A study of the underlying assets in debt-based sukuk structure from the shari`ah perspective

Abstract

Sukuk market has witnessed massive development in recent years, many governments and financial institutions expressed interest in Sukuk and its unique Islamic principles. However, the securitization activities and the evolution of financial engineering process of fixed income Sukuk have become very challenging in terms of its conformity with the principles of shariah law. Asset based Sukuk which includes debt securitization that evidences indebtedness originating from the contract of exchange of bay` bi thaman ajil, murabahah, istisna, salam and ijarah Sukuk are seen by many scholars as controversial products. This is due to many issues surrounding the securitization process of the underlying assets used in debt based Sukuk structures such as non-existent assets and future assets (ma`dum), tangible and intangible assets usufruct and rights. Bay` al-inah and dayn are also among the controversial issues analyzed in this study. The evolution of Sukuk structures still remain active and continue to grow despite all the challenges. The meaning of tangible and intangible assets according to their linguistic origin and their various applications in Islamic law are explained and contrasted with the contemporary applications and Sukuk practices. Special attention is given to understanding the concept of futures assets and ayn ma’dum to ascertain whether or not they are acceptable asset for Sukuk transaction. Several forms of Islamic contracts are analyzed in details; couple with their various components in order to assess their validity based on the various opinions of the four main schools of Islamic thought. In this, the differences between schools are identified along with the sources of these differences. The finding of the research shows that asset in debt based Sukuk should be legally owned by the originator and should be free from any encumbrances. Debt based Sukuk certificates may only be negotiable in the secondary market if they form a small part of a larger portfolio comprising mostly of other negotiable instruments such as musharakah, and mudarabah Sukuk. Ijarah asset should be legally transferred to investors and the issuer should not in any circumstance include the asset in his balance-sheet.