Jhordy Kashoogie, graduated from International Islamic University
Malaysia (IIUM) with a B. Econs.(Hons) in Islamic Economics and Finance
qualification, he recently completed his postgraduate study, MSc Islamic
Finance, at Durham University, United Kingdom. He has studied various aspects of
Islamic finance and co-authored the paper "Debt versus Equity Financing in the
Light of Maqasid al-Shari'ah" (see
In Shari'a, sukuk have to represent the ownership of assets or services that
belong to sukuk holders, and therefore sukuk have to be traded against the value
of its underlying assets or services. However, that is not happening in actual
practises of sukuk trading as there is a grey area for what constitutes sukuk to
be tradable in the market. Therefore, in this opportunity, the sukuk trading is
examined in light of Shari'a and the regulatory framework. Interviews with
scholars (Prof. Tariqullah Khan and Bilal Khan), and advisers in leading Islamic
banks (Abdulkhaliq Elshayyal and Nayyar Azam Saifi) are conducted in order to
incorporate their insights regarding issues of sukuk trading practises, and also
suggestions for the future of sukuk.
Shari'a and Regulations Framework of Sukuk Trading
From Shari'a perspective, Al-Jarhi and Abozaid (2010) impose rules and
conditions (ahkam) related to the tradability of the sukuk in primary and
secondary markets. To begin with, sukuk must be issued against some tangible
assets and not against cash or debts. Therefore, the tradability of sukuk at the
time of issuance (primary market) as well as in the secondary market must follow
1. If sukuk are issued against specific assets ('ayn) or services, then this
issuance implies the sale of these assets to the sukuk holders in return for
cash money based on current values of assets or services, and therefore the
sukuk becomes tradable.
2. If sukuk are issued against described assets or services to be manufactured
or constructed in the future (mausuf fii zimmah), then this issuance implies the
sale of these assets to the sukuk holders in return for cash money, and these
sukuk are not tradable until the deliverability of assets or services.
3. If sukuk are not issued against assets or services, but for the purpose of
utilising the proceeds to acquire some assets, then sukuk do not become tradable
until the stage at which those assets or services are purchased. This is because
the sukuk up to that point represent liquid proceeds, i.e. cash money, and money
cannot be sold against money unless the Shari'a rules of sarf are observed.
4. If there is any mixture between 'ayn and dayn, then 'ayn must dominate dayn
in sukuk issuance.
Condition no. 1 stresses the importance of asset ownership in which asset
ownership must be fully transferred to the sukuk holders, so under that
condition they can trade in secondary markets with asset ownership as an object
of sale (mauqud alaihi). Even if the sukuk holders wish to sell immediately
after the sukuk have been traded to them in the primary market, complete
transfer of asset ownership to the sukuk holders from the sukuk issuer has to be
fulfilled. This condition is governed in accordance to AAOIFI Shari'a standards
No. 17 on investment sukuk, clause 5/2/4 as follows:
It is permissible, immediately upon issue and up to the date of maturity, but
after passing ownership of the assets to the holders of the sukuk, to trade in
sukuk that represent ownership of existing leased assets or assets to be leased
Condition no. 2 is in line with AAOIFI Shari'a standards No. 17 on investment
sukuk, clause 5/2/1 that govern what constitutes sukukto be tradable in the
secondary market, as follows:
It is permissible, after closing subscription, allotment of sukuk and
commencement of activity, to trade in and redeem investment sukuk that represent
common ownership of tangible assets, usufructs or services.
As for condition no. 3, the condition is straightforward and yet there has been
no specific regulation framework so far to be put by regulators. Condition no.
4, however, is still contentious because there has been a trend that sukuk
issuance comprises a mixture of ayn and dayn assets, the so-called sukuk
istishmar, in which the former is tradable in the market whilst the latter is
not. Sukuk that include both cash and debt have to follow the laws of cash and
debt in which the sukuk should be traded at par; any debt trading (bay al-dayn)
either above or below the par value, it is tantamount to riba al-bay. Therefore,
since the dayn is not tradable in the market, there are dissenting opinions
among regulators and different practises across jurisdictions regarding the
extent to which dayn can dominate the 'ayn in order for sukuk istishmar to be
tradable in the market.
According to OIC Fiqh Academy resolution no. 30 (4/5), if the majority of the
underlying asset is dayn then the sukuk are not tradable in the market, whilst
if the majority of the underlying asset is 'ayn, then the sukuk are tradable in
the market. Nevertheless, a fatwa from AAOIFI stipulates that sukuk which have
30% 'ayn asset composition is tradable in the market so long as the dayn and
cash do not exceed 70%. At worst, Dubai financial markets allow sukuk that have
10% 'ayn asset composition to be traded in the market. Both AAOIFI's fatwa and
the Dubai financial market practices have given rise to controversial views with
regard to allowing dayn-dominant sukuk istishmar to be traded in the market.
AAOIFI claims that the fatwa is derived from a Hanafi point of view, whereby as
long as there is no intention for hiyal, there is nothing wrong from shari'a
However, in Malaysia, the selling of debt (bay al-dayn), which indicates no
limit for level of debt, is allowed by the Shari'ah Advisory Council (SAC) of
the Securities Commission (SC), which allows bay al-dayn based on the premise of
Ibn Al-Qaym that bay al-dayn is permissible because there was no evidence from
Qur'an and Sunnah that disallows bay al-dayn. By contrast, Gulf countries
disallow bay al-dayn,as the debt money represents cash and when cash is traded
with cash over premium or discount, it is tantamount to riba (Mohammad et al,
Actual Practises of Sukuk Trading
In the actual practises of sukuk trading, there are deviations from Shari'a and
regulation framework found in trading sukuk in secondary market because it
involves contentious issues, such as asset ownership and bay al-dayn. While for
the primary market, there are no deviations since the rules are clear and
straightforward, not involving contentious issues.
This deviation problem is actually rooted from the current sukuk structure,
which is asset-based sukuk. Shari'a rules no. 1, 2, and 3 of sukuk trading are
violated in asset-based sukukbecause asset-based sukuk are traded against
pecuniary assets in the form of cash, not asset ownership, since the sukuk
holders do not have recourse to the underlying assets but rather just the
capital guarantee. Therefore, in those cases,sukuktrading is akin to debt
trading (bay al-dayn) with the return or loss generated from the debt trading,
which is tantamount to riba al-fadl and riba al-nasi'ah. Furthermore, it
involves gharar, as there is an uncertainty with any debt traded in the market.
Based on the interviews, this problem happens because there is still an
unwillingness of key players to adhere to the prevalent standards since they
have preferred practice and practicability of sukuk issuance. The key players
inherently still prefer asset-based sukuk instead of asset-backed sukuk because
they are averse to market risk more than to credit risk, as Prof. Tariqullah
said. So the way they structure sukuk is focusing more on credit risk of the
issuer, which characterises asset-based sukuk. However, even if asset-backed
sukuk are preferred for sukuk issuance, this structure still hinges problems, as
it will be costly or incurring big losses in the event of significant drop of
the assets' value, as noted by Abdulkhaliq in the interview.It is important also
to note that the full transfer legal ownership is difficult to be realised at
certain jurisdictions where the underlying assets still pose regulatory problems
such as legal and taxes issues.
The Way Forward
For the way forward, all the interviewees agree that there is a need for unison
standards or convergence across jurisdictions with regard to sukuk practises-including
sukuk structure and sukuk trading. In order to reach the convergence of sukuk
practises, closer engagement between key players, regulators, and scholars are
urgently needed. Abdulkhaliq adds that regulatorsneed to tackle regulatory
issues such as taxation issues, governance, product development, in order to
make the current practises become more efficient. Furthermore, the transition to
asset-backed structure should be facilitated as this structure represents
genuine Shari'a financing, and the sukuk can be traded against values of
underlying assets. Hence, the originators, rating bodies, arrangers, and
regulators should sit together to discuss on how to manage the market risks,
different proxies for sukuk rating, and so on for giving incentives to key
players and investors to have asset-backed sukuk in the market. On another
aspect, Shari'a advisors along with Shari'a compliance team, who are the
gatekeepers in the industry, shall monitor and review the sukuk throughout its
life tenure to ensure that the sukuk trading is Shari'a compliant at all stages.
The current role of just issuing fatwa of its compliance should be abolished, as
Nayyar said in the interview.
- Abozaid, A & Al-Jarhi Mabid (2010). Reasons for Failure of Some Sukuk
Issuances. International Fiqh Academy, IRTI & Islamic Economics Research Center
Conference, Islamic Sukuk: Examination & Reevaluation, King Abdul-Aziz
University & Westin Hotel, Jeddah, Saudi Arabia, May 24-25.
- Mohammad, Shamsiah, Mohd Fadhly Md Yusoff, and Abdul Aziz Al Qassar (2009).
"Ground Rules for Sukuk Issuance" in Sukuk: Islamic Capital Market Series.
Malaysia: Sweet & Maxwell Asia.
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