The Role of Sukuk in Islamic Capital Markets
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For countries which have adopted the 2-tier centralized model, the SAC at the central
regulatory authority must approve all sukuk structures prior to the issuance. In Malaysia, for
instance, all matters pertaining to Shariah in ICM products and instruments, including sukuk,
fall under the authority of the SAC of the SC. At the outset, sukuk issuances must be approved
by registered Shariah advisers or the Shariah committees of the relevant Islamic banks and
financial institutions. LCY sukuk that utilize the existing structures approved by the SC and
issued in the market require the issuer to submit all the requisite documents to the SC for its
SAC’s endorsement, at least 10 business days before the lodgment date. However, for issuances
involving new structures or variations to existing structures, the SC must be consulted prior to
submission to the SAC, to facilitate a detailed deliberation.
For countries which adopt non-centralized Shariah governance, the commercial or investment
banks appoint their own Shariah committees, which comprise eminent scholars, to provide
their opinion on the Shariah compliance of the sukuk structures, without any specific national
regulatory oversight. By contrast, the single centralized model only has a centralized SAC at
the regulatory level. Nonetheless, this model remains unclear in terms of its practicality,
considering the volume of sukuk structures that require Shariah approval.
Based on our analysis, countries which have 2-tier centralized Shariah governance have
facilitated the rapid growth of the sukuk market, and provided greater clarity and
transparency to the industry in terms of the Shariah compliance of structures, thereby
improving standardization. This is proven in the case of Malaysia, the sukuk market of which
has reached maturity. This model has never interrupted the established regime of the
country’s regulatory and supervisory frameworks.
2.6 THE IMPORTANCE OF CREATING A CONDUCIVE ENVIRONMENT FOR
SUKUK
Most countries looking into the development of the sukuk market seek to establish a conducive
environment that would support sukuk issuance and safeguard investor protection. In
particular, they endeavour to set up a facilitative legal and regulatory framework in
accordance with international standards and best practices.
2.6.1 LEGAL
Capital market transactions, including sukuk, are typically under the purview of the same laws
and regulations that govern conventional finance, not Islamic law. Most of the contract clauses
are usually compared against conventional practices and the sukuk documents generally
reflect Shariah compliance and are not governed by Shariah.
In general, there are 3 kinds of legal systems: common law, civil law and Islamic law. Most
countries tend to adopt the common law or the civil law system or have legal systems that
reflect aspects of both civil and common law. Many Muslim-majority countries tend to
incorporate Islamic law within their conventional legal frameworks to some extent, especially
on personal matters (e.g. marriage, divorce, family law, inheritance) and criminal law. Islamic
law would not, in principle, govern commercial transactions. Figure 2.8 provides examples
where these legal systems prevail.