Monday, March 29, 2010

WHERE IS DEBT IN SUKUK?

WHERE IS DEBT IN SUKUK?
I was shocked today when one national daily quoted a senior officer in-charged of Islamic rating at a well-known Rating Agency as referring to Sukuk as Islamic debt paper. I am perplexed as to the fact that that statement, which is far from the truth about Sukuk that is globally defined as investment rather than debt certificate came from someone who is supposed to know the basic. However the maker of the statement can be excused if what he meant was that type of the so-called sukuk structured based on sale of debt that have been flooding the market for quite sometimes. This type of sukuk is no sukuk as far the international perspective is concerned, at least in theory. The truth is that sukuk if they are to be understood correctly must refer to certificates issued as evidence of investment and not of money lent to the issuer. But unfortunately, given the conventional framework within which many sukuk have been hitherto issued, that original basic concept has been forgotten more frequently than ever. It is perhaps thus not surprising to find series of reports that talk about defaults in sukuk as similar to default in loan repayment or point towards the need for any relevant issuer of sukuk to redeem the sukuk at the designated time at par value or to pay as a matter of contractual obligation the profit as contracted. If this is the true description of sukuk, then why in the first place there is any need to name the same as sukuk; just name them as bonds where money is borrowed and lent based on a contracted price@ interest.
Just because sukuk were viewed as no different from fixed income instruments based on debt, any failure to pay the so-called profit will constitute a default irrespective of whether such non-payment is due to fault or negligence or breach of rules or not. If this is truly what is intended by the relevant parties they have to accept that they are not issuing sukuk but just any other bond or fixed income instrument in respect of which Islam has nothing to do with.

3 comments:

  1. Assalamualaikum Dear Professor! I had a question regarding legality of al-Arbun from the standpoint of Sharaih and its relevance to the Call Option. Some people think that Arbun is an alternative to Call Option, is it true? Because to the extent I know Arbun is an advance payment by a customer who wants to purchase an asset and makes promise that he will purchase it when the seller buys the asset from the vendor. In case the Customer fulfill his promise Arbun will be part of the price of the asset, otherwise it will belong to the seller. So Arbun is part of the price while call option is not part of the price of any asset. Many Thanks

    Ab.Ghafoor

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  2. Dear A. Ghafoor,
    Waalaikumussalam.
    You are right; arbun or urbun is different from the call option price as the option price is for the right to buy the underlying asset/share. In the case of urbun however, the amount paid is considered as part payment should the intended sale is completed, to be off set from the whole purchase price agreed. Muslim jurists are however divided in their opinions as to the permissibility of urbun.

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  3. Sir i accidental found your blog. And i am really happy because you might help me. I am a student of BS management from Lahore (Pakistan). I was looking for some who can guide me about derivatives, financial derivatives and commodity derivatives. Are these tools "Haram" according to Islam? or they can be practiced but declared as "unlikeable" practice?. I am very much interested in derivatives but no idea about their status in Islam.

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