Asset Securitization Sukuk and Islamic Capital Markets : Structural Issues in These Formative Years

After introducing some fundamental concepts of relevance to Islamic finance, this article describes investment funds used to make investments in the United States, lease (ijara) investment structures used for real estate investments in different jurisdictions (including the early development of those structures), and the equity investment paradigm (including applicable tests) for making Shari`ah-compliant equity investments as set forth in the leading fatwa on the topic. The article next turns to asset securitizations, summarizing the primary considerations in effecting conventional asset securitizations. Thereafter, the article discusses asset-backed sukuk (Shari`ah compliant securitizations), including parameters set forth by the Accounting and Auditing Organization for Islamic Financial Institutions in its original sukuk standard and those discussed in its 2008 clarification of that standard. As that 2008 clarification primarily addressed musharaka (profit sharing partnership) sukuk, the article discusses certain critical elements of valid musharaka structures. Next, the articles turns to a discussion of the capital markets initiative of the Islamic Financial Services Board. An overview is then provided of the primary sukuk structures, in particular those utilizing an underlying ijara (lease). Two 2007 securitizations are considered as abbreviated case studies: the Tamweel sukuk al-ijara of residential villas in Dubai; and a conventional commercial mortgage-baked security relating to the TECOM Free Zone in Dubai. The second sukuk structure discussed in the article is the sukuk al-mudaraba, pertaining to profit sharing service-capital partnerships. After discussing Shari`ah principles applicable to mudaraba arrangements, the sukuk al-mudaraba structure is considered.The third and final sukuk structure considered in this section is the sukuk al-musharaka. The sukuk structure is discussed after a review of the relevant Shari`ah principles applicable to musharaka arrangements