The Islamic capital market generally consists of two (2) main areas; the equity market and the debt market. The equity market is more involved in the dynamics of trading securities, shares and other exchange-traded instruments, while the debt market is usually represented by sukuk which have been the most active type of Islamic debt market instrument. Sukuk issuances have maintained their momentum with over USD 26.6 billion placed during the second quarter of 2013, which adds to the USD 34.5 billion placed during the first quarter of 2013 to a total of USD 61.2 billion.1 Even though the amount was nevertheless lower than the amount issued in the same period in 2012, it remains to be the most popular instrument in the international Islamic capital market.
Generally, sukuk can be defined as transferable certificates representing a share either in the business undertakings or ownership of assets. This entitles the sukuk-holders to obtain periodic fixed returns. Hence, upon maturity of the sukuk, the sukuk-holders have full redemption. With that been said, there are two structures of sukuk that are becoming more popular in the Islamic capital market, namely asset-backed sukuk and asset-based sukuk. According to Moody (2006), in an asset-backed sukuk, the sukuk- holders benefit over some form of security over the assets, enabling them to be in a preferred position over other unsecured creditors. Thus in the event that the issuer defaults or become insolvent, the sukuk-holders would be able to recover by taking control of the assets and realizing its value. However, in the case of Malaysia, this structure created a huge legal hindrance as it was perceived as a direct breach of the negative pledge clause that confines the bond issuers from issuing any future bonds that is not in pari-passu with the existing secured bonds. Considering that Malaysian international bonds were all unsecured bonds, this then led to the birth of asset-based sukuk. Instead of attaining legal ownership of the assets by the sukuk-holders, under the revised asset-based sukuk structure, the sukuk-holders would only attain beneficial ownership of the assets, thus resolving the issue of not being in pari-passu with the existing unsecured bonds. It is noteworthy to point out that an asset-based sukuk mirror bond issuance in the conventional space whereby bondholders are creditors to the obligor. In addition, asset-based sukuk-holders do not have any form of indemnity and their interest in the collateral is strictly on security basis, and not ownership.
The article will further elaborate on both asset-backed and asset-based sukuk and highlight their main differences; especially on the issue of true ownership. Besides that, case-studies of both sukuk structures will be also provided for further comprehension.
