MUDARABAH SUKUK CERTIFICATES: WHY DOES IT MATTER?

The topic may looks irrelevant when one recognises the fact that sukuk are no longer novelties like what they used to be around 20 years ago. Since then billion dollars of sukuk have been issued, both as public and private securities not to mention also, in not small number of reading materials, sukuk have been referred to as debt securities. In fact many so-called Islamic finance writers generally put sukuk within the framework of the so called Islamic debt market or sometimes Islamic fixed income instruments. However from a number of court cases so far adjudicated, it is clear that the true nature of sukuk certificates is still far from proper understanding. This is so partly because sukuk have been issued using various underlying contracts not similar to conventional bonds of various types where the main contract used in the structures are no other than debt contracts i.e lending/borrowing contracts.

The above issue leads us to answering the question posed in the heading: why the nature of certificates issued in connection with sukuk needs to be fully explained. As mentioned, this matter is closely related to the contracts used in the relevant structures as there is no single character that can be attributed to such certificates without full understanding of the underlying contracts employed. For example in Dana Gas sukuk case, the issue about whether the sukuk were truly of mudarabah type where profit could not be fully guaranteed remains relevant as ever although the parties had come to mutual  settlement of their disputes.

To put it simply: when one party hands over certain sum of money to a sukuk issuer as a result of which process the later (sukuk issuer) hands over to the former (money provider) the so-called sukuk certificates, the question is these certificates would stand for what?. Let us refer to the very first pronouncement by one Islamic authoritative/reputable body about sukuk. The OIC Fiqh Academy (Islamic Law Academy of OIC) in 1988 issued a very useful statement about the nature of sukuk certificates. Interestingly this pronouncement was issued in relation to Muqaradah (another name for Mudarabah) sukuk as the most important of all possible sukuk that could be offered, at least during that very early period of sukuk development.

According to the OIC Fiqh Academy’s resolution: “Muqaradah (Mudarabah) securities  are investment instruments that are structured on the basis of splitting Muqaradah capital by issuing sukuk  testifying   ownership over units (of the capital) of equal value registered in the name of the owners thereof  on the basis that they own undivided common shares of the Muqaradah capital and whatever that may thereafter result from (employment of ) such capital, proportionate to the ownership of every such owner as mentioned”.

From the above statement we know that in the first instance, the sukuk certificates represent certain sums of money capital of the Mudarabah as provided by the investors to the Mudarib on the basis of which the relevant certificates are issued to them. But the resolution does not stop there in explaining what may further happen to the said capital by adding the phase “..and whatever that may thereafter result from (employment of) such capital”. By this we know that whatever the mudarib may acquire in the form of other assets for the purpose of the Mudarabah will come within the ambit of the definition of the sukuk in the sense that at this later stage (if actually taken place) the certificates can no longer be considered exclusively representing the money capital.

Hence when one talks about asset-backed sukuk for instance, one needs to be very particular about what types of asset that are owned by the Mudarabah at the relevant time. This is important given the fact that Shariah law recognizes several classes of assets with their specific governing rules. After a subscription period is closed and money capital handed over to the mudarib, at that moment the  sukuk can be described as asset-backed although they are entirely backed by such  monetary sums as contributed since money is a form of asset if not the most important of all assets. However when the mudarib starts to acquire some other assets with the use of the money capital, the sukuk are now considered to be backed by several categories of asset that are not necessarily supposed to be governed by same rules governing money capital. There may be assets in the form of real tangibles, debts, usufructs of tangibles or even recognised rights. Under this scenario we may talk about sukuk that are backed by a combination of assets rather than just by the monetary ones.

In connection to the above aspect, the OIC Fiqh Academy thus in the context of using Mudarabah sukuk for project financing further require the sukuk to be “representing common undivided ownership of the project for which establishment or financing such sukuk have been issued and the need to consider such an ownership as continuing from the beginning to the end of such project”. Hence it is clear here that the sukuk holders are in fact joint owners of the project funded by the issuance. As such they are considered as partners in Sharikat al-milk based on the project assets held by the Mudarabah considered to be jointly owned by all of them.