Understanding Islamic Finance - Doha Academy of Tertiary Studies

410 Understanding Islamic Financeconditions). 21 But the way in which various Sukuk are structured and marketed tends toassure the subscribers/holders that the issue carries a fixed return rate, like any fixed incomesecurity in the conventional interest-based structure.One view is that the financier partner can give a part of its own profit or even out of itsown wallet to the client partners, as in the case of deposits kept on the basis of Mudarabah.But even there the banks are not free; they can accommodate the clients up to the limit ofa pre-agreed ratio only and any arrangement of payment of an agreed amount of profit outof the banks’ own income may dilute the sanctity of the institution of Shirkah, particularlywhen adopted as a system. In the case of Sukuk, even this is not possible and the SPVs haveto distribute among the Sukuk holders the net proceeds of the business in which the raisedfunds have been used.Ijarah has flexibility in the sense that the rental rate can be fixed or floating and the lessormay know in advance his future expected receipts. But the lessor is exposed to losing rentalcollection when the lessee fails in timely payment. He may also lose his property becauseof both systematic and unsystematic risks. So, how can Sukuk holders be given a guaranteeof investment and assured of a fixed income? One possibility is that the owner/lessor ofthe asset may assure the purchaser of the asset (while selling it to the SPV) about theperformance of the lessees, as in the case of IDB Trust Sukuk issued on the basis of a mixedportfolio of assets booked by the IDB. In the case of Murabaha or other receivables, the SPVmay have recourse to the institution that has undertaken the underlying transactions. It seemspertinent that the Sharī´ah scholars may explain the limits within which such guarantee orassurance can be given, particularly in respect of future assets to be leased by the SPV. Ifthe asset is destroyed without any fault or negligence of the lessee, the risk has to be borneby the lessor – Sukuk holders. They may also like to clarify how the requirement of takingup the ownership-related risks would be fulfilled if Ijarah Sukuk holders were guaranteed afixed return on their investment, as in the case of conventional securities.Another important issue is that a number of contracts are combined in one arrangementof Sukuk issue in such a way that they are interdependent on one another. The Ijarah Sukukissue with a sale and lease-back arrangement involves about six agreements. If these aremade integral parts of the main contract, Sharī´ah compliance is at stake. Sequencing of theseagreements, which has a bearing on Sharī´ah compliance, also needs to be taken care of.Further, it has been observed that most of the issues lack transparency in respect ofdocumentation and rights and liabilities of various parties to the issue. Proper care of allthe aspects and transparency would lend enhanced credibility to the concept of Sukuk andwiden the Islamic finance market. According to the AAOIFI’s Standard, a prospectus of anyissue must include all contractual conditions, rights and obligations of various parties and theparty covering the loss, if any. The Sharī´ah boards should not only approve the procedureof the issue but also monitor the implementation of the project throughout its duration. Thisnecessarily includes matters relating to the distribution of profit, trade and redemption of thecertificates. 22A related point of concern is that of reliance on Ijarah Sukuk only; the potential ofShirkah-based or even mixed portfolio Sukuk is not being properly realized. Most of theSukuk issued for public sector financing are not based on the best possible structures of21 AAOIFI, 2004–5a, Standard on Investment Certificates, clause 5/1/8/7; see also clause 6/7 of Standard No. 5 on Guarantees.22 AAOIFI, 2004–5a, Standard on Investment Certificates, clause 5/1/8.