Pragmatic and Idealistic Approaches to Structuring Sukuk
Sukuk are Islamic securities that are often translated as "Islamic bonds." However, that translation does not entirely cover the substance of sukuk. A closer look at sukuk shows that it has elements that might resemble both shares and bonds, depending on the applicable underlying Islamic financial contract terms and structures. In this chapter we will outline the background of sukuk to provide a better understanding of it as an Islamic financial instrument.
This chapter aims to illustrate the discrepancies in the idealistic approach toward sukuk structures. That is, how this financial product should ideally be structured from a Shari'ah participatory perspective is compared to the pragmatic approach that has been adopted at this early stage of the product's market development in 2014.
In order to place sukuk in context, some relevant concepts associated with Shari'ah will be briefly mentioned. These include key sources of Shari'ah as well as the concepts of ijtihad, riba, and gharar (defined later). In the following historical overview of sukuk, we provide particular focus on the origins of the word sukuk, its use in medieval times, and the recent history of sukuk, which are known today as new financial instruments in financial and capital markets. Finally, the development of several forms of sukuk will be described, and a number of structures and mechanisms will be explained that have been developed in practice over the years, highlighting the tension between the idealistic and pragmatic approaches toward sukuk structures today.
SHARI'AH: THE BASIC FOUNDATIONS OF ISLAMIC FINANCE AND SUKUK
The raison d'etre of sukuk lies in the Shari'ah. Shari'ah literary means "the way," and it is generally understood to be the body of Islamic religious law. Islamic law, in the context of Islamic finance, does not refer to a specific law of a particular jurisdiction. Instead, what is meant is a set of religious and moral principles, concepts, and rules as developed throughout Islamic history, based largely on the Quran and the Sunnah. Fiqh (Islamic jurisprudence) is the knowledge of the practical regulations and rules of Shari'ah acquired by detailed study of the sources. Banking and financial activities form part of the economic activities that make up one area of fiqh called fiqh al-mu'amalat.
Sources of Shari'ah
In accordance with the classical theory of Islamic jurisprudence, there are two primary sources of Islamic law and a range of secondary sources. The primary source is the Quran, the holy scripture of Islam that Muslims believe was revealed to the Prophet Muhammad by the angel Gabriel. About 80 verses of the Quran refer to strictly legal matters, although it is unclear whether the legal injunctions in these verses are obligatory or permissible. After the Quran, the second most important source is the Sunnah (an account of the normative behavior of the Prophet, as documented in the hadith, the record of his words and deeds). The secondary sources include ijma' (the consensus of the scholars), and qiyas (reasoning by analogy).
Ijtihad (defined next) is often referred to as a secondary source of Islamic jurisprudence. However, ijtihad is not strictly a source of law; rather, it is a method by which an individual interprets the legal meaning of the texts and rules of the Quran and the Sunnah. Although each individual has the freedom to propose interpretations of texts and rules, it is only when these interpretations are supported by a subsequent ijma', or scholarly consensus, that they attain the necessary authority in Islamic law.
Sukuk are not referred to in the Quran or in the Sunnah. The ideas that have been developed in relation to sukuk, how they are to be structured and used, are the result of ijtihad.