not only Zara-beige, but also in the country. Our citizens have an indispensable financial resources, which can participate in ambitious projects in the country. Financial literacy of citizens should be an integral quality of every citizen of Kyrgyzstan, he should be able to open a Bank account, invest in shares and other securities, deal in basic banking products, medicines-ish and pension insurance.

3. If the state is a bad owner shall allow to restore order in the area of private property by creating a fair and honest rules of the game. Also the government should recruit its personnel the highest number of young metal hedgerow and experts in the field of Finance and economy, it can be also specialists from neighbouring States, ethnic Kyrgyz people living and studying abroad, (such as Xinjiang, Tur-tion, Pakistan, Russia, Europe, USA) it is necessary to offer them the quality of the resettlement program, an easy-to-obtain Kyrgyz citizenship). These shots should to become the backbone of two major state holding companies that would control state assets state's largest industrial enterprise of Kyrgyzstan, including zolotoreva company). This personnel policy will allow you to keep this area out corrupt relations and outside political intrigues, and division of spheres of influence, as citizens and experts coming for example from China, will be per-new turn to put the interests of corporate and state, and not tribal or any political party.

4. As the company have the country shaken by scandals not seen early, it becomes clear that all is not well in this area. Shareholders hold regular and special meetings, elect and remove the presidents, governments intervene (or not intervene), calms, utracet situation. And all this against the backdrop of constant new reports of theft and corruption in state-owned companies.

Financial analysts argue that there are gross violations adopted at the legislative level the norms of corporate governance. They see a way out of this situation through the creation of state holding for management of state assets.

For this purpose it is necessary to take measures to legitimize these processes. Given the situation in the first hol-Ding should be concentrated in strategic company, which as the locomotive can pull the entire economy of Kyrgyzstan – Kyrgyztelecom, the international airport "Manas", the National electric grid of Kyrgyzstan, electric power plants, "Severelektro", "Bishkekteploset", "RSK Bank", "Ayilbank", "alpha-Telecom" and others.

5. The second state holding it is proposed to create from pre-formed by Kyrgyzaltyn. This is necessary for the development of large-nogo state mining holding, which also owned all the major assets in this area, including existing assets of Centerra (33%), as well as other fields and large buildings and institutions, including solitairebala companies and laboratories (including the Kara-Balta solitairebala around the plant, you must cancel all agreements for the sale of the company and the shares of the Russian state company Renova, and return the plant to it was not). Management should consist of young specialists financiers, lawyers, stamp experts and economists that are trained and have received a quality foreign education abroad. In the "Kyrgyzaltyn" IU-the management and accounting should conform to international standards of otchetnosti, and demonstrate corporate governance. For these purposes it is necessary to carry out the Rebbe-rending of the holding company and its subsidiaries that will allow the company to create the image of a reliable international company with great experience.

6. The next step in the transformation of the holding company Kyrgyzaltyn should be the formation of a public-private partnership che-RES partial transfer of ownership through sale to the market share of the company's shares, but a controlling stake in AK-tion must possess a state with so-called "Golden share". Chairman of the Board of Directors of the holding company should be a person appointed by the Government and approved by Parliament CU.

7. After an international audit of the holding CERGY-saltin, it is necessary to proceed to stage major issue Islamic securities - sukuk for implementation of further projects in development and production of minerals have been discovered in Deposit Kumtor, as well as to implement other projects in the other place-births, and in the construction of real estate. The issue is-Islamic securities - sukuk certificates will be issued for 5, 10, 15 years and posted under the provision of existing assets (for example, parcels of land, buildings, equipment and shares of Centerra 33% ). That is, the population will have the opportunity to buy certificates sukuk, which will be a valuable paper - evidence certifying the ownership share of the assets of KZN. Placement of Islamic securities under the guarantee of the Government of the KYRGYZ Republic will have a broad geographic coverage and high rating, because sukuki secured by the assets of Kyrgyzaltyn under the guarantee of the Government of the KYRGYZ Republic will be highly liquid financial instruments. Accommodation may be on the trading floors of Luxembourg, offshore Labuan (Malaysia), and in Bahrain and other Middle East countries.
Placement and allocation among investors in global markets for these certificates must be in the ratio of 51% the middle East-current(Bahrain), 30% Kyrgyz,15 % Southeast Asia (Malaysia),4% USA and Canada.


4. The need for legislative changes for the introduction of Islamic financial instruments in the banking and financial system of the Kyrgyz Republic

For adapting the legislation of the KYRGYZ Republic in order to implement the above-mentioned financial instruments and for the overall securities market development BU-the magician of the Kyrgyz Republic, recommended the following changes in the legislation of the KYRGYZ Republic:

1. Since the Kyrgyz Republic has a legal framework for the functioning of a traditional financial institution and banks, but also at the state level have already been adopted relevant changes in legislation for the functioning of a parallel Islamic banking institution then it is possible to speak of a dualistic model of the financial system pursued by the state in the construction of its financial market. For the dualistic model of the financial system of such countries as Malaysia, Bahrain and Kyrgyzstan characterized by the following features:

  • Vmeshatelstvo public and political support of Islamic banks and other Islamic financial institutions.

  • Parallel operation of conventional and Islamic financial sectors.

  • A special law regulating the activities of Islamic financial institutions. But at the same time, Islamic banks and insurance companies operate within the legal field with traditional banks and insurance companies.

  • The liberalization of the capabilities of the traditional banks and insurance companies offering Islamic financial products through Islamic "Windows" in banks.

2. Thus the law of the Kyrgyz Republic "About National Bank of the Kyrgyz Republic" of 29 July 1997 N 59 should be changed as well as the LAW of the KYRGYZ REPUBLIC "ON banks and banking activity in the Kyrgyz Republic" in the part describing the concepts of Islamic principles of financing. It is recommended to remove from this law, these concepts, and incorporate them into a newly created law. These changes are needed because the current legislation to this day there is no separate specific law regulating the activities of Islamic financial institutions.

3. It is necessary to adopt a law regulating the market of Islamic bonds (sukuk), which clearly will be installed authorities responsible for the development of this sector of the financial market and the bodies that will carry out the analysis and regulation of this market. Also, the law should give special importance to the SPV companies, their statuses, which should be provided to tax trade and other preferences for their operations. Because the status of the SPV company and the tax regime applicable to these companies should be attractive for foreign invest-ment banks, you must provide the best tax-ries, administrative and investment conditions among all countries of the world. This is done to encourage and create such company, which are essentially engines of market development of the Islamic bonds.

From the point of view of the legislation of the KYRGYZ Republic the adoption of these principles of financing may not cause much difficulty, because the law in this area has long existed in many countries of South-East Asia and the West. The need for the creation of large state agencies or regulators for the implementation of these financial instruments. Since the existing financial Supervisory agencies can take some specific functions for regulation and development of the market for sukuk bonds. Also for coordination and approval of the issuance of Islamic bonds and monitoring their compliance with the principles of Shariah there are official religious institutions of the Kyrgyz Republic. Their possible role in CU will be decisive in issuing Islamic bonds, so it is advisable to establish at DUM CU Board of Shariah judges and lawyers, and granting them the relevant powers to review and approve such financial instruments.

For the operation of all laws in the KYRGYZ Republic, whatever they seemed perfect, not only their adoption. More important is their implementation by the state for popularization and introduction into practice of financial institutions. For these purposes, should be created a policy to support and promote financial literacy. In particular through the establishment of a higher educational institution for training specialists for the industry and the transformation of private television broadcasters (e.g. channel 5) to TV channels entirely dedicated to business, financial markets and financial literacy of the population.


[1] SPV company is a specialized division, a specialized subsidiary company (a division or subsidiary established to perform any task and usually have a limited period of existence; for example, a unit for controlling the gradua-com of certain securities). This unit is specially created for the purpose of issue of securities and to ensure the independence of the Issuer from the debtor for the obligations.

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