Sukuk, TFC or Money Market: A Family Office's Rs 250 Million
A family office in Islamabad has Rs 250 million to deploy for an 18-month horizon. The mandate is Shariah-compliant and prioritises capital preservation, with liquidity needed in month 18 for a property payment. The advisor is comparing three options: a 3-year Musharakah Sukuk issued by a sugar company with an expected profit rate of 10.5% and no credit rating; a 5-year conventional TFC from a leasing company paying 3-month KIBOR plus 300 bps; and an Islamic money market fund with an indicative yield of 8.9% and daily redemption. The client likes the Sukuk because the sugar sector is 'booming' and wants 40% there; the client's cousin, a bank relationship manager, recommends the TFC because 'the bank's Shariah board approved the bank's Islamic window'. The client also wants to keep 25% in cash for flexibility. The advisor must recommend an allocation and explain the risks in plain language.
1. Compare the three options for an 18-month Shariah-compliant, capital-preservation mandate.
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Sukuk. A Musharakah Sukuk is a partnership interest, not a loan. The 10.5% is an expected profit, not a guaranteed coupon; if the underlying sugar project underperforms, the return can be lower or zero. The issuer is unrated, so credit risk is significant. A 3-year maturity against an 18-month liquidity need creates duration and secondary-market risk; the investor may have to sell at a discount.
TFC. The TFC pays KIBOR plus 300 bps, which is interest-based and generally not Shariah-compliant unless it is a specifically structured Islamic instrument. It also carries credit and rate risk. The cousin's statement that the bank's Shariah board approved the Islamic window does not make a conventional leasing company's TFC compliant.
Islamic money market fund. It offers daily redemption and diversification, which fits the 18-month property payment, but its yield is indicative and the NAV can fall. For a capital-preservation mandate with a hard liability date, liquidity and credit quality matter more than headline yield. A suitable starting point is a large money market allocation, a limited Sukuk position only if the credit and exit liquidity are acceptable, and no TFC.
2. The client instructs that 40% be placed in the TFC to boost return, arguing that the bank's Shariah board has approved the institution. How should the advisor respond?
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Separate entity from product. A Shariah board may approve a bank's Islamic window, but each product needs its own approval and structure. A conventional TFC paying interest is not made compliant by the issuer's or distributor's general reputation. The advisor must not describe it as Shariah-compliant.
Suitability. The client's 18-month horizon and capital-preservation objective argue against a 5-year credit instrument. A 40% allocation would also concentrate credit risk in one leasing company. The advisor should explain the conflict between the client's stated Shariah mandate and the TFC recommendation, show the income difference but also the risk, and offer compliant alternatives. If the client still insists after a documented discussion, the advisor should decline to execute the TFC as part of a Shariah mandate or obtain a formal waiver and separate mandate. The advisor cannot let a cousin's recommendation substitute for product-level due diligence.
3. If the Sukuk is unrated and 3-year but the client wants 35%, how should the advisor analyse the concentration and liquidity mismatch?
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Mismatch. A 35% allocation to an unrated 3-year Sukuk is too large for an 18-month liability. The client may be forced to sell before maturity in an illiquid market. Credit risk is undiversified and there is no rating to anchor an independent assessment. The sugar sector's 'boom' is not a substitute for cash-flow analysis of the issuer.
Possible approach. Reduce the Sukuk to a size the client can hold without jeopardising the property payment, or find a shorter-dated or rated Sukuk. Obtain the offering document, asset structure, obligor financials, security and maturity profile. Stress-test a 10-15% price fall and a delayed sale. Keep the property money in the money market fund or short-dated Islamic instruments. If the client wants the higher return, explain that it is being earned by taking credit and liquidity risk, not by a better Shariah structure.