88 Islamic Finance in Practice
and with the investors looking to the revenues and returns generated by the
assets as being their sole payment source. This is the classic conventional
securitization model. Mostsukukhave involved investors acquiring assets
but, in reality, the main focus of the investors has been on the credit
worthiness of the party that issued an undertaking to purchase the assets
from the investors if, for example, there was an event of default. This meant
that oftensukukhave been asset backed, rather than asset based. The
recent statement issued by AAOIFI (Accounting and Auditing Organization
for Islamic Financial Institutions) has, however, raised concerns about the
use of such undertakings in certain circumstances.^1
The Tamweel issue did not have this type of purchase undertaking. The
commercial objective of the originator was to ensure that the pool of assets
that it was disposing of would become off balance sheet; having any form of
contingent liability through a purchase undertaking issued by the originator
would, therefore, not be acceptable. It should also be noted that when one is
structuringsukukon a securitization basis and in particular where sukuk
are to be rated, the rating agencies will also want to see a true sale legal
opinion that will clearly establish that title to the assets has passed to the
investors with no recourse back to the originator (other than in limited
circumstances, such as misrepresentation). Accordingly, structuring the
issue to be non-recourse to the originator (other than in very limited
circumstances) met the requirements not only of the customer but also the
rating agencies and also fellwithin Shari’a parameters.Multi-tranches
It is customary with a conventional securitization for there to be different
classes which will be paid differing returns and which have different
priorities. The challenge in structuring the transaction was that this seemed
to be against Shari’a principles, which require that all investors should be
equal. The Shari’a advisers undertook a significant amount of research and
concluded that the issue could be structured in such a manner because it
was possible for the investors to agree to subordinate their interests so that
different classes of investors obtained differing returns and at different(^1) Statement relating tosukukissued in February 2008. The fourth paragraph states: “It is not permissible
for themudarib(investment manager),sharik(partner), orwakil(agent) to undertake to re-purchase the
assets fromsukukholders or from one who holds them, for its nominal value, when the sukuk are
extinguished, at the end of its maturity. It is, however, permissible to undertake the purchase on the basis
of the net value of assets, its market value, fair value, or a price to be agreed, at the time of their actual
purchase, in accordance with Article (3/1/6/2) of AAOIFI Shari’a Standard (12) on Sharikah (musharaka)
and Modern Corporations, and Articles (2/2/1) and (2/2/2) of the AAOIFIShari’aStandard(5)onGuarantees.
It is known that a Sukuk manager is a guarantor of the capital, at its nominal value, in case of his negligent
acts or omissions or his non-compliance with the investor’s conditions, whether the manager is amudarib
(investment manager),sharik(partner) orwakil(agent) for investments. In case the assets ofsukuk of al-
musharaka,mudarabah,orwakalahfor investment are of lesser value than the leased assets of “lease-to-
own” contracts (ijarah muntahia bittamleek), then it is permissible for thesukukmanager to undertake to
purchase those assets – at the time thesukukare extinguished – for the remaining rental value of the
remaining assets; since it actually represents its net value.”