Sukuk structures in accordance with the principles of Shari’ah are the same as the principles which apply to other products in Islamic finance. An excellent guide produced by Latham and Watkins outlines real world case studies various structures used in sukuk.
The case studies covers include:
The key principles relevant to structuring sukuk in accordance with the principles of Shari’ah are the same as the principles which apply to other Islamic financing structures, and can be summarised as follows:
Under the principles of Shari’ah, money is considered to be a tool for measuring value and a medium of exchange, and has no intrinsic utility. Accordingly, under Shari’ah, an investor should realise no profit or gain merely for the employment of money. The return to an investor must be linked to the profits of an enterprise and derived from the commercial risk assumed by that investor. Investors should therefore share in the income generated by the ownership of assets or the profits or revenues of the business in which they invest.
The assets or businesses underlying the sukuk must be Shari’ah-compliant and therefore cannot be related, for example, to gambling or to the production or sale of alcohol or pork.
Shari’ah prohibits intentionally induced uncertainty or unnecessary risk in contracts (gharar), transactions in which the outcome is entirely dependent on chance or speculation (maysir) and transactions in which one party gains because of the other party’s ignorance (jahl). Transactions containing uncertainty with regards to an essential element of the underlying contracts such as price, time of delivery or subject matter may not be compliant with Shari’ah. All rights and obligations relating to an investment certificate must be transparent and clear.
Guide to structuring sukuk (2.25 MB)
An equally useful guide has been produced by Linklaters, within which the Ijara, Mudaraba, Commodity Murabaha, Wakala and Mudaraba Hybrid are illustrated.
Sukuk Structuring Considerations are also discussed with emphasis on Transfer of Title, Nature of the Assets, Tax and Zakat, Governing law, Capacity and Authority, Tradability of Sukuk, Differences between structures in the Middle East and East Asia, Liability Management, and Types of Sukuk.
Linklaters Sharia Compliant Securities Sukuk Download Guide (535KB)