Definition and Characteristics
Commercial papers (CPs) are short-term, unsecured negotiable instruments issued by corporations to raise working capital. They typically have maturities between 1 and 270 days (typically 30–180 days). Commercial papers are a tool for managing short-term liquidity; they are not long-term capital instruments like Sukuk or bonds.
Types of Commercial Papers
Salam-Based Commercial Papers
The issuer receives cash upfront and delivers goods at maturity (per the Salam contract). This is appropriate for companies with commodity inventories or production capability.
Murabahah-Based Commercial Papers
The issuer sells goods at cost-plus-margin on deferred payment terms. The investor (CP buyer) provides capital; the issuer uses it to purchase goods, then sells them to a third party on Murabahah terms. The investor is eventually repaid as the goods are sold.
Istisna'a-Based Commercial Papers
The issuer manufactures goods commissioned by the investor. Payments are tied to manufacturing progress. Upon completion, the investor receives the finished goods.
Shari'ah Requirements for Commercial Papers
- Real Underlying Transaction: The CP must represent a genuine sale, lease, or manufacturing activity—not a mere borrowing of funds for general purposes.
- Asset Existence and Delivery: For Murabahah and Salam CPs, the underlying goods must be real, deliverable, and specified.
- No Gambling or Uncertainty (Gharar): The terms, goods, and delivery dates must be clearly defined.
- Maturity Limitation: CPs are short-term; excessively long maturities may transform them into bonds, which face different rules.
- No Interest (Riba): Returns must flow from the underlying transaction (markup, profit), not from interest calculations.
Trading Rules for Commercial Papers
Commercial papers can be traded in secondary markets, but with restrictions:
- Salam-Based CPs: Cannot be traded until goods are delivered (or a back-to-back Salam is arranged).
- Murabahah-Based CPs: Restricted trading; can be traded at par value, but not at discount (which would resemble interest).
- Istisna'a-Based CPs: Cannot be traded until the manufacturing phase is complete and goods are delivered.
CP vs. Sukuk: Key Distinctions
| Feature | Commercial Paper | Sukuk |
|---|---|---|
| Maturity | Short-term: days to months | Medium-long-term: months to years |
| Capital Purpose | Working capital (short-term) | Project financing or asset acquisition (long-term) |
| Investor Base | Sophisticated, institutional investors | Broad investor base |
| Underlying | Specific short-term transaction | Asset pool or project |
| Tradability | Limited (tied to underlying contract) | Broader tradability (esp. asset-based Sukuk) |
| Use Case | Seasonal financing, inventory management | Long-term capital raising, securitization |