IRP 8 – Critical Appraisal of Shari’ah Issues on Ownership in Asset-based Sukuk as Implemented in The Islamic Debt Market

Sukuk comprise one of the fastest-growing segments of the Islamic debt capital market. This paper aims to shed light on Shari‘ah issues that arise in asset-based sukuk structures and operations. It first discusses the concept of sukuk and delineates the difference between asset-based and asset-backed sukuk. It then discusses Shari‘ah issues with regards to ownership (qabd). From the analysis of case studies conducted, three major issues were identified in the operation of asset-based sukuk. They are sukuk-holders’ interest in the underlying assets, restrictions on asset disposal, and due diligence regarding sukuk assets. The paper concludes that restriction of the right of disposal poses a serious doubt whether asset-based sukuk structures truly comply with Shari‘ah principles. Furthermore, the coupling of this restriction of disposal with the purchase undertaking at par effectively turns sukuk into a debt instrument. Hence the paper suggests that there is a need to move towards asset-backed sukuk that clearly fulfils the Shari‘ah requirement. Nonetheless the paper recognizes that the current legal framework impedes the issuance of asset-backed sukuk. Instead of making overnight changes to the sukuk market, the paper highlights the need for all stakeholders to come together and thoroughly discuss measures needed for a transition to an improved market.