Sukuk; Equity or Bonds?
Sukuk a relatively infant financial instrument, designed to be a Shariah compliant alternative to conventional bonds, however much debate has been raised on the nature of the instrument, particularly in cases of default, where sukuk holders designation was confused between equity holders and debtors. There are many reasons behind the confusion; however Sukuk is indeed equity and not a bond. A sukuk can be structured on a debt based model such as Ijarah or Murabaha, yet certificate holders still are owners of the underlying asset that is leased to the beneficiary. So either the sukuk is structured on an equity based model where sukuk holders partner with the originator in a completely new venture or in already existing business or based on a debt based model, the sukuk holders are always and surely equity holders and not debtors.
Because of some common characteristics with bonds and few other reasons, Sukuk are classified as fixed income and sold in debt capital markets. It is very much like fitting a square peg into a round hole. It is a continuous attempt to sell an equity based instrument in debt markets, and to be able to complete the in-consistent sale, sukuk issuers and arrangers had to innovate features or mechanisms that shift the structure of sukuk towards bond. Those mechanisms commonly referred to as credit enhancers implicitly guarantee capital and profits. It is with these credit enhancers come the Shariah violations, these credit enhancers added to the structure violate its core objective which is to have the sukuk holders as owners whose revenue depends on the actual performance of the underlying asset, and not independent of it as the case with bond holders.
Sukuk have suitably evoluted throughout the last decade, and indeed the next step is on the Shariah front, how compliant is a sukuk structure and how compliance differ among diverse mandates or Shariah schools of thought. For this purpose IdealRatings have innovated a sukuk screening solution, which associated with a unique, accurate research methodology, screens over 120 Shariah issues pertaining to the various structures utilized in global sukuk.
The web-based solution has successfully produced compliance status of outstanding sukuk in the market, the compliance is variable depending on the Shariah opinions adopted and rulebook followed. The solution is embedded with all Shariah standards available worldwide, so that every user can include/exclude the Shariah rules constituting his mandate.
Ghada Essam
