114 Islamic Finance in Practice
In the first case, key securitization elements need to be present in the
structure to ensure that thesukukholders have beneficial title to the assets
and in case of default enforce their security over such assets. Although the
originator of thesukukis responsible for the periodic payments and the
redemption price, default situations would provide senior security over the
underlying assets. The rating agencies would look at the legal enforceability
of the title to the asset and the liquidation procedures in the jurisdictions
where the assets are placed. Even if the original borrower becomes insolvent,
thesukukdoes not default. The rating for suchsukuks is normally higher
with corresponding lower costs although the legal structures are often more
complex.
In the second case, the title to the underlying assetsmay notbeenforceable
since these will not be in the name of the Issuer but in the name of the
managing agent or partner. Thesukukholders are primarily reliant on the
credit worthiness of the originator to perform under the agency/ partnership
agreements and the obligations entered into under the purchase undertak-
ings. The asset performance does not affect thesukukperformance but
rather the borrower’s undertaking to repurchase the assets at maturity at a
redemption price that is equivalent to the face value of the certificates
outstanding. The fact that such an undertaking is provided alters the credit
risk of thesukukstructure. Thesukukholders in such situations rankpari
passuwith senior unsecured creditors of the borrower. The rating assigned
is therefore that of the borrower.Current issues with the sukuk structures
There has been considerable publicity as to non-Shari’a compliance of the
sukukstructures. This controversy arose as a result of a discussion paper
issued by an eminent Shari’a scholar−Justice (retired) Mohammed Taqi
Usmani, the chairman of the AAOIFI Shari’a board. In his discussion paper,
he highlighted the fact that Shari’a-compliant structures such asmudaraba
andmusharakaare essentially used for equity investments and not for
raising debts. Debts can be raised by use ofijara,murabahah,salamand
istisna’amodes of financing. In the case ofmudarabaandmusharaka, the
investor takes the full performance risk of the investment. He questioned
the widespread use of the purchase undertakings in themudarabaand
musharaka-basedsukuks to redeem thesukukcertificates at face value by
the borrower. This effect resulted in the investors being guaranteed the
return of their capital. Any purchase undertakings in such structures should
provide for the assets being purchased at their market value, and hence any
gain or loss on the redemption date being for the account of thesukuk
holders.
Scholars who have allowed the use of purchase undertakings have not
viewed such undertakings as providing a guarantee to the investors. The
purchase undertakings have been related to the purchase of the underlying