Post-Default Sukuk Restructuring: An Appraisal of Shari’ah Issues

in Hassan, M. K. and Rashid, M. (eds.). Management of Islamic Finance Principle, Practice, and Performance, International Finance Review, Emerald Publishing, Volume 19, 113, Forthcoming

16 Pages Posted: 20 Mar 2019

See all articles by Abu Umar Faruq Ahmad

Abu Umar Faruq Ahmad

Independent

Aishath Muneeza

International Islamic University of Malaysia (IIUM) - Ahmad Ibrahim Kulliyyah of Laws

Mohammad Omar Farooq

Independent

Rashedul Hasan

Nilai University - Department of Accounting and Finance

Date Written: 2019

Abstract

Sukuk restructuring primarily aims at offering a debtor more latitude, in form and time, to settle his obligations. To meet Shari’ah requirements of transferring assets to Sukuk holders in asset-based Sukuk, the originator usually transfers the beneficial ownership to the issuer special purpose vehicles (SPV). However, in asset-backed Sukuk, the originator sells the underlying asset to an SPV and Sukuk holders do not have recourse to the originator in the event of defaults. Among some key unresolved Shari’ah issues in this regard is whether a change of contract necessitates entering a new contract.

Other related issues that conflict with the tenets of Shari’ah are:

(1) Sukuk structuring on tangible assets and debts;

(2) receiving the full title by the Sukuk holders to the underlying assets in the event of default in case of securities that are publicized as asset backed;

(3) Sukuk’s similarity with interest bearing conventional bonds:

(a) capital guarantee by the originator or third party,

(b) the originators’ promise to repurchase Sukuk at face value upon their redemption, and

(c) providing internal and external credit enhancement.

The Shari’ah-compliance of the above-mentioned clauses and structures of Sukuk remain debated among the Shari’ah scholars. Based on some specific cases, this study examines the Shari’ah viewpoint on sukuk restructuring and potential solutions to these unresolved Shari’ah issues in light of the past and recent declaration of some Sukuk defaults as non-Shari’ah complaints. Undoubtedly, resolution of these and other unresolved issues pertaining to Sukuk defaults can help strengthen the confidence of investors in Islamic capital market structures.

Keywords: Sukuk, Sukuk restructuring, Shari’ah asset-based, asset-backed, default, ownership

JEL Classification: G19

Suggested Citation

Ahmad, Abu Umar Faruq and Muneeza, Aishath and Farooq, Mohammad Omar and Hasan, Rashedul, Post-Default Sukuk Restructuring: An Appraisal of Shari’ah Issues (2019). in Hassan, M. K. and Rashid, M. (eds.). Management of Islamic Finance Principle, Practice, and Performance, International Finance Review, Emerald Publishing, Volume 19, 113, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3342353

Abu Umar Faruq Ahmad

Independent

Aishath Muneeza

International Islamic University of Malaysia (IIUM) - Ahmad Ibrahim Kulliyyah of Laws ( email )

P.O. Box 10, 50728
Kuala Lumpur
Malaysia

Rashedul Hasan

Nilai University - Department of Accounting and Finance ( email )

No 1, Persiaran Universiti
Putra Nilai
71800 Nilai
Malaysia

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