96 Islamic Finance in Practice
mudarib(an investment manager) to invest on their behalf pursuant to a
business plan and feasibility study. It is critical for Shari’a compliance that
themudaribis entitled to a share in the profits rather than a flat fee. A
mudaribcan also be paid an incentive fee.
Any losses would be borne by therabb al-maal,unless they were caused
by the negligence or default of themudarib.Amudaribshould produce a
business plan and a feasibility study and these are likely to be important if
any losses were suffered because, while themudaribcannot be required to
guarantee profits or a return, if the business plan and/or the feasibility
study were negligently prepared and losses subsequently suffered, they
could be used in evidence against themudarib.
Inthecontextofsukuk,therefore,theinvestorsacquiringsukukcertificates
would pass their funds over to themudarib, which would likely be the
originator or a group company. The business plan would call for the funds to
be invested in projects which would in fact be the projects/buildings/assets
that the originator required to be financed.
The return to thesukukcertificate holders would be based on the profits
and revenue stream generated by the assets that are being acquired and
funded as part of themudarib’sbusiness plan. In the structures to date
there have also been undertakings from themudaribto purchase the
investment of thesukukcertificate holders for an amount that enables them
to recover the balance of their outstandinginvestments.Recent issues arising out of the AAOIFI statement
on Sukuk^1
AAOIFI (Accounting and Auditing Organization for Islamic Financial
Institutions) is not a statutory industry-wide body, but is an organization
based in Bahrain in which leading Shari’a scholars participate in order to
resolve issues and try and reach agreed settled positions.^2 AAOIFI’s
statement onsukukwas issued due to various concerns being expressed
about some techniques that had been used in the structuring ofsukuk.
These concerns related in particular to:- The use of liquidity facilities in order to ensure thatsukukcertificate
holders received timely payments, even if the assets were not generating
sufficient income to pay them^3 ; and
(^1) AAOIFI is based in Bahrain. It has issued numerous standards relating to Islamic financial products,
including a statement in relation tosukukthat was issued in February 2008.
(^2) In Bahrain, however, where AAOIFI is based, it does have a statutory standing. The Central Bank of
Bahrain Rulebook has various relevant provisions. Rulebook HC-1.3.15 provides that there should be an
independent Shari’a Supervision Committee for a regulated Islamic financial institution complying with
AAOIFI’s governance standards for Islamic Financial Institutions No. 1and No.2 and Rulebook HC-1.3.16
provides that all Islamic banks must comply with all AAOIFI issued accounting standards as well as the
Shari’a pronouncements issued by the Shari’a Board of AAOIFI.