Sukuk: The cornerstone of Islamic finance | White & Case LLP International Law Firm, Global Law Practice
Sukuk: The cornerstone of Islamic finance

Sukuk: The cornerstone of Islamic finance

Sukuk have emerged as one of the most significant financing tools in Islamic finance.  These securities form a bridge between issuers—primarily sovereigns and corporations—and investors located in the Middle East and Southeast Asia.

2016 global sukuk issuance volume expected to remain below
US$55
billion

Source: IIFM sukuk database

According to the IIFM sukuk database, global sukuk issuance has been decreasing (from US$106.96 billion in 2014 to US$60.693 billion in 2015), and is expected to remain below peak levels in 2016 (between US$50 billion and US$55 billion) as a result of external factors affecting global financial markets generally, such as decreasing oil prices, ongoing uncertainties in the global financial system and the Central Bank of Malaysia's resolution to cease issuance of its short-term sukuk.  The sukuk market remains relatively niche, but it has huge potential for growth.

Much like other non-capital market forms of Islamic financing, sukuk are designed to be compliant with the principles of Islamic Shari'ah.  An alternative to conventional financing techniques such as bonds, sukuk are fixed-income capital market instruments that allow investors to achieve returns similar to those they could achieve by investing in bonds, but to do so in a Shari'ah-compliant way, by linking such returns to the income generated by underlying assets selected for the purposes of supporting the relevant sukuk.

Certain criteria must be met to ensure that sukuk arrangements comply with Shari'ah, which prohibits all forms of conventional interest income and requires that profits be derived from commercial risk taking and trading only. Equally important, the income-generating assets themselves must be permissible (halal). Transactions that are speculative, uncertain, unfair or unethical are deemed void under Shari'ah principles, so the underlying purpose of the financing must be deemed beneficial to society; for example, Shari'ah- compliant financing cannot strictly be raised for the construction of a tourist facility that includes bars or casinos.  Shari'ah scholars play a role in ensuring that sukuk arrangements are Shari'ah compliant, approving products and suggesting relevant changes to such arrangements. A fatwa—a decision typically issued by a board of Shari'ah scholars—must be obtained in order to market a sukuk transaction as Shari'ah-compliant.

The board must review and approve the legal documents and structure of the sukuk in order to provide a fatwa.  On the other hand, in certain jurisdictions (e.g., Malaysia), fatwas or Shari'ah approvals may be issued by a centralized authority.

Shari'ah scholars play a role in ensuring that sukuk arrangements are Shari'ah compliant, approving products and suggesting relevant changes to such arrangements. A fatwa—a decision typically issued by a board of Shari'ah scholars—must be obtained in order to market a sukuk transaction as Shari'ah-compliant.

The board must review and approve the legal documents and structure of the sukuk in order to provide a fatwa. On the other hand, in certain jurisdictions (e.g., Malaysia), fatwas or Shari'ah approvals may be issued by a centralized authority.


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