Islamic Capital Markets 105
Sukuk
The idea behindasukuk(popularlyknownasanIslamicorShari’a-compliant
“bond”) is simple. Prohibition of interest virtually closes the door for a pure
debt security, but an obligation which is linked to the performance of a real
asset is acceptable. Shari’a prohibits earning returns from loan contracts
upon which returns are based on interest. For instance, conventional bonds
and other derivative instruments that rely on profiting holders by providing
returns based on interest are unavailable to Muslims. In order words, a
financial instrument that derives its returns from the performance of a
tangible or even intangible asset is acceptable under Shari’a.
The wordsukukis derived from the Arabic wordsak, which is literally
translated as “written document",ora more commonmeaningof“certificate",
and reflects participation rights in underlying assets. In Islamic finance the
concept of securitization is what is known in Arabic as “taskeek”, that is the
process of dividing ownership of tangible assets, usufructs or both into units
of equal value and issuing securities as per their value.
The creation of Islamic financial securities can be done in two distinct
ways:
- Direct structuring of securities; and
- The process of asset securitization.
Direct structuring involves the initial issuance of securities, and the funds
raised will be used to fund certain assets/projects with the client company.
The profits generated from these assets/ projects are then distributed
amongst security holders. The opposite to direct structuring is asset
securitization, where existing assets of the client company are identified,
pooled, and then securitiesare issued against them.
There are many structures that can generate the revenue paid tosukuk
holders. Mostsukukissuances to date have been wholly asset-based rather
than asset-backed; this has an impact on their ratings. In an asset-based
sukuk,sukukholders rely for payment on the company seeking to raise
finance (the originator), in the same way as they would under a corporate
bond issue. In an asset-backedsukuk,sukukholders rely on the assets of
thesukukfor security. More importantly, in an asset-basedsukuk,the
market value of the underlying assets has no bearing on the redemption
amount as this is fixed at the outset when the relevant undertakings are
agreed. More recently, the market has seen issuances with a mix of cash and
assets, and in several cases,sukukshave been issued for a new business
with no tangible assets. The issuances of convertible and exchangeable
sukuksare more recent developments.
The modern form ofsukukis an asset-backed trust certificate. In its
simplest form,sukukis a trust instrument with thesukukholder having
beneficial or legal ownership of the trustassetoritsusufruct.TheAccounting
