Sukuk in its Infancy: Misstep and Sequel

Abstract

This article discusses the 2008 "clarification" of the Sukuk Standard of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The clarification was issued by the Shariah Committee of AAOIFI in response to a review of all outstanding sukuk at the time. The clarification focused, in particular, on sukuk al-musharaka. Musharaka are profit-and-loss sharing partnerships.

The use of the musharaka sukuk increased dramatically in the 2006-2008 period. The AAOIFI Shariah Committee determined that a significant portion of those sukuk were not compliant with the Shariah, and issued the clarification. The clarification focuses, primarily, on three structural infirmities: (a) the absence of enterprise ownership; (b) interest-free loans made to sukuk holders where no profits were available to be distributed to those sukuk holders; and (c) guaranteed returns of principal to the sukuk holders. The AAOIFI Shariah Committee, quite accurately, characterized the offending sukuk al-musharaka as "bonds", noting that sukuk are not bonds - they are securitizations of different types.

Keywords: Shariah, sukuk, bonds, Islamic finance, Islamic capital markets, musharaka, partnership, AAOIFI

JEL Classification: E22, E44, F00, F21, F33, F34, F42, G15, G24, G32, G38, K22, K23, K33