Sukuk: Its Definition and Characteristics
It is apparent that the contemporary era denotes the Islamic capital markets recognizing the issuance of Shari’a-compliant financial instrument called as Sukuk (Godlewski, Turk-Ariss, & Weill, 2011). From a business perspectives, the term Sukuk refers to securities that conform to the Shari’a as well as to investment principles, which likely prohibits the various Shari’a laws stated such as the riba or paying or accepting interests (Shaikh & Saeed, 2010). According to the Accounting and Auditing Organization for Islamic Financial Institutions or AAOIFI, Sukuk are certificates of equal value representing undivided shares in the ownership of ...view middle of the document...
There are six simple rules to follow in relation to issuing sukuk (AAOIFI, n.d.).
• First, sukuk should be owned by Sukuk holders in order to make it tradable. Sukuk holders must be in possession of all the rights as well as be accountable for their obligations of ownership in real assets (e.g. tangible assets, usufructs, services). Such ownership should be made legal not just in accord with the Shari’a, but also in accord with the statements and rules emphasized in the AAOIFI Shari’a Standard on Investment Sukuk. Furthermore, issuance manager must make sure that they officially state and declare the transfer of ownership of these assets in its Sukuk books (AAOIFI, n.d., pp. 1-2).
• Second, in order for Sukuk to be tradable, Sukuk should not have the characteristics of being receivables or debt; however, exclusion could be made in instances where all assets are sold or traded by financial entity, or a portfolio with a standing financial obligation (AAOIFI, n.d., p. 2).
• Third, if occurrences of actual earnings fail to meet the expected earnings, the manager of Sukuk should not carry out activities concerning offering loans to Sukuk holders. Further, it is not acceptable to distribute expected earnings or to achieve project financing on account of the Sukuk holders, as set forth and emphasized in the AAOIFI Shari’a Standard on Mudaraba (AAOIFI, n.d., p. 2).
• Fourth, it is not permitted for investment managers, partners and their agents to perform re-purchases of assets, for its nominal value, from Sukuk holders when Sukuk reached at the end of its maturity. Contrastingly, it is however allowable to carry out purchase based on the grounds of net value of assets, its market value, faire value or a price to be agreed at the time of their actual purchase, as what certain articles of the AAOIFI Shari’a Standard on Sharika and Modern Corporations stressed out (AAOIFI, n.d., pp. 2-3).
• Fifth, it is allowable for a lessee in a Sukuk al-Ijarah to carry out activities relating to purchasing of leased assets when the Sukuk, for its nominal value, reached at the end of its maturity, having to consider that the lessee is not a partner or investment agent.
• Lastly, the Shari’a Supervisory Boards should make certain that they carry out their full responsibility when it comes to reviewing contracts and documents about actual transactions, assessing whether or not these contracts follow the Shari’a guidelines and the AAOIFI Shari’a Standard (AAOIFI, n.d., p. 4).
4. Current State of Global Sukuk Markets
Despite the fact that the earliest issuance of Sukuk happened in the 1980, its progress and growth only occurred within the past decade, from 2000 to 2010. More so, the global outstanding volume of Sukuk had reached to its highest peak that exceeded about $90 billion in 2007 and is expected to rise...