The Role of Sukuk in Islamic Capital Markets
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as a trustee and declares a trust over the sukuk assets in favour of the beneficiaries (sukuk
holders/investors) that have beneficial rights over the assets, entitling them to receive cash
flow from the assets, usufructs and/or investments. The trust assets hence comprise the
underlying assets as well as the related rights and obligations. As a means of credit
enhancement, these sukuk structures usually incorporate a purchase undertaking from the
obligor to buy back the assets or the investors’ ownership in the usufruct, investment and/or
partnership upon the redemption of the sukuk or in the event of a default. This purchase
undertaking is akin to a contractual claim against the originator for non-payment of the
sukuk’s financial obligations. As such, the level of protection afforded to investors depends on
the type of contract adopted and the terms and conditions of the sukuk structure. Table 2.4
summarizes the key legal, financial and risk implications of asset-based and asset-backed
sukuk structures.
In civil law jurisdictions which do not easily allow the setting up of trusts, alternative
structures have begun to emerge to allow sukuk transactions to be carried out in accordance
with the local laws.
Table 2.4: Asset-Based and Asset-Backed Sukuk
Implication Asset-based Asset-backed
Legal - ownership of
the assets
 Originator/obligor transfers
beneficial ownership of the
assets to investors.
 Legal ownership remains with
originator/obligor.
 In the event of a default,
investors have recourse to
originator/obligor.
 Transfer of legal ownership
of the assets from
originator/obligor to a third
party (typically, an SPV).
Financial - cashflow
source
 Based on originator/obligor’s
principal activities, although
structuring mechanism may
elevate the creditworthiness
of originator/obligor.
 Based on cash flow generated
by the assets.
Risk – default  Investors have recourse to
originator/obligor.
 Investors have recourse to
the assets and rights of
disposal.
Sources: ISRA, RAM
SPV – Country-Level Differences between Sukuk Mechanisms/Structures, Acceptability
from a Legal Perspective
Sukuk structures typically involve a legal entity, known as an SPV (special-purpose vehicle) or
SPC (special-purpose company) or SPE (special-purpose entity), which holds the sukuk assets
as an agent or trustee on behalf of the sukuk holders. Trust laws tend to be the preferred
mechanism when establishing such an entity. The characteristics of an SPV is described in
Figure 2.9.