SUKUK STRUCTURES: PRAGMATIC AND IDEALISTIC APPROACHES
In light of the prohibition of riba under Shari'ah, trading in pure debt instruments is forbidden. Hence, sukuk are structured to generate the same economic effects as conventional bonds, but in a Shari'ah-compliant manner. Each sakk represents an undivided interest in an asset. Sukuk reflect participation in the underlying tangible assets, so what is being traded is not merely a debt. Sukuk are entitlements to rights in certain assets inclusive of some degree of ownership. For a sukuk structure to comply with Shari'ah, the underlying assets must themselves also comply with Shari'ah, which means that they must be halal.
In this section we will discuss sukuk structures and contextualize them in the broader discussion of the different approaches of Islamic finance. The Shari'ah requirements for a valid sukuk structure will be described. Once the Shari'ah framework is clarified, we will discuss how some sukuk structures were structured in practice. This will show that the sukuk practitioners developed several mechanisms that seemed necessary from a practical point of view. We will contrast this pragmatic approach to the idealistic approach.
Shari'ah Requirements for Sukuk Structures
The most important Islamic principle for sukuk transactions, and probably for Islamic finance as a whole, is the prohibition of riba. Two important aspects of the prohibition of riba are paying or receiving interest and bay' al-dayn, or trade in debt claims. As mentioned above, according to the majority of contemporary scholars, the prohibition of riba is a prohibition on all forms of interest. Since interest payments are forbidden under Shari'ah, the transaction must be structured so that no interest payments are present in the entire transaction. Contrary to conventional bonds, for which the periodic payments are interest payments, the source for the periodic payments of the sukuk must be the return on the underlying transaction.
In the AAOIFI definition of sukuk certificates, they must represent ownership rights in the underlying assets. This is the result of the prohibition of riba and indirectly leads to a prohibition on trading in debt receivables (bay' al-dayn). Therefore, pure debt instruments are forbidden. Money must be used to create real economic value, and trade in claims and receivables is not allowed. Consequently, the presence of underlying tangible assets in the transaction is required. This means that the special purpose vehicle (SPC) must hold underlying tangible assets in order to issue sukuk. In addition, the sukuk holders must hold some degree of ownership in the underlying tangible assets as a consequence of the prohibition on the bay' al-dayn.
This makes the sukuk tradable in secondary markets, because what is being traded is not merely a debt claim but is rather an ownership right in a tangible asset.
-  M. Ainley, A. Mashayekhi, R. Hicks, A. Rahman, and A. Ravalia, Islamic Finance in the UK: Regulation and Challenges (London: Financial Services Authority, 2007), p. 24.
-  Z. Iqbal and A. Mirakhor, An Introduction to Islamic Finance: Theory and Practice (Singapore: John Wiley & Sons, 2006), 177; L. Saqqaf, "Middle East Debt: The New Sukuk; Innovative Structures Are Changing the Face of Islamic Bonds," International Finance Law Review 10, (2006), 19.
-  Allen & Overy, "Allen & Overy Advises on Islamic First," press release, August 12, 2003.
-  T. Box and M. Asaria, "Islamic Finance Market Turns to Securitization," International Finance Law Review 7](2005): 22; M. J. T. McMillen, "Contractual Enforceability Issues: Sukuk and Capital Market Development," Chicago Journal of International Law 7, no. 2 (Winter 2007): 427-29.
-  A. H. Abdel-Khaleq and C. F. Richardson, "New Horizons for Islamic Securities: Emerging Trends in Sukuk Offer Earnings," Chicago Journal of International Law 7, no. 2 (Winter 2007): 418-19.