Sukuk Illegal?

The Islamic Banking fraternity was shaken by the view of the prominent Shariah scholar, Sheikh Muhammad Taqi Usmani, that up to 85% of the Sukuks issued up to now may not have been fully Shariah-compliant.

This has forced scholars and practitioners to go back to the drawing board and re-look at their existing Sukuk structures, and the Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) quickly issued guidelines on Sukuk to ease the market worries. Depsite this, the debate is still on-going on how “Islamic” are the current structures of Sukuks and what can be done to mitigate or improve this.

Of course, the Ijarah-based structure of Sukuks remains viable as a Shariah-compliant structure, based on the prominent scholar’s view. Read more below on these issues:

• Booming Islamic Bond market embroiled in debate over Shariah compliance (International Herald Tribune)
• Islamic bond decree delivers rude shock to Sukuk market (Gulf-news article)
• Fatally Flawed Bonds (Bloomberg article) 
• AAOIFI Ruling on Sukuk (PDF file)
• Islamic bond market ‘wrecked’ by critical remarks (Arabian Business.com) 

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Is Wa’ad the next star in Islamic Banking?

Forward dealing transaction has always been a difficult proposition for Islamic Banking as most of the attributes in dealing in future dates contradicts the Islamic Banking requirements of certainty and transparency. Of course there are contracts that caters for future transactions such as the Bai Salam and Bai Istisna, but those never really took off in a big way due to the restrictive conditions imposed for such contracts.

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In Focus : Bai Salam

The basis of Islamic Banking is based on the premises of the existence of an underlying asset. The asset itself must have the following attributes:

• Firstly, the asset must exist. Therefore, an asset which does not exist at the time of sale cannot be sold.
• Secondly, the seller should have acquired the ownership of that asset. Therefore, if the asset exists, but the seller does not own it, he has no right to sell it.
• Thirdly, mere ownership is not enough. It should have come into the possession of the seller, either physically or constructively. If the seller owns an asset, but he has not taken its delivery himself or through an agent, he cannot sell it.

The only exception to this rule is the contract of Bai Salam (Trust Sale) and Bai Istisna (Order Sale). These two contracts deal with the sale transaction involving an asset which is at the point of contract, is non-existance.

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In Focus : Murabahah contract

Murabahah (cost plus profit sale) is one of the most commonly used mode of FINANCING by Islamic financial institutions, especially in the middle-east regions. In countries such as Malaysia however, a different model is more popular i.e. the Bai Bithaman Ajil (BBA), Ijarah or the Musyarakah (and to a certain extend, Musyarakah Mutanaqisah).

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Learn More About Islamic Banking

Find out more about Islamic Banking Contracts and Concepts.

Islamic Banking News Snippets

Compilation of news snippets on Islamic Banking which do not normally appear on the daily Malaysian newspaper.