The Role of Sukuk in Islamic Capital Markets
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Difference in Shariah Views on Selected Shariah Principles
There are differences in Shariah opinions among scholars on some of the Shariah principles
applicable to sukuk structuring and trading, such as bay’ al-inah (sale and buy-back) and bay’
al-dayn (sale of debt). Bay’ al-inah is applied in ijarah and murabahah sukuk involving the sale
and buy-back of the underlying assets or commodities. The majority of scholars prohibit inah.
For example, the International Islamic Fiqh Academy (IFA) of the Organisation of Islamic
Cooperation (OIC), in its 20th session (2012) issued a resolution prohibiting the current
structure of asset-based ijarah sukuk because it is a form of sell-and-buy-back arrangement (bay’
al-inah). Nonetheless, based on its meeting held on 12 December 1998, the Shariah Advisory
Council (SAC) of Bank Negara Malaysia (BNM) approves of bay’ al-inah as the mechanism is
acceptable to the Shafi’i School. The Guidelines on Unlisted Capital Market Products under the
Lodge and Launch Framework (2015) by Securities Commission Malaysia (SC) also allow the
trading of sukuk representing only receivables at any price, subject to some conditions. Even
so, there have been efforts in the Malaysian market to introduce some degree of Shariah
harmonization by shifting away from bay’ al-inah practices. This is mainly the result of an
attempt to align Malaysian market practices with Middle Eastern practices, to seek greater
international acceptance of Islamic financial transactions.
Two main schools of thought prevail regarding the secondary market trading of sale-based
sukuk, which faces the issue of bay’ al-dayn (sale of debt). These sukuk create indebtedness
due to the sale of the underlying assets (e.g. in bay’ al-inah, tawarruq, murabahah, istisna’
transactions) or commodities to be received in the future (e.g. in salam sukuk). Global Shariah
standards restrict the trading of these sukuk because receivables are viewed as money; thus,
trading must be done at par, i.e. for the same amount with no discounting. On the contrary, the
sale of debt at a discount is allowed by the SAC of the SC, which enables the trading of sale-
based sukuk in the secondary market (ISRA, 2016).
2.1.4 THE COMPATIBILITY OF CURRENT SUKUK PRACTICES WITH ISLAMIC LAW
Sukuk structuring must, of course, comply with Shariah principles. However, Shariah issues
arise in the structures of several sukuk. One of the strongest criticisms against partnership-
based sukuk is by the prominent Shariah scholar, Mufti Taqi Usmani, in 2007. He stated that
the use of purchase undertakings and liquidity facilities converts partnership-based sukuk to a
debt-based transaction, whereby the sukuk is redeemed at par value and sukuk holders are
paid a guaranteed periodic return on capital throughout the tenure of the sukuk. Pursuant to
the Shariah concerns raised, the AAOIFI pronounced in February 2008 that partnership-based
sukuk prohibit credit enhancements in the form of Shariah-compliant funding to smooth out
periodic income distributions to sukuk holders and purchase undertakings to guarantee the
return of the principal amount to sukuk holders at its par or nominal value. Shariah scholars
constantly seek to address the concerns on Shariah issues.