Contractual Enforceability Issues: Sukuk and Capital Markets Development

Abstract

This article considers the development of sukuk as the mainstay element of the "debt" or finance side of the Islamic capital markets. The two general types of sukuk are described: whole-business securitization sukuk; and asset secrutization sukuk.

Differences between the conventional interest-based markets and the Islamic finance markets in terms of risk/rewared expectations and the degree of recognition and incorporation (or disregard and non-incorporation) of the Shari'ah in secular legal systems are noted. The effects of those differences on capital markets instruments and on certainty, consistence, predictability and transparency of outcome (and thus enforcement elements) are discussed. An English appellate court opinion (Shamil Bank v. Beximco) and its holding (which will not consider the Shari'ah as a legitimate governing law) are discussed.

Enforceability and remedies legal opinions that are rendered in financing transactions are discussed, and some of the more vexing issues in rendering enforceability and remedies opinions in sukuk transactions are noted. These issues include true sale, non-consolidation, bankruptcy/insolvency, collateral security, enforceability, choice of law, and enforceability of foreign judgments and awards.

Finally, the article proposes a model code and model act concept to enhance enforceability of the Shari'ah. The proposal is based upon the model code and model act framework in respect of the National Conference of Commissioners on Uniform State Laws.

Keywords: Islamic finance, sukuk, bonds, securitization, legal opinions, uniform laws

JEL Classification: F00, F02, F23, F30, F34, F36, G15, G21, G32, K11, K12, K33