A CRITICAL APPRAISAL OF SHARĪʿAH ISSUES RELATED TO ṢUKŪK AL-IJĀRAH

The success of the Islamic financial industry over the last two decades has brought new challenges related to liquidity management. An alternative to conventional debt securities was needed as an avenue for investment of excess liquidity, one which complies with Sharīʿah principles and yet meets the diverse risk-return profiles of those issuing such instruments as well as of investors. At the same time, Muslim countries and large corporations wishing to raise Sharīʿah-compliant financing for national and international development projects required a substitute financing instrument that avoids the prohibited ribā (interest). The Islamic financial institutions (IFIs) and fiqh councils have undertaken exhaustive efforts to provide an alternative for these riba-based instruments. These are exemplified in what is commonly known as “Islamic bonds”, or sukūk, in order to answer the ever-increasing demand for large-scale Sharī ah-compliant financing.

Şukük al-ijarah (lease-based sukūk) enjoy the distinction of representing shares in the ownership of real assets that contribute to the economic production in the real economy and that add value to project financing. This structure has been one of the most dominant and widely used for both domestic and international issuances. While in theory the sukük al-ijarah structure may not involve many Shari’ah non-compliance issues, these sukuk have encountered some difficulties during the process of their development and have been the subject of certain criticisms when it comes to implementation.

This research provides a critical appraisal of two types of sukük al-ijarah that the International Islamic Fiqh Academy is planning to discuss in its twentieth session. The first issue relates to sukük al-ijarah al-muntahiyah bi al-tamlīk, i.e., sukük based on assets that are the subject of lease agreements ending in the transfer of ownership back to the party from whom the assets were originally purchased; what is the Shari’ah ruling on issuing and trading such sukük? The second issue relates to şukük al-ijarah al mawşüfah fi al-dhimmah, that is sukük based on forward leases; what is the rule for issuing and trading such sukük?

The subject is investigated in three sections: the first defines sukük al-ijarah and its types; the second traces the development of the sukuk market and the challenges of implementation; and the third examines the Shari’ah issues associated with sukuk al-ijarah based on leases that end in a transfer of ownership and sukük al-ijarah based on forward lenses.