Once regarded as the driving force behind the boom in Islamic finance, sukuk have been looked at more critically recently. Hari Bhambra, Founder and Senior Partner of DIFC-based Praesidium Consulting, which specialises in Islamic finance-related regulatory issues, explains why not all Islamic bonds have been structured in line with Shariah.
Q: Currently there are discussions that some 85% of sukuk might be haram (not Shariah complaint). Can you explain what impact this will have on the industry?
Hari Bhambra There have been discussions by some eminent scholars that the concept of profit and loss sharing, which underpins Islamic finance, has not been present in some of the sukuk models that we have seen over the past five to six years.
Typically, sukuk are often held out as being Islamic bonds, which tends to confuse the juristic basis of a conventional bond and sukuk. Sukuk is based on Islamic principles of profit and loss sharing, as the sukuk holders are deemed to be owners of the underlying assets supporting most sukuk structures.
In conventional bonds, bondholders do not have the same perspective. The debate that has arisen in respect of sukuk focuses on the use of guarantees which, at some level, conflicts with the concept of profit and particularly loss sharing.
Unlike with conventional bonds, sukuk holders are deemed to be owners of the underlying assets in the sukuk fund and therefore should be exposed to the risk associated with those assets as well as the profit, which some scholars have indicated has not been the case to date.