Preference Sukuk to Share Revenue

Revenue Sharing (RS) or output sharing financing contracts are extensions to some contracts known in Islamic fiqh and practiced from antiquity, such as Muzara'ah (sharecropping), Musaqah (financing and management of a fruit orchard) and Mugharasah (plantation in return for a share of the trees). Despite their promising potential in financing income-generating infrastructure projects, RS contracts have yet to be applied in Islamic Finance. This paper briefly reviews literature in conventional economics on RS and their modern application to Public–Private Partnership (PPP) in infrastructure projects. The paper suggests a novel Shari’ah-compliant sukuk structure based on RS, with extra flexibility through giving preference to one party over another in sharing revenue and/or bearing certain costs. This permit attracting to the same project parties having different risk appetites and expectations about the project’s returns. The paper highlights the significance and potential applications of the fact that RS in general, and the suggested sukuk structure in particular, reduce information asymmetry; and thus, minimize the need for agent monitoring and its high associated costs, as compared to profit sharing contracts. Certain economic and Shari’ah issues arising in such potential applications are outlined for further research