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The AAOIFI framework indicates that sukuk can be traded only if the issuer transfers real ownership to the sukuk holders. However in practice there is no real transfer of ownership taking place. Consequently, sukuk are traded based on capital guarantee rather than market value of underlying assets. Why do you think there is a deviation between actual practices and AAOIFI rules to trade sukuk?

It is not accurate to say that there are no real transfers in practice. The issue is between transfer or legal rights and beneficial rights. The former constitutes the transfer of the asset outright to the SPV and thus giving the investors the right on recourses by way of the assets. The latter does not as the beneficial rights ends as soon as the contract ends. Meaning that when the lease contract, say defaults, the beneficial rights end, thus giving the investors without recourse on the tangible asset. Actually this is not a Shariah issue. The whole exercise must be looked at upon the distinction whether it is a credit issue or otherwise.

Wan A R Kamil
Director, First International Consulting Group
Former Islamic Capital Market Consultant for the Securities Commission Malaysia



In our 2001 survey of perceptions of market participants in Islamic financial industry (Risk Management: An analysis of issues in Islamic financial industry) we got a surprising but revealing response. The major Islamic banks in our survey reported that, with respect to Islamic financial contract, for them the banking book market risk is more serious than the credit risk. Surprising - because, banking book market risk is never understood to be more important as market risk is a trading book phenomenon. Surprising -also, because market risk is never seen more serious as compared to credit risk. But in Islamic finance it is! That means the participants of the industry - including originators, issues, rating agencies, arrangers and investors are averse to market risk more than to credit risk. So naturally, the issues should be based on credit risk and not market risk. I am sure this is the main reason that explains the phenomenon. Add to it the actual size of interest rate derivatives in the market - 75% of all derivatives and 400 trillion US$ - interest rate swaps to manage interest rate risk or rate of return risk euphemistically, which are not available if issues are to be issued based on market risk (asset-backed).

Professor Tariqullah Khan
Professor of Islamic Finance
Qatar Foundation




AAOIFI recognises two different types of ownership; legal ownership and constructive ownership. It is important to bear in mind the concept of constructive or beneficial ownership when looking at jurisdictions where transfer of legal title is difficult to perfect or where the asset in question attracts taxes or other burdens when looking to transfer it. Rather than there being a deviation from the AAOIFI guidelines, local differences have dictated a growth in the sukuk market along certain terms. For example, historically, as the majority of the early sukuk issued in the GCC were property based, local GCC laws on foreign ownership of property were reflected in the sukuk assets and thus were always going to remain a cause for concern for foreign certificate holders.
Abdulkhaliq Elshayyal
Legal Adviser & Shariah Compliance Officer
Bank of London and The Middle East



The simple and short answer is the practicability and preferred practice of key players. It is pointless having AAOIFI rules which are not adhered to.
Bilal Khan
Law Lecturer and Executive Director
Islamic Finance Education Council


Yes, I believe that the Sukuks are not being traded in compliance to the Shariah Guidelines, and there is of course a deviation between actual practices and AAOIFI rules.
Nayyar Azam Saifi
Manager Shari'ah Audit, Compliance & Advisory
United Bank Limited


 
In order for sukuk to be tradable in the market, there is a certainlevel of debt (dayn) set by regulators in sukuk's asset composition (AAOIFI's Fatwa: 70%, OIC Fiqh Academy Resolution: <50%, Dubai financial market: 10%). Why do you think there is a difference among regulators regarding this matter? What do you think should be an appropriate framework for composition of debt?

This is a matter of Shariah interpretation. The hadith "thuluth kathir" or one third is a lot, has been used to set the limit. It differs from time to time and within the same jurisdiction and by the same body as well. Such as the IDB case.

Wan A R Kamil
Director, First International Consulting Group
Former Islamic Capital Market Consultant for the Securities Commission Malaysia


For this matter you have to look at various qualifiers. They talk about different matters no one. Those numbers that you mentioned are for investing in stocks and shares and not for Sukuk as debt instruments. For Sukuk as debt instruments - there is Malaysia and outside Malaysia. Outside Malaysia ALL will fix a benchmark of 51 non-debts for making any Sukuk tradable. In Malaysia this condition is not required meaning that even 100% debt is tradable.

Professor Tariqullah Khan
Professor of Islamic Finance
Qatar Foundation


The devil is in the detail as they say. This can only be cleared up if we were to interview the prominent scholars for the basis of their rulings in different forums. Having said that, the varying positions appeal to different people with different perspectives.

Bilal Khan
Law Lecturer and Executive Director
Islamic Finance Education Council



This difference derives from varying applications of ijtihad by shariah scholars. As with most modern issues arising out of financial transactions, different scholars apply different degrees of reasoning and there are a number of opinions which represent different views. It is important to bear in mind however that these institutions are not regulators, contrary to what you mention.

Abdulkhaliq Elshayyal
Legal Adviser & Shariah Compliance Officer
Bank of London and The Middle East



The difference among regulators is not a matter of any concern as it is due to the market conditions and practices of the market. However, ideally there should be a single practice round the globe the best should be 33% of debt.

Nayyar Azam Saifi
Manager Shari'ah Audit, Compliance & Advisory
United Bank Limited