Islamic Capital Markets 113
for short-term securities such as the Salam-based quarterlysukuks issued
by government of Bahrain.
The second class of assets are those that generate periodic returns.Sukuk-
based structure provide longer term maturity, tradability and negotiability
to investors. For instance, as noted above,sukuk al-ijarais based on leasing
transaction and bears the closest resemblance to a conventional lease
contract and offers flexibility of both fixed and floating-rate payoffs. The
cash flows of the lease including rental payments andprincipal repayments
are passed through to investors in the form of coupon and principal
payments. Since the asset that is the subject matter of theijaracan be
traded at market value, thesukukcertificate representing a beneficial
interest in such asset can also be traded at market value. The premium or
discount that is given for thesukukcertificate therefore represents the
changes in the value of the underlying asset. Similarly the structure of
mudarabaandmusharaka sukuks allow for tradability as well as fixed or
floating coupon payments.
Rating of sukuks
Most of thesukuks issued have not been rated, other than the larger issues
in the last few years and many of the sovereign issues. This has been due to
the cost both in terms of time and expense as well as the fact that technology
to rate thesukuks have taken time to develop. A key issue that has now
been understood is thatsukuks do not represent entire new asset class and
are similar to existing securities that employ the existing legal and financial
tools to create securitization structures that are alsoShari’a-compliant. In
general rating agencies do not take into consideration the extent to which
thesukukis Shari’a-compliant as long as adequate disclosure is made in the
offering circular. For instance in certainsukuks based on themudarabaor
musharakamodels, Shari’a scholars have insisted that periodic review be
undertaken of thesukuksto ensure that the funds are being used in Shari’a-
compliant manner. This requirement adds a risk that during the period of
thesukuk, the Shari’a scholars may declare that thesukukis no longer
compliant. Such a declaration would not result in a default and hence lead
to early redemption unless stated in the terms of the issue. Only the Islamic
investors would be affected in that the income generated from non-Shari’a-
compliant investment has to be given over to charity.
International rating agencies, such as Moody’s, tend to look through the
Shari’a structure and categorize thesukuks into:
- asset-backedsukuk, for which the ratings are primarily dependent on a
risk analysis of the assets; and
- unsecured (repurchase)sukuk, for which ratings are primarily dependent
on the risk-rating of the borrower.
