Development of sukuk has evolved vigorous growth. Recent study shows that many investors are believing that investing in sukuk is relative safe for them than investing in bond. One of the reasons is that in sukuk the value of investment is secured by the underlying asset which will not disappear when the issuing unit goes to bankruptcy. In addition, Special Purpose Vehicle (SPV) which issues sukuk separates its entity body from the company which uses that sukuk funds.
At least the above explanation is trying to figure out the different characteristics of sukuk comparing to bond in a theoretical manner. To get a sophisticated understanding on how sukuk and bond are structured, there are three indicators that can be used to compare them namely guaranteeing the return of principle, regular distribution to certificate holders, and certificate’s holder ownership to enterprise asset. In bond, the issuing unit will guarantee the return of bond holder principles in the same time they will guarantee that the bond holder will get periodic interest payment of their funds, there’s no other explanation of this since the bond has structured as a debt of issuing unit to the bond holders. In other words, the issuing unit must pay the principal at a maturity and periodic interest payment until maturity. The other characteristic of bond that the bond does not represent the ownership of an asset in the company, it’s just a promissory note of the issuer to the bold holder. The following is an example on how it works, let say in 2009 Mr. X wants to invest in Treasury bill of United States which will mature in 2015. For this he will purchase that bond which price of $500.000 with 5% interest rate per year. Periodically, Mr. X will get $25.000 a year for 5 years, and at maturity, he will get the principle with the same value. Hence, for 5 years his money will increase from $500.000 to $625.000.
Above structure will be basically different with Sukuk. The structure of sukuk must strictly follow the rule and nature of Islamic commercial law that integrated into its structured. The characteristics of Sukuk are highly influenced with the Islamic contract itself. As a consequence, the treatments of the above indicators will be different each other. This may lead to the flexibility of sukuk structures. The Islamic contract is basically divided into three models, i.e. Sale based model, profit and loss sharing model, and ijarah based model. Sale based model is represented by contract of Murabahah, Salam, Istishna while the profit and loss sharing model is represented by the contract of musyarakah and mudharabah, and the other one is represented by the contract of ijarah. For illustration, we are going to structure the sukuk using the profit and loss sharing model such as musyarakah. From the Islamic viewpoint, musyarakah is a contract whereby the contracting parties agree to involve in a certain business. The capital will be shared among parties based on an agreed ratio. If the business is profitable then the profit will be distributed among parties based on the profit ratio that has been agreed at the beginning of the contract. If the business is losses then it must be distributed among the parties based on their capital contribution. Because of that, this kind of contract is not guaranteeing the return of principal, because the nature of this contract is uncertainty in terms of the return of capital and the profit. Hence, it’s prohibited to guaranteeing the return of principle and the periodic profit distribution if the sukuk using this contract in its structure. The other characteristic of this sukuk that the certificate represents the ownership of an asset.
One of the famous sukuk that used musyarakah was East Cameron Gas Sukuk (ECG Sukuk) what was issued by East Cameron Gas Co. United States in 2006. Even so, unfortunately, this sukuk is default because of the hurricane damage and the fall of production. This default leads the next challenges on how this structure can be resolved in the court. Because some issues need to be addressed such as How will the default on these Sukuk bonds be dealt with? Will they be treated in the same manner as default on conventional bonds? How will the judiciary deal with cases where conventional law and Islamic Shariaa law conflict? And in cases of bankruptcy, how will the judiciary deal with Sukuk assets? Will they be considered assets of the Sukuk holders, or will they be included in bankruptcy, thus reducing the Sukuk holders to the level of other creditors with regards to splitting the loss? What is the precise definition of payment default under the provision of Islamic Shariaa law? Is it impossible to reschedule these payments, or provide compensation when payment is delayed? Moreover, are the local courts, especially those in the Gulf States, even qualified to provide rulings on Sukuk cases?
Wallohu a'lam bishowab.
Yudi Ahmad Faisal
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